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 V, SCALE. 
 
 Under 2 inhab. to sq. mile. | | 
 
 7 2tO 6..." — " — "■•• lb=J 
 
 ^ i8to 45.. ."...."...."... |§§| 
 
 45 to 90. . ."...•"•■••"••• mi 
 
 90 and over. . . " B«W 
 
 ""A Cities over 8,ooo inhabitants 
 in solid color in circles propor- 
 tionate to population. v - 
 
 / ■, 
 
From '• Apjdftons' Annual Cyclopaedia.' 
 
 
From "Amteton*" Annual Cyclopaedia." 
 
CHART II. 
 
 - -r 8,000 inhabi 
 in solid color in circles propo: 
 tionate to population. 
 Note,— Centre of popuiau 
 _39 d.4m.Ss, N .,g.nl,3Qm . jos. \V 
 
PRINCIPLES 
 
 POLITICAL ECONOMY, 
 
 BY --7 
 
 JOHN STUART MILL. 
 
 ABRIDGED, WITH CRITICAL, BIBLIOGRAPHICAL, AND EXPLANATORY NOTES, 
 AND A SKETCH OF THE HISTORY OF POLITICAL ECONOMY, 
 
 BY 
 J. LAURENCE LAUGHLIN, Ph. D., 
 
 ASSISTANT PROFESSOR OF POLITICAL ECONOMT IN HARVARD UNIVERSITY. 
 
 
 A TEXT-BOOK FOR COLLEGES. 
 
 NEW YORK: 
 D. APPLETON AND COMPANY, 
 
 1, 8, and 5 BOND STP.EET. 
 
 1884. 
 

 Copyeight, 1884, 
 Bt D. APPLETON AND COMPANY. 
 
PEEFAOE. 
 
 An experience of five years with Mr. Mill's treatise in 
 the class-room convinced me, not only of the great useful- 
 ness of what still remains one of the most lucid and system- 
 atic books yet published which cover the whole range of the 
 study, but I have also been convinced of the need of such 
 additions as should give the results of later thinking, with- 
 out militating against the general tenor of Mr. Mill's sys- 
 tem ; of such illustrations as should fit it better for Ameri- 
 can students, by turning their attention to the application 
 of principles in the facts around us ; of a bibliography which 
 should make it easier to get at the writers of other schools 
 who offer opposing views on controverted questions ; and of 
 some attempts to lighten those parts of his work in which 
 Mr. Mill frightened away the reader by an appearance of 
 too great abstractness, and to render them, if possible, more 
 easy of comprehension to the student who first approaches 
 Political Economy through this author. Believing, also, that 
 the omission of much that should properly be classed under 
 the head of Sociology, or Social Philosophy, would narrow 
 the field to Political Economy alone, and aid, perhaps, in 
 
jy PREFACE. 
 
 clearer ideas, I was led to abridge the two volumes into one, 
 with, of course, the additional hope that the smaller book 
 would tempt some readers who might hesitate to attack his 
 larger work. In consonance with the above plan, I have 
 abridged Mr. Mill's treatise, yet have always retained his own 
 words ; although it should be said that they are not always 
 his consecutive words. Everything in the larger type on 
 the page is taken literally from Mr. Mill, and, whenever it 
 has been necessary to use a word to complete the sense, it 
 has been always inserted in square brackets. All additional 
 matter added by me has been printed in a smaller but dis- 
 tinctive type. The reader can see at a glance which part 
 of the page is Mr. Mill's and which my own. 
 
 It has seemed necessary to make the most additions to 
 the original treatise under the subjects of the Wages Ques- 
 tion : of "Wages of Superintendence ; of Socialism ; of Cost 
 of Production; of Bimetallism ; of the Paper Money ex- 
 periments in this country ; of International Yalues ; of the 
 Future of the Laboring-Classes (in which the chapter was 
 entirely rewritten) ; and of Protection. The treatment of 
 Land Tenures has not been entirely omitted, but it does not 
 appear as a separate subject, because it has at present less 
 value as an elementary study for American students. The 
 chapters on Land Tenures, the English currency discussion, 
 and much of Book Y, on the Influence of Government, have 
 been simply omitted. In one case I have changed the order 
 of the chapters, by inserting Chap. XY of Book III, treating 
 of a standard of value, under the chapter treating of money 
 and its functions. In other respects, the same order has 
 been followed as in the original work. 
 
 Wherever it has seemed possible, American illustrations 
 have been inserted instead of English or Continental ones. 
 
PREFACE. v 
 
 To interest the reader in home problems, twenty-four charts 
 have been scattered throughout the volume, which bear upon 
 our own conditions, with the expectation, also, that the differ- 
 ent methods of graphic representation here presented would 
 lead students to apply them to other questions. They are 
 mainly such as I have employed in my class-room. The use 
 and preparation of such charts ought to be encouraged. The 
 earlier pages of the volume have been given up to a " Sketch 
 of the History of Political Economy," which aims to give 
 the story of how we have arrived at our present knowledge 
 of economic laws. The student who has completed Mill 
 will then have a very considerable bibliography of the various 
 schools and writers from which to select further reading, and 
 to select this reading so that it may not fall wholly within the 
 range of one class of writers. But, for the time that Mill is 
 being first studied, I have added a list of the most important 
 books for consultation. I have also collected, in Appendix I, 
 some brief bibliographies on the Tariff, on Bimetallism, and 
 on American Shipping, which may be of use to those who 
 may not have the means of inquiring for authorities, and in 
 Appendix II a number of questions and problems for the 
 teacher's use. 
 
 In some cases I have omitted Mr. Mill's statement en- 
 tirely, and put in its stead a simpler form of the same expo- 
 sition which I believed would be more easily grasped by a 
 student. Of such cases, the argument to show that De- 
 mand for Commodities is not Demand for Labor, the Doc- 
 trine of International Yalues, and the Effect of the Prog- 
 ress of Society on wages, profits, and rent, are examples. 
 Whether I have succeeded or not, must be left for the ex- 
 perience of the teacher to determine. Many small figures 
 and diagrams have been used throughout the text, in order 
 
 B 
 
yj PREFACE. 
 
 to suggest the concrete means of getting a clear grasp of a 
 principle. 
 
 In conclusion, I wish to acknowledge my indebtedness 
 to several friends for assistance in the preparation of this 
 volume, among whom are Professor Charles F. Dunbar, Dr. 
 F. "W. Taussig, Dr. A. B. Hart, and Mr. Edward Atkinson. 
 
 J. Laurence LAUGHLm. 
 
 Harvard University, Cambridge, Massachusetts, 
 September, 1884- 
 
CONTENTS. 
 
 PAGE 
 
 Sketch of the IIistory of Political Economy 1 
 
 Books for Consultation 43 
 
 Preliminary Remarks 47 
 
 BOOK I. 
 
 PRODUCTION. 
 
 CnAPTEE I. — Of the Requisites of Production. 
 
 § 1. Requisites of production, what 63 
 
 § 2. Of labor as an agent of production 55 
 
 § 3. Of capital as a requisite of production 57 
 
 Ciiapter II. — Of Unproductive Labor. 
 
 § I. Definition of productive and unproductive labor . . . . .60 
 
 § 2. Productive and Unproductive Consumption 61 
 
 § 3. Distinction between labor for the supply of Productive Consumption 
 
 and labor for the supply of Unproductive Consumption . . .62 
 
 Ciiaptek 111. — Of Capital. 
 
 § 1. Capital is wealth appropriated to reproductive employment . . .65 
 § 2. More capital devoted to production than actually employed in it . . 68 
 § 3. Examination of cases illustrative of the idea of capital . . .70 
 
 Chapter IV. — Fundamental Propositions respecting Capital. 
 
 § 1. Industry is limited by capital 74 
 
 § 2. Increase of capital gives increasad employment to labor, without assign- 
 able bounds 75 
 
viii CONTENTS. 
 
 PAGE 
 
 § 3. Capital is the result of saving, and all Capital is consumed . . 79 
 
 § 4. Capital is kept up by perpetual reproduction, as shown by the recovery 
 
 of countries from devastation 81 
 
 § 5. Effects of defraying government expenditure by loans . . .83 
 
 § 6. Demand for commodities is not demand for labor . . . .87 
 
 Chapter V. — Of Circulating and Fixed Capital. 
 
 § 1. Fixed and Circulating Capital, what 93 
 
 § 2. Increase of fixed capital, when, at the Expense of Cir culating, might be 
 
 detrimental to the laborers . . . . . . . .95 
 
 § 3. — this seldom, if ever, occurs 97 
 
 Chapter VI. — Of Causes affecting the Efficiency of Production. 
 
 § 1. General causes of superior productiveness 99 
 
 § 2. Combination and division of labor increase productiveness . . . 101 
 
 § 3. Advantages of division of labor , 104 
 
 § 4. Production on a large and production on a small scale . . . 108 
 
 Chapter VII. — Of the Law of the Increase of Labor. 
 
 § 1. The law of the increase of production depends on those of three ele- 
 ments — Labor, Capital, and Land 112 
 
 § 2. The Law of Population 112 
 
 § 3. By what checks the increase of population is practically limited . .115 
 
 Chapter VIII. — Of the Law of the Increase of Capital. 
 
 § 1. Means for saving in the surplus above necessaries .... 120 
 § 2. Motive for saving in the strength of the effective desire of accumula- 
 tion 122 
 
 § 3. Examples of deficiency in the strength of this desire .... 124 
 § 4. Examples of excess in this desire 127 
 
 Chapter IX. — Of the Law of the Increase of Production from Land. 
 
 § 1. The law of production from the soil, a law of diminishing return in 
 
 proportion to the increased application of labor and capital . .130 
 § 2. Antagonist principle to the law of diminishing return ; the progress of 
 
 improvements in production 134 
 
 §3. — in railways 136 
 
 § 4. — in manufactures . 138 
 
 § 5. Law holds true of mining 142 
 
CONTEXTS. 
 
 IX 
 
 Chapter X. — Consequences of the Foregoing Laws. 
 
 PAGE 
 
 § 1. Remedies for weakness of the principle of accumulation . . . 144 
 § 2. Even where the desire to accumulate is strong, population must be 
 
 kept within the limits of production from land .... 145 
 § 3. Necessity of restraining population not superseded by free trade in 
 
 food 148 
 
 § 4. — nor by emigration 150 
 
 BOOK II. 
 DISTRIBUTION. 
 
 * Ciiapteb I. — Of Property. 
 
 § 1. Individual Property and its opponents 155 
 
 § 2. The case for Communism against private property presented . . 158 
 
 § 3. The Socialists who appeal to state-help 160 
 
 §4. Of various minor schemes, Communistic and Socialistic . . .165 
 
 § 5. The Socialist objections to the present order of Society examined . 168 
 
 §6. Property in land different from property in movables . . . . 171 
 
 Chapter II. — Of Wages. 
 
 § 1. Of Competition and Custom . . 175 
 
 § 2. The Wages-fund, and the objections to it considered . . . .177 
 
 § 3. Examination of some popular opinions respecting wages . . . 183 
 § 4. Certain rare circumstances excepted, high wages imply restraints on 
 
 population 188 
 
 § 5. Due restriction of population the only safeguard of a laboring-class . 190 
 
 v Chapter III. — Of Remedies for Low Wages. 
 
 § 1. A legal or customary minimum of wages, with a guarantee of employ- 
 ment 193 
 
 § 2. — would require as a condition legal measures for repression of popu- 
 lation 196 
 
 § 3. Allowances in aid of wages and the standard of living . . . 198 
 
 § 4. Grounds for expecting improvement in public opinion on the subject 
 
 of population 200 
 
 § 5. Twofold means of elevating the habits of the laboring-people ; by edu- 
 cation, and by foreign and home colonization 202 
 
CONTENTS. 
 
 Chapter IV. — Of the Differences of Wages in Different Employments. 
 
 PAGE 
 
 § 1. Differences of wages arising from different degrees of attractiveness in 
 
 different employments 205 
 
 § 2. Differences arising from natural monopolies 208 
 
 § 3. Effect on Wages of the competition of persons having other means of 
 
 support 210 
 
 § 4. Wages of women, why lower than those of men ..... 213 
 
 § 5. Differences of wages arising from laws, combinations, or customs . 214 
 
 Chaptek V. — Of Profits. 
 
 § 1. Profits include interest and risk ; but, correctly speaking, does not in- 
 clude wages of superintendence 216 
 
 § 2. The minimum of profits ; what produces variations is the amount of 
 
 profits 218 
 
 § 3. General tendency of profits to an equality 220 
 
 §4. The cause of the existence of any profit; the advances of capitalists 
 
 consist of wages of labor 224 
 
 § 5. The rate of profit depends on the Cost of Labor 226 
 
 Chaptek YI— Of Bent. 
 
 § 1. Rent the effect of a natural monopoly 232 
 
 § 2. No land can pay rent except land of such quality or situation as 
 
 exists in less quantity than the demand 233 
 
 § 3. The rent of land is the excess of its return above the return to the 
 
 worst land in cultivation 235 
 
 § 4. — or to the capital employed in the least advantageous circumstances. 236 
 
 § 5. Opposing views to the law of rent . 240 
 
 § 6. Rent does not enter into the cost of production of agricultural produce. 244 
 
 BOOK III. 
 
 EXCHANGE. 
 
 Chapter I. — Of Value and the Laws of Value. 
 
 § 1. Definitions of Value in Use, Exchange Value, and Price . . . 249 
 § 2. Conditions of Value : Utility, Difficulty of Attainment, and Transfera- 
 
 bleness 252 
 
CONTEXTS. x i 
 
 PAGE 
 
 § 3. Commodities limited in quantity governed by the law of Demand and 
 
 Supply : general working of this law ...... 254 
 
 § 4. Miscellaneous cases falling under this law ...... 257 
 
 § 5. Commodities which are susceptible of indefinite multiplication without 
 
 increase of cost. Law of their Value Cost of Production . . 259 
 
 § 6. The Value of these commodities conform, in the long run, to their 
 
 Cost of Production through the operation of Demand and Supply . 261 
 
 Chapter II. — Ultimate Analysis of Cost of Production. 
 
 § 1. Of Labor, the principal element in Cost of Production . . . 264 
 § 2. Wages affect values, only if different in different employments ; " non- 
 competing groups " 266 
 
 § 3. Profits an element in Cost of Production 267 
 
 § 4. Cost of Production properly represented by sacrifice, or cost, to the 
 laborer as well as to the capitalist ; the relation of this conception to 
 
 Cost of Labor 267 
 
 § 5. When profits vary from employment to employment, or are spread 
 
 over unequal lengths of time, they affect values accordingly . . 272 
 § 6. Occasional elements in Cost of Production ; taxes and ground-rent . 275 
 
 Chapter III. — Of Rent, in its Relation to Value. 
 
 § 1. Commodities which are susceptible of indefinite multiplication, but not 
 without increase of cost. Law of their Value, Cost of Production in 
 the most unfavorable existing circumstances ..... 277 
 
 § 2. Such commodities, when produced in circumstances more favorable, 
 
 yield a rent equal to the difference of cost 279 
 
 § 3. Rent of mines and fisheries and ground-rent of buildings, and cases 
 
 of gain analogous to rent 282 
 
 § 4. Resume of the laws of value of each cf the three classes of commodi- 
 ties . . .285 
 
 Chapter IV. — Of Money. 
 
 § 1. The three functions of Money — a Common Denominator cf Value, a 
 
 Medium of Exchange, a " Standard of Value " 286 
 
 § 2. Gold and Silver, why fitted for those purposes 290 
 
 § 3. Money a mere contrivance for facilitating exchanges, which docs not 
 
 affect the laws of value 292 
 
 v Chapter V. — Of the Value of Money, as dependent on Demand and 
 
 Supply. 
 
 § 1. Value of Money, an ambiguous expression 2P4 
 
 § 2. The Value of Money depends, ceteris paribus, on its quantity . . 204 
 
xu 
 
 CONTENTS. 
 
 PAGE 
 
 § 3. — together with the rapidity of circulation 297 
 
 § 4. Explanations and limitations of this principle . . • . . 299 
 
 Chaptee VI. — Of the Value of Money, as dependent on Cost of 
 Production. 
 
 § 1. The value of money, in a state of freedom, conforms to the value of 
 
 the bullion contained in it 302 
 
 g 2. — which is determined by the cost of production .... 303 
 § 3. This law, how related to the principle laid down in the preceding 
 
 chapter 309 
 
 Chapter VII. — Of a Double Standard, and Subsidiary Coins. 
 
 § 1. Objections to a double standard 312 
 
 § 2. The use of the two metals as money, and the management of Subsidi- 
 ary Coins 315 
 
 § 3. The experience of the United States with a double standard from 1*792 
 
 to 1883 . .316 
 
 Chaptee VIII. — Of Credit, as a Substitute for Money. 
 
 § 1. Credit not a creation but a transfer of the means of production . .325 
 
 § 2. In what manner it assists production . 325 
 
 § 3. Function of credit in economizing the use of money .... 327 
 
 § 4. Bills of Exchange 328 
 
 § 5. Promissory notes 331 
 
 § 6. Deposits and checks 332 
 
 Chaptee IX. — Influence of Credit on Prices. 
 
 § 1. What acts on prices is Credit, in whatever shape given . . . 335 
 
 § 2. Credit a purchasing power, similar to money 336 
 
 § 3. Great extensions and contractions of credit. Phenomena of a com- 
 mercial crisis analyzed 337 
 
 § 4. Influence of the different forms of credit on prices .... 339 
 
 § 5. On what the use of credit depends 341 
 
 § 6. What is essential to the idea of money ? 342 
 
 Chaptee X. — Of an Inconvertible Paper Currency. 
 
 § 1. What determines the value of an inconvertible paper money ? . . 344 
 § 2. If regulated by the price of bullion, an inconvertible currency might 
 
 be safe, but not expedient 350 
 
CONTENTS. xiii 
 
 PAGE 
 
 § 3. Examination of the doctrine that an inconvertible currency is safe, if 
 
 representing aciual property 352 
 
 §4. Experiments with paper money in the United States . . . .355 
 
 § 5. Examination of the gain arising from the increase and issue of paper 
 
 currency 360 
 
 § 6. Resume of the subject of money 363 
 
 Chapter XL — Of Excess of Supply. 
 
 § 1. The theory of a general over-supply of commodities stated . . . 365 
 § 2. The supply of commodities in general can not exceed the power of 
 
 purchase 366 
 
 § 3. There can never be a lack of demand arising from lack of desire to 
 
 consume 367 
 
 §4. Origin and explanation of the notion of general over-supply . . 369 
 
 Chapter XII. — Of some Peculiar Cases of Value. 
 
 § 1. Values of commodities which have a joint cost of production . . 372 
 § 2. Values of the different kinds of agricultural produce . • . .374 
 
 Chapter XIII. — Of International Trade. 
 
 § 1. Cost of Production not a regulator of international values. Extension 
 
 of the word " international " 377 
 
 § 2. Interchange of commodities between distant places determined by dif- 
 ferences not In their absolute, but in their comparative, costs of 
 production 380 
 
 § 3. The direct benefits of commerce consist in increased efficiency of the 
 
 productive powers of the world 384 
 
 § 4. — not in a vent for exports, nor in the gains of merchants . . 386 
 
 § 5. Indirect benefits of commerce, economical and moral ; still greater 
 
 than the direct 388 
 
 Chapter XIV. — Of International Values. 
 
 § 1. The values of imported commodities depend on the terms of interna- 
 tional interchange 391 
 
 § 2. The values of foreign commodities depend, not upon Cost of Produc- 
 tion, but upon Reciprocal Demand and Supply .... 392 
 
 § 3. — as illustrated by trade in cloth and linen between England and Ger- 
 many 396 
 
 § 4. The conclusion stated in the Equation of International Demand . . 398 
 
 § 5. The cost to a country of its imports depends not only on the ratio of 
 
 exchange, but on the efficiency of its labor 402 
 
X JV CONTENTS. 
 
 Chapter XV. — Of Money considered as an Imported Commodity, 
 
 PAGE 
 
 1. Money imported in two modes ; as a commodity, and as a medium of 
 
 exchange 404 
 
 2. As a commodity, it obeys the same laws of value as other imported 
 
 commodities 405 
 
 Chapter XVI. — Of the Foreign Exchanges. 
 
 § 1. Money passes from country to country as a medium of exchange, 
 
 through the exchanges 410 
 
 § 2. Distinction between variations in the exchanges which are self-adjust- 
 ing and those which can only be rectified through prices . . .415 
 
 Chapter XVII. — Of the Distribution of the Precious Metals through 
 the Commercial World. 
 
 § 1. The substitution of money for barter makes no difference in experts 
 
 and imports, nor in the law of international values . . . .418 
 
 § 2. The preceding theorem further illustrated 422 
 
 § 3. The precious metals, as money, are of the same value, and distribute 
 themselves according to the same law, with the precious metals as a 
 commodity 426 
 
 § 4. International payments entering into the " financial account " . . 427 
 
 Chapter XVIII. — Influence of the Currency on the Exchanges and on 
 Foreign Trade. 
 
 § 1. Variations in the exchange, which originate in the currency . . 430 "\ 
 
 § 2. Effect of a sudden increase of a metallic currency, or of the sudden ^ 
 
 creation of bank-notes or other substitutes for money . . .431 "*■ 
 § 3. Effect of the increase of an inconvertible paper currency. Real and 
 
 nominal exchange .......... 436 
 
 Chapter XIX. — Of the Rate of Interest. 
 
 § 1. The rate of interest depends on the demand and supply of loans . . 440 
 § 2. Circumstances which determine the permanent demand and supply of 
 
 loans 441 
 
 § 3. Circumstances which determine the fluctuations 444 
 
 § 4. The rate of interest not really connected with the value of money, but 
 
 often confounded with it 447 
 
 § 5. The rate of interest determines the price of land and of securities . 448 
 
CONTENTS. 
 
 XV 
 
 / 
 
 Chaptee XX. — Of the Competition of Different Countries in the same 
 
 Market. 
 
 PAGE 
 
 § 1. Causes which enable one country to undersell another . . . . 450 
 
 § 2. High wages do not prevent one country from underselling another . 452 
 § 3. Low wages enable a country to undersell another, when peculiar to 
 
 certain branches of industry 457 
 
 § 4. — but not when common to all . . . . . . . . 460 
 
 § 5. Low profits as affecting the carrying trade 463 
 
 Chapter XXI. — Of Distribution as affected by Exchange. 
 
 § 1. Exchange and money make no difference in the law of wages . . 465 
 
 § 2. In the law of rent 468 
 
 § 3. — nor in the law of profits 469 
 
 BOOK IV. 
 
 INFLUENCE OF THE PROGRESS OF SOCIETY ON PRODUCTION AND DIS- 
 TRIBUTION. 
 
 Chapter I. — hifluence of the Progress of Industry and Population on 
 Values and Prices. 
 
 § 1. Tendency of the progress of society toward increased command over 
 the powers of nature ; increased security, and increased capacity of 
 co-operation 475 
 
 § 2. Tendency to a decline of the value and cost of production of all com- 
 modities 477 
 
 §3. — except the products of agriculture and mining, which have a tend- 
 ency to rise 479 
 
 § 4. — that tendency from time to time counteracted by improvements in 
 
 production 484 
 
 § 5. Effect of the progress of society in moderating fluctuations of value . 485 
 
 Chapter II. — Influence of the Progress of Industry and Population on 
 Bents, Profits, and Wages. 
 
 § 1. Characteristic features of industrial progress 489 
 
 § 2. First two cases, Population and Capital increasing, the arts of produc- 
 tion stationary 488 
 
XVI 
 
 CONTENTS. 
 
 PAGE 
 
 § 3. The arts of production advancing, capital and population stationary . 491 
 § 4. Theoretical results, if all three elements progressive .... 492 
 § 5. Practical results 493 
 
 Chapter III. — Of the Tendency of Profits to a Minimum. 
 
 § 1. Different theories as to the fall of profits 497 
 
 § 2. "What determines the minimum rate of profit ? 499 
 
 § 3. In old and opulent countries, profits habitually near to the minimum . 501 
 
 g 4, — prevented from reaching it by commercial revulsions . . . 504 
 
 g 5. — by improvements in production 506 
 
 § 6. — by the importation of cheap necessaries and implements . . 507 
 
 § 7. — by the emigration of capital 510 
 
 Chapter IV. — Consequences of the Tendency of Profits to a Minimum, 
 and the Stationary State. 
 
 § 1. Abstraction of capital not necessarily a national loss . . . .511 
 § 2. In opulent countries, the extension of machinery not detrimental but 
 
 beneficial to laborers 512 
 
 § 3. Stationary state of wealth and population dreaded by some writers, 
 
 but not in itself undesirable . , 514 
 
 Chapter V. — The Future of the Laboring- Class. 
 
 § 1. The possibility of improvement while laborers remain merely receivers 
 
 of wages . . . .518 
 
 § 2. — through small holdings, by which the landlord's gain is shared . 522 
 
 § 3. — through co-operation, by which the manager's wages are shared . 523 
 
 § 4. Distributive Co-operation 523 
 
 § 5. Productive Co-operation 526 
 
 § 6. Industrial Partnership 529 
 
 § 7. People's Banks ., . . . 532 
 
 BOOK V. 
 
 THE INFLUENCE OF GOVERNMENT. 
 
 Chapter I. — On the General Principles of Taxation. 
 
 1. Four fundamental rules of taxation 537 
 
 2. Grounds of the principle of Equality of Taxation .... 539 
 
CONTENTS. 
 
 XV11 
 
 PAGE 
 
 § 3. Should the same percentage be levied on all amounts of income ? . 540 
 § 4. Should the same percentage be levied on perpetual and on termiuable 
 
 incomes ? 544 
 
 § 5. The increase of the rent of land from natural causes a fit subject of 
 
 peculiar taxation 546 
 
 § 6. Taxes falling on capital not necessarily objectionable .... 548 
 
 Chapter II. — Of Direct Taxes. 
 
 § 1. Direct taxes either on 
 
 § 2. Taxes on rent 
 
 § 3. — on profits 
 
 § 4. — on wages 
 
 § 5. An Income-Tax 
 
 8 6. A House-Tax 
 
 ncome or expenditure 
 
 550 
 550 
 551 
 553 
 555 
 557 
 
 Chapter III. — Of Taxes on Commodities, or Indirect Taxes. 
 
 § 1. A tax on all commodities would fall on profits 562 
 
 § 2. Taxes on particular commodities fall on the consumer . . . 563 
 
 § 3. Peculiar effects of taxes on necessaries 565 
 
 § 4. — how modified by the tendency of profits to a minimum . . . 568 
 
 § 5. Effects of discriminating duties 570 
 
 § 6. Effects produced on international exchange by duties on exports and 
 
 on imports 574 
 
 Chapter IV. — Comparison between Direct and Indirect Taxation. 
 
 1. Arguments for and against direct taxation . 
 
 2. What forms of indirect taxation are most eligible ? . 
 
 3. Practical rules for indirect taxation .... 
 
 : 4. Taxation systems of the United States and other countries 
 j 5. A resume of the general principles of taxation . 
 
 583 
 587 
 588 
 590 
 594 
 
 Chapter V. — Of a National Debt. 
 
 § 1. Is it desirable to defray extraordinary public expenses by loans ? . 596 
 § 2. Not desirable to redeem a national debt by a general contribution . 599 
 § 3. In what cases desirable to maintain a surplus revenue for the redemp- 
 tion of debt 601 
 
xviii CONTENTS. 
 
 Chapter VI. — Of an Interference of Government grounded on Erro- 
 neous Theories. 
 
 PAGE 
 
 § 1 . The doctrine of Protection to Native Industry 605 
 
 § 2. — had its origin in the Mercantile System 60*7 
 
 § 3. — supported by pleas of national subsistence and national defense . 609 
 
 § 4. on the ground of encouraging young industries ; colonial policy. 612 
 
 § 5. on the ground of high wages 615 
 
 § 6. on the ground of creating a diversity of industries . . .621 
 
 § Y. on the ground that it lowers prices 625 
 
 Appendix I. 
 
 Bibliography of United States Tariff History . . . . .631 
 
 Bimetallism . . 633 
 
 American Shipping . . . .... . . . 635 
 
 Appendix II. 
 
 Examination Qaestions 637 
 
INDEX OF OHAETS. 
 
 PAGE 
 
 I. Population in 1830 Frontispiece, 
 
 II. Population in 1880 " 
 
 III. Increase of Population in the United States and the Various 
 
 Countries of Europe 114 
 
 IV. Movement of Population Center westward .... 116 
 V. Receipts, Expenses, and Profits of all Railways in the State 
 
 of New York 137 
 
 VI. Miles of Railroad in Operation, and Miles added each Year, 
 
 in the United States 139 
 
 VII. Proportion of Miles of Railroad to the Square Mile in the 
 
 United States and Europe face 140 
 
 VIII. Density of Foreign-horn Population in the United States '■ 152 
 
 IX. Production of Gold and Silver 307 
 
 X. Relative Values of Gold and Silver 318 
 
 XI. Issues and Depreciation of Continental Currency . . 357 
 XII. Premium on Gold, 1862-1865 face 359 
 
 XIII. Exports and Imports of Merchandise, from and into the 
 
 United States 401 
 
 XIV. Exports and Imports of Specie, from and into the United 
 
 States 408 
 
 XV. Cotton Crops under Free and Slave Labor . . . . 459 
 XVI. Changes in the Rank of the States in respect of Population. 496 
 
 XVII. Grain Crops of the United States 509 
 
 XVIII. Relative Areas of States of the United States and the Coun- 
 tries of Europe face 510 
 
 XIX. Comparison of Wages and Production in Cotton-Mills, 
 
 1830-1884 face 519 
 
 XX. Comparison of Spindles, Capital, etc., in Cotton-Mills, 1840- 
 
 1884 face 520 
 
 XXT. Public Revenue of the United States . " 590 
 
 XXII. Public Debt of the United States . . . . " 602 
 
 XXIII. Reduction of National Debts in Various Countries . . 604 
 
 XXIV. Occupations of People of the United States . . .619 
 
A SKETCH 
 
 HISTORY OF POLITICAL ECONOMY. 
 
 General Bibliography. — There is no satisfactory general history 
 of political economy in English. Blanqui's "Histoire de l'6conomie 
 politique en Europe " (Paris, 1837) is disproportioned and superficial, 
 and he labors under the disadvantage of not understanding the English 
 school of economists. He studies to give the history of economic facts, 
 rather than of economic laws. The hook has heen translated into Eng- 
 lish (New York, 1880). 
 
 Villeneiwe-Bargemont, in his " Histoire de l'economie politique " 
 (Paris, 1841), aims to oppose a "Christian political economy" to the 
 "English" political economy, and indulges in religious discussions. 
 
 Travers Twiss, " View of the Progress of Political Economy in Eu- 
 rope since the Sixteenth Century " (London, 1847), marked an advance 
 by treating the subject in the last four centuries, and by separating the 
 history of principles from the history of facts. It is brief, and only a 
 sketch. Julius Kautz has published in German the best existing history, 
 " Die geschichtliche Entwickelung der National-Oekonomie und ihrer 
 Literatur" (Vienna, 1860). (See Cossa, "Guide to the Study of Po- 
 litical Economy," page 80.) Cossa in his book has furnished a vast 
 amount of information about writers, classified by epochs and countries, 
 and a valuable discussion of the divisions of political economy by vari- 
 ous writers, and its relation to other sciences. It is a very desirable 
 little hand-book. McCulloch, in his "Introduction to the Wealth of 
 Nations," gives a brief sketch of the growth of economic doctrine. The 
 editor begs to acknowledge his great indebtedness for information to his 
 colleague, Professor Charles F. Dunbar, of Harvard University. 
 
 Systematic study for an understanding of the laws of 
 political economy is to be found no farther back than the 
 l 
 
2 A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 
 
 sixteenth century. The history of political economy is not 
 the history of economic institutions, any more than the his- 
 tory of mathematics is the history of every object possessing 
 length, breadth, and thickness. Economic history is the 
 story of the gradual evolution in the thought of men of an 
 understanding of the laws which to-day constitute the science 
 we are studying. It is essentially modern. 1 
 
 Aristotle 2 and Xenophon had some comprehension of the 
 theory of money, and Plato 3 had defined its functions with 
 some accuracy. The economic laws of the Romans were all 
 summed up in the idea of enriching the metropolis at the 
 expense of the dependencies. During the middle ages no 
 systematic study was undertaken, and the nature of economic 
 laws was not even suspected. 
 
 It is worth notice that the first glimmerings of political 
 economy came to be seen through the discussions on money, 
 and the extraordinary movements of gold and silver. About 
 the time of Charles Y, the young study was born, accom- 
 panied by the revival of learning, the Reformation, the dis- 
 covery of America, and the great fall in the value of gold 
 and silver. Modern society was just beginning, and had 
 already brought manufactures into existence — woolens in 
 England, silks in France, Genoa, and Florence ; Yenice had 
 become the great commercial city of the world ; the Hanse- 
 atic League was carrying goods from the Mediterranean to the 
 Baltic ; and the Jews of Lombardy had by that time brought 
 into use the bill of exchange. While the supply of the pre- 
 cious metals had been tolerably constant hitherto, the steady 
 increase of business brought about a fall of prices. From the 
 middle of the fourteenth to the end of the fifteenth century 
 
 1 Yet Blanqui diffusively gives nearly one half of his " History of Political 
 Economy " to the period before the sixteenth century, when politico-economic 
 laws had not yet been recognized. A. L. Perry, " Political Economy " (eighteenth 
 edition, 1883), also devotes thirty-five out of eighty-seven pages to the period 
 in which there was no systematic study of political economy. 
 
 9 Xenophon, " Means of increasing the Revenues of Attika," ch. ix ; also 
 see his " Economics ; " and Aristotle, " Politics," b. i, ch. vi, b. iii, ch. i. 
 
 8 " Republic," b. ii. 
 
A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 3 
 
 the purchasing power of money increased in the ratio of 
 four to ten. Then into this situation came the great influx 
 of gold and silver from the New World. Prices rose un- 
 equally ; the trading and manufacturing classes were flourish- 
 ing, while others were depressed. In the sixteenth century 
 the price of wheat tripled, but wages only doubled; the 
 laboring-classes of England deteriorated, while others were 
 enriched, producing profound social changes and the well- 
 known flood of pauperism, together with the rise of the mer- 
 cantile classes. Then new channels of trade were opened to 
 the East and West. Of course, men saw but dimly the oper- 
 ation of these economic causes ; although the books now be- 
 gan to hint at the right understanding of the movements 
 and the true laws of money. 
 
 Even before this time, however, Nicole Oresme, Bishop 
 of Lisieux (died 1382), had written intelligently on money ; ' 
 but, about 1526, the astronomer Copernicus gave a very good 
 exposition of some of the functions of money. But he, as 
 as well as Latimer,* while noticing the economic changes, 
 gave no correct explanation. The Seigneur de Malestroit, 
 a councilor of the King of France, however, by his errors 
 drew out Jean Bodin ' to say that the rise of prices was due 
 to the abundance of money brought from America. But he 
 was in advance of his time, as well as William Stafford, 4 the 
 author of the first English treatise on money, which showed 
 a perfect insight into the subject. Stafford distinctly grasped 
 
 1 Roscber exhumed this book, entitled " De Origine, Natura, Jure et Muta- 
 tionibus Monetarum," and it was reprinted in 1864 by Wolowski at Paris, 
 together with the treatise of Copernicus, " De Monetae Cudendae Ratione." 
 
 * Sermon at St. Paul's Cross, 1549 (also see Jacob, "On the Precious Met- 
 als," pp. 244, 245). 
 
 8 1530-1596. See H. Baudrillart's "J. Bodin et son temps" (Paris, 1853). 
 Bodin wrote "R6ponsc aux paradoxes de M. de Malestroit touchant l'en- 
 cherissement de toutes les choses et des monnaies" (1568), and "Discours sur 
 le rehaussement et la diminution des monnaies" (1578). 
 
 4 " A Briefe Conceipte of English Policy " (1581). The book was published 
 under the initials " W. S.," and was long regarded as the production of Shake- 
 spere 
 
4 A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 
 
 the idea that the high prices brought no loss to merchants, 
 great gain to those who held long leases, and loss to those 
 who did not buy and sell ; that, in reality, commodities were 
 exchanged when money was passed from hand to hand. 
 
 Such was the situation 1 which prefaced the first general 
 system destined to be based on supposed economic considera- 
 tions, wrongly understood, to be sure, but vigorously carried 
 out. I refer to the well-known mercantile system which 
 over-spread Europe. 2 Spain, as the first receiver of American 
 gold and silver, attributed to it abnormal power, and by 
 heavy duties and prohibitions tried to keep the precious 
 metals to herself. This led to a general belief in the tenets 
 of the mercantile system, and its adoption by all Europe. 
 1. It was maintained that, where gold and silver abounded, 
 there would be found no lack of the necessaries of life ; 2. 
 Therefore governments should do all in their power to secure 
 an abundance of money. Noting that commerce and politi- 
 cal power seemed to be in the hands of the states having the 
 greatest quantity of money, men wished mainly to create 
 such a relation of exports and imports of goods as would 
 bring about an importation of money. The natural sequence 
 of this was, the policy of creating a favorable "balance of 
 trade " by increasing exports and diminishing imports, thus 
 implying that the gain in international trade was not a mutu- 
 al one. The error consisted in supposing that a nation could 
 sell without buying, and in overlooking the instrumental 
 character of money. The errors even went so far as to create 
 prohibitory legislation, in the hope of shutting out imported 
 goods and keeping the precious metals at home. The system 
 
 1 For information on this as well as a later period, consult Jacob " On the 
 Precious Metals" (1832), a history of the production and influences of gold and 
 silver from the earliest times. He is considered a very high authority. Hum- 
 boldt's " Essay on New Spain " gives estimates and facts on the production of 
 the precious metals in America. A very excellent study has been made by 
 Levasseur in his "Histoire des classes ouvrieres en France jusqu'a la Revolu- 
 tion." For pauperism and its history, Nicholl's " History of the Poor Laws " 
 is, of course, to be consulted. 
 
 2 See Cossa, "Guide," p. 119. 
 
A SKETCH OF THE niSTORY OF POLITICAL ECONOMY. 5 
 
 spread over Europe, so that France (1544) and England (1552) 
 forbade the export of specie. But, with the more peaceful 
 conditions at the end of the sixteenth century, the expansion 
 of commerce, the value of money became steadier, and prices 
 advanced more slowly. 
 
 Italian writers were among the first to discuss the laws 
 of money intelligently, 1 but a number of acute Englishmen 
 enriched the literature of the subject, 3 and it may be said 
 that any modern study of political economy received its first 
 definite impulse from England and Erance. 
 
 The prohibition of the export of coin was embarrassing 
 to the East India Company and to merchants; and Mun 
 tried to show that freedom of exportation would increase 
 the amount of gold and silver in a country, since the profits 
 in foreign trade would bring back more than went out. It 
 probably was not clear to them, however, that the export of 
 bullion to the East was advantageous, because the commodi- 
 ties brought back in return were more valuable in England 
 than the precious metals. The purpose of the mercantilists 
 was to increase the amount of gold and silver in the country. 
 Mun, with some penetration, had even pointed out that too 
 much money was an evil ; but in 1663 the English Parlia- 
 ment removed the restriction on the exportation of coin. 
 The balance-of-trade heresy, that exports should always ex- 
 
 1 See Antonio Serra, " Breve Trattato delle Cause che possono fare abbon- 
 dare li Regni d' Oro e d' Argento," Naples, 1613. 
 
 8 Thomas Mun, "England's Treasure by Foreign Trade" (published in 1640 
 and 1664); "Advice of the Council of Trade" (1660), in Lord Overstone'a 
 " Select Tracts on Money " ; Sir William Petty, " Political Arithmetic," etc. 
 (about 1680); Sir Josiah Child, "New Discourse of Trade" (1690) ; Sir Dudley 
 North, " Discourse on Trade"(1691); Davenant's Works (1690-1711); Joshua 
 Gee, "Trade and Navigation of Great Britain" (1730); Sir Matthew Decker 
 (according to McCulloch, William Richardson), "Essay on the Causes of the 
 Decline of Foreign Trade" (1744); Sir James Steuart, "An Inquiry into the 
 Principles of Political Economy" (1767). For this period also consult Ander- 
 son's "History of Commerce" (1764), Macpherson's "Annals of Commerce" 
 (1803), and Lord Sheffield's " Observations on the Commerce of the American 
 States " (1783). 
 
6 A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 
 
 ceed imports (as if merchants would send out goods which, 
 when paid for in commodities, should be returned in a form 
 of less value than those sent out !), was the outcome of the 
 mercantile system, and it has continued in the minds of many 
 men to this day. The policy which aimed at securing a 
 favorable balance of trade, and the plan of protecting home 
 industries, had the same origin. If all consumable goods 
 were produced at home, and none imported, that would 
 increase exports, and bring more gold and silver into the 
 country. As all the countries of Europe had adopted the 
 mercantile theory after 1664, retaliatory and prohibitory 
 tariffs were set up against each other by England, France, 
 Holland, and Germany. Then, because it was seen that 
 large sums were paid for carrying goods, in order that no 
 coin should be required to pay foreigners in any branch 
 of industry, navigation laws were enacted, which required 
 goods to be imported only in ships belonging to the im- 
 porting nation. These remnants of the mercantile system 
 continue to this day in the shipping laws of this and other 
 countries. 1 
 
 A natural consequence of the navigation acts, and of the 
 mercantile system, was the so-called colonial policy, by which 
 the colonies were excluded from all trade except with the 
 mother-country. A plantation like New England, which 
 produced commodities in competition with England, was 
 looked upon with disfavor for her enterprise ; and all this 
 because of the fallacy, at the foundation of the mercantile 
 
 1 The English Navigation Act of 1651 is usually described as the cause of the 
 decline of Dutch shipping. The taxation necessitated by her wars is rather the 
 cause, as history shows it to us. Sir Josiah Child (1668. and 1690) speaks of a 
 serious depression in English commerce, and says the low rate of interest among 
 the Dutch hurts the English trade. This does not show that the acts greatly 
 aided English shipping. Moreover, Gee, a determined partisan of the mercantile 
 theory, says, in 1730, that the ship-trade was languishing. Sir Matthew Decker 
 (1744) confirms Gee's impressions. It looks very much as if the commercial 
 supremacy of England was acquired by internal causes, and in spite of her 
 navigation acts. The anonymous author of " Britannia Languens " confirms 
 this view. 
 
A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 7 
 
 system, that the gain in international trade is not mutual, but 
 that what one country gains another must lose. 1 
 
 An exposition of mercantilism would not be complete 
 without a statement of the form it assumed in France under 
 the guidance of Colbert, 2 the great minister of Louis XIV, 
 from 1661 to 1683. In order to create a favorable balance of 
 trade, he devoted himself to fostering home productions, by 
 attempts to abolish vexatious tolls and customs within the 
 country, and by an extraordinary system of supervision in 
 manufacturing establishments (which has been the stimulus 
 to paternal government from which France has never since 
 been able to free herself). Processes were borrowed from 
 England, Germany, and Sweden, and new establishments for 
 making tapestries and silk goods sprang up ; even the sizes 
 of fabrics were regulated by Colbert, and looms unsuitable 
 for these sizes destroyed. In 1671 wool-dyers were given 
 a code of detailed instructions as to the processes and ma- 
 terials that might be used. Long after, French industry felt 
 the difficulty of struggling with stereotyped processes. His 
 system, however, naturally resulted in a series of tariff meas- 
 ures (in 1664 and 1667). Moderate duties on the exportation 
 of raw materials were first laid on, followed by heavy customs 
 imposed on the importation of foreign goods. The shipment 
 of coin was forbidden ; but Colbert's criterion of prosperity 
 was the favorable balance of trade. French agriculture was 
 overlooked. The tariff of 1667 was based on the theory 
 that foreigners must of necessity buy French wines, lace, and 
 wheat ; that the French could sell, but not buy ; but the act 
 of 1667 cut off the demand for French goods, and Portu- 
 
 1 This was, in substance, the whole teaching of one of the leading and most 
 intelligent writers, Sir James Steuart (1*767), " Principles of Political Econo- 
 my." See also Held's " Carey's Socialwisscnschaf t und das Merkantilsystem " 
 (1866), which places Carey among the mercantilists. 
 
 2 Forbonnais, " R6cherches sur les finances de la France" (1595-1721); Pierre 
 C16ment, " Histoirc de Colbert ct de son administration" (1874); "Lettres, 
 instructions et m6moires de Colbert" (1861-1870) ; " Histoire du systeme pro- 
 tectee en France " (1S54) ; Martin, " Histoire de France," tome xiii. 
 
8 A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 
 
 guese wines came into the market. England and Holland 
 retaliated and shut off the foreign markets from France. The 
 wine and wheat growers of the latter country were ruined, 
 and the rural population came to the verge of starvation. 
 Colbert's last years were full of misfortune and disappoint- 
 ment ; and a new illustration was given of the fallacy that 
 the gain from international trade was not mutual. 
 
 From this time, economic principles began to be better 
 apprehended. It is to be noted that the first just observa- 
 tions arose from discussions upon money, and thence upon 
 international trade. So far England has furnished the most 
 acute writers : now France became the scene of a new move- 
 ment. Marshal Yauban, 1 the great soldier, and Boisguille- 
 bert a both began to emphasize the truth that wealth really 
 consists, not in money alone, but in an abundance of com- 
 modities ; that countries which have plenty of gold and silver 
 are not wealthier than others, and that money is only a me- 
 dium of exchange. It was not, however, until 1750 that 
 evidences of any real advance began to appear ; for Law's 
 famous scheme (1716-1720) only served as a drag upon the 
 growth of economic truth. But in the middle of the eight- 
 eenth century an intellectual revival set in : the " Encyclo- 
 paedia " was published, Montesquieu wrote his " l'Esprit des 
 Lois," Rousseau was beginning to write, and Voltaire was at 
 the height of his power. In this movement political econo- 
 my had an important share, and there resulted the first school 
 of Economists, termed the Physiocrats. 
 
 The founder and leader of this new body of economic 
 thinkers was Francois Quesnay, 8 a physician and favorite at 
 
 1 " Dime royale " (1707). 
 
 2 " Factum de la France " (1707). 
 
 8 When Quesnay was sixty-one years old he wrote the article, " Fermiera," in 
 the "Encyclopaedia" (of Diderot and D'Alembert) in 1756; article "Grains," in 
 the same, 1757; "Tableau economique," 1758; "Maximes generates du gou- 
 vernement economique d'un royaume" ; "Probleme economique " ; " Dialogues 
 sur le commerce et sur les travaux des artisans " ; " Droit natural " (1768). " Col- 
 lection des principaux economistes," edited by E. Daire (1846), is a collection 
 
A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 9 
 
 the court of Louis XY. Passing by his ethical basis of a 
 natural order of society, and natural rights of man, his main 
 doctrine, in brief, was that the cultivation of the soil was the 
 only source of wealth ; that labor in other industries was 
 sterile ; and that freedom of trade was a necessary condition 
 of healthy distribution. While known as the " Economists," 
 they were also called the " Physiocrats," ' or the "Agricultural 
 School." Quesnay and his followers distinguished between 
 the creation of wealth (which could only come from the soil) 
 and the union of these materials, once created, by labor in 
 other occupations. In the latter case the laborer did not, in 
 their theory, produce wealth. A natural consequence of this 
 view appeared in a rule of taxation, by which all the burdens 
 of state expenditure were laid upon the landed proprietors 
 alone, since they alone received a surplus of wealth (the famous 
 net produit) above their sustenance and expenses of produc- 
 tion. This position, of course, did not recognize the old 
 mercantile theory that foreign commerce enriched a nation 
 solely by increasing the quantity of money. To a physiocrat 
 the wealth of a community was increased not by money, but 
 by an abundant produce from its own soil. In fact, Quesnay 
 argued that the right of property included the right to dispose 
 of it freely at home or abroad, unrestricted by the state. This 
 doctrine was formulated in the familiar expression, " Laissez 
 faire, laissez passer.' 1 '' ' Condorcet and Condillac favored 
 the new ideas. The " Economists " became the fashion in 
 France; and even included in their number Joseph II of 
 Austria, the Kings of Spain, Poland, Sweden, Naples, Catha- 
 
 containing the works of Quesnay, Turgot, and Dupont de Nemours. See also 
 Lavergne, " Les economistes franchises du 18 e siecle" (1870); and H. Martin, 
 " Histoirc de France." Quesnay's " Tableau economique " was the Koran of 
 the school. 
 
 1 From x/"»T7?<ns rr/s (pvtrtus, as indicating a reverence for natural laws. 
 
 s The words were not invented by Quesnay, but formed the phrase of a mer- 
 chant, Legendrc, in addressing Colbert ; although it was later ascribed, as by 
 Perry, "Political Economy" (p. 46), and Cossa (p. 150), to one of the Econo- 
 mists, Gournay. (See Wolowski, in his Essay prefixed to " Roscher's Political 
 Economy," p. 36, American translation.) 
 
10 A SKETCH OF THE HISTOET OF POLITICAL ECONOMY. 
 
 rine of Russia, and the Margrave of Baden. 1 Agriculture, 
 therefore, received a great stimulus. 
 
 Quesnay had many vigorous supporters, of whom the 
 most conspicuous was the Marquis de Mirabeau a (father of 
 him of the Revolution), and the culmination of their popu- 
 larity was reached about 1764. A feeling that the true 
 increase of wealth was not in a mere increase of money, but 
 in the products of the soil, led them naturally into a reaction 
 against mercantilism, but also made them dogmatic and over- 
 bearing in their one-sided system, which did not recognize 
 that labor in all industries created wealth. As the mercan- 
 tile system found a great minister in Colbert to carry those 
 opinions into effect on a national scale, so the Physiocrats 
 found in Turgot 3 a minister, under Louis XVI, who gave 
 them a national field in which to try the doctrines of the 
 new school. Benevolently devoted to bettering the condi- 
 tion of the people while Intendant of Limoges (1751), he 
 was made comptroller-general of the finances by Louis XVI 
 in 1774. Turgot had the ability to separate political economy 
 from politics, law, and ethics. His system of freeing indus- 
 try from governmental interference resulted in abolishing 
 many abuses, securing a freer movement of grain, and in 
 lightening the taxation. But the rigidity of national preju- 
 
 1 The Margrave Karl Friedrich was the author of " Abrege des principes 
 de l'economie politique " (1775), and applied the physiocratic system of taxation 
 to two of his villages with disastrous results. 
 
 2 He published a first work on "Population" (1*756); the "Theorie de 
 l'hnpot" (1760); and "Philosophic rurale " (1763). In this latter work Mira- 
 beau adopted the " Tableau economique " as the key to the subject, and classed 
 it with the discovery of printing and of money. 
 
 3 In 1742 Turgot, when scarcely twenty, appeared as a sound writer on 
 Paper Money in letters to Abbe Cice. The physiocratic doctrines were pre- 
 sented in a more intelligible form in his greater work, " Reflexions sur la for- 
 mation et la distribution des richesses " (1766). Three works of Turgot, on 
 mining property, interest of money, and freedom in the corn-trade, bear a high 
 reputation. For works treating of Turgot, see Batbie, "Turgot, philosophe, 
 economiste et administrateur " (1861); Mastier, "Turgot, sa vie et sa doc- 
 trine" (1861); Tissot, "Turgot, sa vie, son administration et ses ouvrages " 
 (1862). 
 
A SKETCH OF THE HISTORY OP POLITICAL ECONOMY. \\ 
 
 dices was too strong to allow him success. He had little 
 tact, and raised many difficulties in his way. The proposal 
 to abolish the corvees (compulsory repair of roads by the 
 peasants), and substitute a tax on land, brought his king into 
 a costly struggle (1776), and attempts to undermine Turgot's 
 power were successful. With his downfall ended the in- 
 fluence of the Economists. The last of them was Dupont 
 de ISTemours, 1 who saw a temporary popularity of the Physio- 
 crats in the early years of the French Revolution, when the 
 Constituent Assembly threw the burden of taxes on land. 
 But the fire blazed up fitfully for a moment, only to die 
 away entirely. 
 
 All this, however, was the slow preparation for a newer 
 and greater movement in political economy than had yet been 
 known, and which laid the foundation of the modern study as 
 it exists to-day. The previous discussions on money and the 
 prominence given to agriculture and economic considerations 
 by the Economists made possible the great achievements of 
 Adam Smith and the English school. A reaction in Eng- 
 land against the mercantile system produced a complete 
 revolution in political economy. Vigorous protests against 
 mercantilism had appeared long before," and the true func- 
 tions of money had come to be rightly understood. 3 More 
 
 1 He was the editor of the works of Quesnay and Turgot, and wrote a 
 "Memoire de Turgot" (181*7). ne opposed the issue of assignats during the 
 French Revolution, and, falling into disfavor, he barely escaped the scaffold. 
 Having been a correspondent of Jefferson's, when Napoleon returned from Elba, 
 he came to America, and settled in Delaware, where he died in 1817. The 
 connection between the Economists and the framers of our Constitution is in- 
 teresting, because it explains some peculiarities introduced into oar system of 
 taxation in that document. The only direct taxes recognized by the Supreme 
 Court under our Constitution are the poll and land taxes ; and it is in this 
 connection that the constitutionality of the income-tax (a direct tax) is doubted. 
 
 8 One of the earliest is that of Roger Coke (1675), in which he argues for 
 free trade, and attacks the navigation acts. Sir Dudley North's " Discourse on 
 Trade " (1691) urges that the whole world, as regards trade, is but one people, 
 and explains that money is only merchandise. 
 
 3 Joseph Harris, an official in the London Mint, published a very clear ex- 
 position of this subject in his "Essay upon Money and Coins" (1757) ; but, 
 
12 A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 
 
 than that, many of the most important doctrines had been 
 either discussed, or been given to the public in print. It is 
 at least certain that hints of much that made so astonishing 
 an effect in Adam Smith's "Wealth of Nations" (1776) 
 had been given to the world before the latter was written. 
 To what sources, among the minor writers, he was most 
 indebted, it is hard to say. Two, at least, deserve consider- 
 able attention, David Hume and Richard Cantillon. The 
 former published his "Economic Essays" in 1752, which 
 contained what even now would be considered enlightened 
 views on money, interest, balance of trade, commerce, and 
 taxation ; and a personal friendship existed between Hume 
 and Adam Smith dating back as far as 1748, when the latter 
 was lecturing in Edinburgh on rhetoric. The extent of 
 Cantillon's acquirements and Adam Smith's possible indebt- 
 edness to him have been but lately recognized. In a recent 
 study l on Cantillon, the late Professor Jevons has pointed 
 out that the former anticipated many of the doctrines later 
 ascribed to Adam Smith, Malthus, and Eicardo. Certain it 
 is that the author of the "Wealth of Nations " took the 
 truth wherever he found it, received substantial sugges- 
 tions from various sources, but, after having devoted him- 
 self in a peculiarly successful way to collecting facts, he 
 wrought out of all he had gathered the first rounded system 
 of political economy the world had yet known ; which 
 pointed out that labor was at the basis of production, not 
 merely in agriculture, as the French school would have it, 
 but in all industries ; and which battered down all the de- 
 fenses of the mediaeval mercantile system. In a marked 
 degree Adam Smith 8 combined a logical precision and a 
 
 eighty years before, Rice Vaughan had given a satisfactory statement in his 
 " Treatise of Money." 
 
 1 " Contemporary Review," January, 1881, "Richard Cantillon." Adam 
 Smith had quoted Cantillon on his discussion of the wages of labor, b. i, ch. 
 viii, and evidently knew his book. 
 
 8 Born in 1*723, and died 1790; he was eleven years younger than Hume. 
 A Professor of Logic (1751) and Moral Philosophy (1752) at Glasgow, he 
 
A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 13 
 
 power of generalizing results out of confused data with a 
 practical and intuitive regard for facts which are absolutely 
 necessary for great achievements in the science of political 
 economy. At Glasgow (1751-1764:) Adam Smith gave lect- 
 ures on natural theology, ethical philosophy, jurisprudence, 
 and political economy, believing that these subjects were 
 complementary to each other. 
 
 A connected and comprehensive grasp of principles was 
 the great achievement of Adam Smith ; ' for, although the 
 " Wealth of Nations " was naturally not without faults, it has 
 been the basis of all subsequent discussion and advance in 
 political economy. In Books I and II his own system is elu- 
 cidated, while Book IV contains his discussion of the Agri- 
 cultural School and the attacks on the mercantile system. 
 Seeing distinctly that labor was the basis of all production 
 (not merely in agriculture), he shows (Books I and II) that 
 the wealth of a country depends on the skill with which its 
 labor is applied, and upon the proportion of productive to 
 unproductive laborers. The gains from division of labor are 
 explained, and money appears as a necessary instrument after 
 society has reached such a division. He is then led to dis- 
 cuss prices (market price) and value ; and, since from the 
 price a distribution takes place among the factors of produc- 
 tion, he is brought to wages, profit, and rent. The functions 
 
 published a treatise on ethical philosophy, entitled the "Theory of Moral Senti- 
 ments" (1759). Dugald Stewart is the authority as to Smith's life, having 
 received information from a contemporary of Smith's, Professor Miller (see 
 Playfair's edition of Smith's works) ; for Adam Smith destroyed all his own 
 papers in his last illness. His lectures on political economy at Glasgow out- 
 lined the results as they appeared in the " Wealth of Nations " ; it was not 
 until 1764 that he resigned his professorship, and spent two years on the Con- 
 tinent (twelve months of this in France). On his return home he immured 
 himself for ten years of quiet study, and published the " Wealth of Nations " 
 in 1776. (See also McCulloch's introduction to his edition of the "Wealth of 
 Nations," and Bagehot's "Economic Studies," iii.) 
 
 1 A glance at Sir James Steuart's treatise (1767) with the "Wealth of Na- 
 tions " shows Adam Smith's great qualities ; the former was a series of detached 
 essays, although of wide range, but admittedly without any consistent plan. 
 
14 A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 
 
 of capital are explained in general ; the separation of fixed 
 from circulating capital is made ; and he discusses the influ- 
 ence of capital on the distribution of productive and unpro- 
 ductive labor ; the accumulation of capital, money, paper 
 money, and interest. He, therefore, gets a connected set of 
 ideas on production, distribution, and exchange. On questions 
 of production not much advance has been made since his 
 day ; and his rules of taxation are now classic. He attacked 
 vigorously the balance-of-trade theory, "and the unnatural di- 
 version of industry in England by prohibitions, bounties, and 
 the arbitrary colonial system. In brief, he held that a plan 
 for the regulation of industry by the Government was inde- 
 fensible, and that to direct private persons how to employ 
 their capital was either hurtful or useless. He taught that a 
 country will be more prosperous if its neighbors are prosper- 
 ous, and that nations have no interest in injuring each other. 
 It was, however, but human that his work should have been 
 somewhat defective. 1 A new period in the history of politi- 
 
 1 (a.) He went into a vague discussion upon labor as a measure of value. (6.) 
 A legal rate of interest received his support, and his argument was answered 
 effectually by Bentham (" Defense of Usury "). (c.) While not agreeing with 
 the French school that agriculture is the only industry producing more than it 
 consumes, and so land pays rent, yet he thinks that it produces more in proportion 
 to the labor than other industries ; that manufactures came next ; and exporta- 
 tion and commerce after them. This error, however, did not modify his more 
 important conclusions. Thorold Rogers and even Chevalier, however, claim that 
 Adam Smith drew his inspiration from the French school, (d.) In the discus- 
 sion of rent, he failed to follow out his ideas to a legitimate end, and did not 
 get at the true doctrine. While hinting at the right connection between price 
 and rent, he yet believed that rent formed a part of price. Of the fundamental 
 principle in the doctrine of rent, the law of diminishing returns, he had no full 
 knowledge, but came very close to it. He points out that in colonies, when the 
 good soil has all been occupied, profits fall, (e.) In saying that every animal 
 naturally multiplies in proportion to, and is limited by, the means of subsist- 
 ence, Adam Smith just missed Malthus's law of population. In fact, Cantillon 
 came quite as near it. 
 
 Book III in his " Wealth of Nations " is concerned with the policy of Europe 
 in encouraging commerce at the expense of agriculture, and has less interest 
 for us. Book V considers the revenue of the sovereign, and much of it is now 
 obsolete ; but his discussion of taxation is still highly important. 
 
A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 15 
 
 cal economy, however, begins with Adam Smith. As Poscher 
 says, he stands in the center of economic history. 
 
 New writers now appear who add gradually stone after 
 stone to the good foundation already laid, and raise the edi- 
 fice to fairer proportions. The first considerable addition 
 comes from a contribution by a country clergyman, Thomas 
 Robert Malthus, 1 in his " Essay on the Principles of Popula- 
 tion " (1798). Against the view of Pitt that " the man who 
 had a large family was a benefactor to his country," Malthus 
 argued conclusively that "a perfectly happy and virtuous 
 community, by physical law, is constrained to increase very 
 rapidly. . . . By nature human food increases in a slow 
 arithmetical ratio ; man himself increases in a quick geomet- 
 rical ratio, unless want and vice stop him." In his second 
 edition (1803), besides the positive check of vice and want, 
 he gave more importance to the negative check of " self-re- 
 straint, moral and prudential." The whole theory was crudely 
 stated at first ; and it raised the cry that such a doctrine was 
 inconsistent with the belief in a benevolent Creator. In its 
 essence, the the law of population is simply that a tendency 
 and ability exist in mankind to increase its numbers faster 
 than subsistence, and that this result actually will happen 
 unless checks retard it, or new means of getting subsistence 
 
 1 Among the English Liberals carried away by the French Revolution, and by 
 such theories as those of Condorcet, was William Godwin, the author of " Po- 
 litical Justice" (1793) and the "Inquirer" (179Y), who advocated the abolition 
 of government and even marriage, since by the universal practice of the golden 
 rule there would come about a lengthening of life. Malthus tells us that hi3 
 study was brought forward as an answer to the doctrines of the " Inquirer," and 
 he applied his principles to Condorcet's and Godwin's ideas. It was a period 
 when pauperism demanded attention from all. Malthus favored the repeal of 
 the old poor-laws, as destroying independence of character among the poor. 
 
 Malthus also wrote "Principles of Political Economy" (1821) and "Defini- 
 tions in Political Economy" (1S27), but the former did not increase his reputa- 
 tion. He believed in taxing imported corn, and he gave in his adherence to the 
 doctrine of over-production. But, on the other hand, he was one of several 
 writers who, almost at the same time, discovered the true theory of rent. His 
 father was a friend of Godwin, and a correspondent of Rousseau. (Sec Bage- 
 hot, "Economic Studies," p. 135.) 
 
16 A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 
 
 arise. If an undue increase of population led to vice and 
 misery, in Malthus's theory, lie certainly is not to be charged 
 with unchristian feelings if he urged a self-restraint by which 
 that evil result should be avoided. Malthus's doctrines ex- 
 cited great discussion : Godwin says that by 1820 thirty or 
 forty answers to the essay had been written ; and they have 
 continued to appear. The chief contributions have been by A. 
 H. Everett, "New Ideas on Population " (1823), who believed 
 that an increase of numbers increased productive power ; by 
 M. T. Sadler, " Law of Population " (1830), who taught that 
 human fertility varied inversely with numbers, falling off 
 with density of population ; by Sir Archibald Alison, " Prin- 
 ciples of Population " (1840), who reasoned inductively that 
 the material improvement of the human race is a proof that 
 man can produce more than he consumes, or that in the prog- 
 ress of society preventive checks necessarily arise; by W, 
 K. Greg, "Enigmas of Life" (1873); and by Herbert Spen- 
 cer, " Westminster Eeview " (April, 1852), and " Principles 
 of Biology," (part vi, ch. xii and xiii), who worked out a physio- 
 logical check, in that with a mental development out of lower 
 stages there comes an increased demand upon the nervous 
 energy which causes a diminution of fertility. Since Dar- 
 win's studies it has^ been very generally admitted that it is 
 the innate tendency oi all organic life to increase until num- 
 bers press upon the limit of food-production ; not that popu- 
 lation has always done so in every country. 1 Malthus's 
 teachings resulted in the modern poor-house system, begin- 
 ning with 1834 in England, and they corrected some of the 
 abuses of indiscriminate charity. 
 
 While Adam Smith had formulated very correctly the 
 laws of production, in his way Malthus was adding to the 
 
 1 See Caimes, " Logical Method," Lecture VII, for the best modern state- 
 ment of the question. Also, Roscher, "Principles of Political Economy," b. 
 v, whose extended notes furnish information on facts and as to books. H. 
 Carey, "Social Science" (edition of 1877), iii, pp. 263-312, opposes the doctrine, 
 as also Bowen, " American Political Economy " (1870), ch. viii, and Henry George, 
 "Progress and Poverty" (1880), pp. 81-134. 
 
A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 17 
 
 means by which a better knowledge of the principles of dis- 
 tribution was to be obtained ; and the next advance, owing 
 to the sharp discussions of the time on the corn laws, was, by 
 a natural progress, to the law of diminishing returns and 
 rent. An independent discovery of the law of rent is to be 
 assigned to no less than four persons, 1 but for the full per- 
 ception of its truth and its connection with other principles 
 of political economy the credit has been rightly given to 
 David Ricardo, 8 next to Adam Smith without question the 
 greatest economist of the English school. Curiously enough, 
 although Adam Smith was immersed in abstract speculations, 
 his " homely sagacity " led him to the most practical results ; 
 but while Ricardo was an experienced and successful man of 
 business, he it was, above all others, who established the ab- 
 stract political economy, in the sense of a body of scientific 
 laws to which concrete phenomena, in spite of temporary 
 inconsistencies, most in the end conform. His work, there- 
 fore, supplemented that of Adam Smith ; and there are very 
 few doctrines fully worked out to-day of which hints have 
 not been found in Ricardo's wonderfully compact statements. 
 
 'J.Anderson, "An Inquiry into the Nature of the Corn Laws" (1777), 
 "Agricultural Recreations," vol. v, p. 401 (1801); Sir Edward West, "Essay 
 on the Application of Capital to Land" (1815); Rev. T. R. Malthus, "An In- 
 quiry into the Nature and Progress of Rent" (1815). The last two appeared 
 after Anderson's discoveries had been forgotten, but he has the honor of first 
 discovery. 
 
 ' Born in 1772 of Jewish parentage, Ricardo died in 1824. A rich banker, 
 who made a fortune on the Stock Exchange, he early in life retired from business. 
 The discussions on the Restriction Act and the corn laws led him to investigate 
 the laws governing the subjects of money and rent. He gained notice first by 
 his "Letters on the High Price of Bullion " (1810). The " Reply to Mr. Bosan- 
 quet" (1811), and "Inquiry into Rent" (1815), were followed by his greater 
 work, "Principles of Political Economy and Taxation " (1817). He entered the 
 House of Commons from Portarlington, a pocket borough in Ireland, and was 
 influential in the discussions on resumption. Although he was not on the 
 committee, his views on depreciated paper are practically embodied in the 
 famous "Bullion Report" (1810). Tooke, "History of Prices," says the results 
 of the restriction were not known until the time of Ricardo's contributions. 
 Neither Mill nor Say has had so great an influence as Ricardo has gained, 
 through the pages of his " Political Economy." 
 
18 A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 
 
 With no graces of exposition, his writings seem dry, but are 
 notwithstanding mines of valuable suggestions. 
 
 «*In the field of distribution and exchange Bicardo made 
 great additions. Malthus and West had shown that rent was 
 not an element in cost of production ; but both Malthus and 
 Kicardo seemed to have been familiar with the doctrine of 
 rent long before the former published his book. Bicardo, 
 however, saw into its connection with other parts of a system 
 of distribution. 1 The Malthusian doctrine of a pressure of 
 population on subsistence naturally forced a recognition of 
 the law of diminishing returns from land ; s then as soon as 
 different qualities of land were simultaneously cultivated, the 
 best necessarily gave larger returns than the poorest ; and the 
 idea that the payment of rent was made for a superior instru- 
 ment, and in proportion to its superiority over the poorest 
 instrument which society found necessary to use, resulted in 
 the law of rent. Bicardo, moreover, carried out this principle 
 as it affected wages, profits, values, and the fall of profits ; 
 but did not give sufficient importance to the operation of 
 forces in the form of improvements acting in opposition to 
 the tendency toward lessened returns. The theory of rent 
 still holds its place, although it has met with no little opposi- 
 tion. 3 A doctrine, quite as important in its effects on free 
 
 1 Johann Heinrich von Thiinen, a rich land-owner of Mecklenburg, in his 
 " Der isolirte Staat in Beziehung auf Landwirthschaft und National-Oekonomie " 
 (1826), worked entirely by himself, but reached practically the same law of rent 
 as Ricardo's. In spreading the doctrines of Adam Smith he has influenced later 
 German writers. 
 
 2 The first distinct recognition of this important physical law, according to 
 McCulloch (Introduction to " Wealth of Nations," lv), was in a fanciful work of 
 two volumes, entitled "Principes de tout gouvernement," published in 1766: 
 " Quand les cultivateurs, devenus nombreux, auront defriche toutes les bonnes 
 terres ; par leur augmentation successive, et par la continuity du defrichement, 
 il se trouvera un point ou il sera plus avantageux a un nouveau colon de prendre 
 a ferme des terres fecondes, que d'en defricher de nouvelles beaucoup moins 
 bonnes" (I, p. 126). The author was, however, unaware of the importance 
 of his discovery. 
 
 8 Carey, " Social Science " (I, ch. iv, v), and Bowen, " American Political 
 Economy " (ch. ix), have denied Ricardo's doctrine of rent. The supposed con- 
 
A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 19 
 
 exchange, was clearly established by Ricardo, under the name 
 of the doctrine of " Comparative Cost," which is the reason 
 for the existence of any and all international trade. 
 
 The work of Adam Smith was soon known to other coun- 
 tries, apart from translations. A most lucid and attractive 
 exposition was given to the French by J. B. Say, " Traite 
 d'economie politique" (1803), followed, after lecturing in 
 Paris from 1815-1830, by a more complete treatise, 1 " Cours 
 complete d'economie politique " (1828). While not con- 
 tributing much that was new, Say did a great service by 
 popularizing previous results in a happy and lively style, 
 combined with good arrangement, and many illustrations. 
 The theory that general demand and supply are identical is 
 his most important contribution to the study. Although he 
 translated Ricardo's book, he did not grasp the fact that 
 rent did not enter into price. Say's work was later supple- 
 mented by an Italian, Pellegrino Rossi,' who, in his " Cours 
 d'economie politique" (1843-1851), naturalized the doctrines 
 of Malthus and Ricardo on French soil. His work is of solid 
 value, and he and Say have given rise to an active school of 
 
 nection between free trade and Ricardo's teachings on rent ha9 prejudiced pro- 
 tectionists against him. Free trade follows from the theory of international 
 trade, and has nothing to do with Ricardo's main doctrines. It is true, Ricardo 
 was a vigorous free-trader. Of opposing views on rent, Carey's argument is 
 the most important. 
 
 1 Say drew considerable attention by his theory of " gluts." He based his 
 idea of value wholly on utility, which has lately been taken up again by Pro- 
 fessor Jevon3. Say was answered on this point by Ricardo in a later edition 
 of his "Political Economy." See Cairnes, "Leading Principles," p. 17. As a 
 free-trader and opponent of governmental interference, he went further than 
 his master, Adam Smith. Napoleon did not like this part of Say's teaching, 
 saying that it would destroy an empire of adamant, and tried to induce him to 
 modify hi3 position, but in vain. The second edition was not allowed to be 
 published until 1815. 
 
 s Educated at Bologna, he went to Geneva in 1816, and was called (1833) by 
 the French Government to succeed Say in the College de France. In 1845 he 
 was sent as minister to Rome, led the revolutionary movement there, and was 
 assassinated in 1848. His lectures were taken down in short-hand by one of his 
 disciples, Poree, and later published. 
 
20 A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 
 
 political economy in France. In Switzerland, Sismondi ex- 
 pounded Adam Smith's results in his " De la richesse com- 
 mAKiale" (1803), but was soon led into a new position, 
 elqftained in his k ' Nouveaux principes d'economie politique " 
 (1819). This has made him the earliest and most distin- 
 guished of the humanitarian economists. Seeing the suffer- 
 ings caused by readjustments of industries after the peace, 
 and the warehouses filled with unsold goods, he thought 
 the excess of production over the power of consumption was 
 permanent, and attacked division of labor, labor-saving ma- 
 chinery, and competition. Discoveries which would supersede 
 labor he feared would continue, and the abolition of patents, 
 together with the limitation of population, 1 was urged. 
 These arguments furnished excellent weapons to the social- 
 istic agitators. Heinrich S torch 2 aimed to spread the views 
 of Adam Smith 3 in Russia, by his " Cours d'economie poli- 
 tique" (1815). Without further developing the theory of 
 political economy, he produced a book of exceptional merit 
 by pointing out the application of the principles to Russia, 
 particularly in regard to the effect of a progress of wealth on 
 agriculture and manufactures ; to the natural steps by which 
 a new country changes from agriculture to a manufacturing 
 regime; and to finance and currency, with an account of 
 Russian depreciate<f*|)aper since Catharine II. 
 
 1 Malthus, who held that the unproductive consumption of the rich was 
 desirable for the poor, supported Sismondi. The latter was answered by Say 
 and McCulloch ("Edinburgh Review," March, 1821), to which Sismondi replied in 
 his second edition, in 182*7, and then withdrew from economic discussion. 
 
 2 A native of Riga, educated in Germany, Storch was charged by the Czar 
 Alexander with the duty of instructing his sons, the Grand Dukes Nicholas and 
 Michael, and his treatise is the collection of his lectures. Knowing little of Mal- 
 thus or Ricardo, he made a near approach to the doctrine of rent. His unspar- 
 ing denunciation of Russian administrative corruption caused the Government to 
 forbid the publication of the Russian translation. 
 
 3 Cossa, " Guide" (p. 173), points out Sartorius, Liider, Kraus, and Schlozer 
 as teachers of Adam Smith, in Germany, followed later by G. Huf eland, J. F. E. 
 Lotz, and L. H. von Jakob ; Count Hogendorp and Gogel, in Holland ; Count 
 Szecheny, in Hungary, and (pp. 211-213) Cagnazzi, Bosellini, Ressi, Sanfilippo, 
 and Scuderi (the last two protectionists), in Italy. Fuoco (1825-1827), in Italy, 
 
A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 21 
 
 For the next advance, we must again look to England. 
 Passing by McCulloch ' and Senior, a gifted writer, the legiti- 
 mate successor of Ricardo is John Stuart Mill. 1 His fat 
 
 itjp. 
 
 first saw the value of Ricardo's theory of rent, while Gioja opposed Adam Smith 
 and Say. But K. H. Rau (died 1870), in his " Lehrbuch der politischen Oekono- 
 mie" (1826, fifth edition 1864), had the most extensive influence in Germany 
 in expounding Adam Smith's system, with proper improvements. Another im- 
 portant writer of this school was F. B. W. von Hermann, "Staatswirthschaftliche 
 Untersuchungen " (1832). 
 
 •From 1810 to 1840, political economy was a favorite study in England, 
 and many writers deserve mention. There were Huskisson, a great financier ; 
 Thomas Tooke (1773-1858), who began his matchless " History of Prices " (1823) ; 
 Lord Overstone (Samuel Jones Loyd), " Tracts and other Publications on Metal- 
 lic and Paper Currency" (1858); Robert Torrens (1784-1864), " Essay on the 
 Production of Wealth" (1821); Archbishop Whately, " Introductory Lectures " 
 (1831), and "Easy Lessons on Money Matters" ; Cobden and Sir Robert Peel; 
 N. W. Senior (1790-1864), Professor of Political Economy at Oxford, article on 
 " Political Economy " (1836) in the " Encyclopaedia Metropolitana," and " Lect- 
 ures on the Cost of obtaining Money" (1830). Senior showed great ability in 
 analyzing cost of production, and stands far above McCulloch in real ability. 
 J. R. McCulloch (1789-1864), who preceded Mill, wrote a good but dry text- 
 book, " Principles of Political Economy " (1825), " A Treatise on the Principles, 
 Practice, and History of Commerce" (1833), an excellent "Dictionary of Com- 
 merce " (last enlarged edition, 1882), " Literature of Political Economy " (1845). 
 He edited Ricardo's works, with a biography, published a " Select Collection of 
 Scarce and Valuable Tracts on Money " (1856), " A Treatise on the Principles and 
 Practical Influence of Taxation and the Funding System " (1845). He contrib- 
 uted nothing practically new to the study. Miss Harriet Martineau (1802-1876) 
 gave some admirable although somewhat extended stories in illustration of the 
 various principles of political economy, entitled " Illustrations of Political Econ- 
 omy "(1859). This period in England was signalized by the abolition of the 
 Corn Laws (1846), and the Navigation Laws (1849), the passage of the Bank 
 Act (which separated the issue from the banking department, 1844), and the 
 general abandonment of protective duties. Cf. Noble, "Fiscal Legislation, 
 1842-1865 "(1867). 
 
 'Born in 1806, he died in 1873. For his extraordinary education see his 
 " Autobiography." When thirteen years old, he began the study of political 
 economy through lectures from his father while walking; he then (1819) read 
 Ricardo and Adam Smith, and at fourteen he journeyed to France, where he 
 lived for a time with J. B. Say. He entered the East India Office at seventeen, 
 was occupied finally in conducting the correspondence for the directors, where 
 he remained until 1858. When about twenty, Mill met twice a week in 
 Threadnccdle Street, from 8.30 to 10 a. m., with a political economy club, com- 
 posed of Grote, Roebuck, Ellis, Graham, and Prescott, where they discussed 
 
22 A SKETCH OF THE HISTORY OF. POLITICAL ECONOMY. 
 
 James Mill, 1 introduced him into a circle of able men, of which 
 Bentham was the ablest, although his father undoubtedly exer- 
 cisM the chief influence over his training. While yet but 
 twenty-three, in his first book, " Essays on some Unsettled 
 Questions of Political Economy" (1829-1830), he gained a 
 high position as an economist. In one form or another, all 
 his additions to the study are to be found here in a matured 
 condition. The views on productive and unproductive con- 
 sumption, profits, economic methods, and especially his very 
 clever investigation on international values, were there pre- 
 sented. His " Logic " (1843) contains (Book YI) a careful 
 statement of the relation of political economy to other sciences, 
 and of the proper economic method to be adopted in inves- 
 tigations. Through his " Principles of Political Economy " 
 (1848) he has exercised a remarkable influence upon men in 
 all lands ; not so much because of great originality, since, in 
 truth, he only put Ricardo's principles in better and more 
 attractive form, but chiefly by a method of systematic treat- 
 ment more lucid and practical than had been hitherto reached, 
 by improving vastly beyond the dry treatises of his prede- 
 cessors (including Ricardo, who was concise and dull), by in- 
 fusing a human element into his aims, and by illustrations and 
 practical applications. Even yet, however, some parts of his 
 book show the tendency to too great a fondness for abstract 
 statement, induced probably by a dislike to slighting his 
 reasons (due to his early training), and by the limits of his 
 book, which obliged him to omit many possible illustrations. 
 With a deep sympathy for the laboring-classes, he was 
 
 James Mill's and Ricardo's books, and also Bailey's " Dissertations on Value." 
 In these discussions, chiefly with Graham, Mill elaborated his theory of inter- 
 national values. In 1865 he entered Parliament for Westminster, and for 
 three years had a singular, characteristic, independent, but uninfluential career. 
 His adherence to two radical reforms, woman suffrage and changes in the ten- 
 ure of land, lost him any considerable influence. 
 
 1 He (m3-1836) wrote the " History of India " (1817-1819), and " Elements 
 of Political Economy " (1821). He was intimate with Ricardo, Bentham, Austin, 
 and Zachary Macaulay. 
 
A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 23 
 
 tempted into the field of sociology in this book, although he 
 saw distinctly that political economy was but one of the sci- 
 ences, a knowledge of which was necessary to a legislator in 
 reaching a decision upon social questions. Mill shows an 
 advance beyond Bicardo in this treatise, by giving the study 
 a more practical direction. Although it is usual to credit 
 Mill with originating the laws of international values, yet 
 they are but a development of Bicardo's doctrine of interna- 
 tional trade, and Mill's discussions of the progress of society 
 toward the stationary state were also hinted at, although 
 obscurely, by Bicardo. In the volumes of Mr. Mill the sub- 
 ject is developed as symmetrically as a proof in geometry. 
 While he held strongly to free trade, 1 he gave little space to 
 the subject in his book. All in all, his book yet remains the 
 best systematic treatise in the English language, although 
 much has been done since his day.' 
 
 He who has improved upon previous conceptions, and been 
 the only one to make any very important advance in the science 
 since Mill's day, is J. E. Cairnes, 2 in his " Leading Principles of 
 
 * In his " infant industries " argument, and his statement on navigation 
 laws (B. v, ch. x, £1), he conceded a great deal of free-trade ground; but in a 
 private letter, 1866 (see New York " Nation," May 29, 1873), he denied that he 
 intended the " infant industries " argument to apply to the United States. He 
 did not consider New England and Pennsylvania any longer as young countries 
 within the limits of his meaning. See also Taussig's " Protection to Young 
 Industries " (1883). 
 
 * W. T. Thornton (1813-1880), in a volume " On Labor: its Wrongful Claims 
 and Rightful Dues " (1869), attacked Mill's position on demand and supply, and 
 on wages, so that Mill in consequence abandoned his doctrine of wages, in the 
 "Fortnightly Review," May 1, 1869. Mr. Cairnes, however, rescued the Wages- 
 Fund theory from Mr. Mill in his "Leading Principles" (1874). Thornton also 
 wrote "Over-Population, and its Remedy" (1846), and an excellent book, 
 "Plea for Peasant Proprietorship" (1848). See also "Nineteenth Century," 
 August, 1879, for an answer by Thornton to Mr. Cairnes on the wages question. 
 
 3 James Eliot Cairnes was born at Drogheda, 1824; was educated at Trinity 
 College, Dublin, and made Whately Professor there in 1S56. Having been 
 Professor of Political Economy in Queen's College, Galway, he left Ireland in 
 1866 to accept the chair of Political Economy in University College, London. 
 In that year, through an attack of inflammatory rheumatism, he fell under 
 the power of a painful and growing malady which rendered him physically 
 
24 A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 
 
 Political Economy newly expounded " (1874). Scarcely any 
 previous writer has equaled him in logical clearness, origi- 
 nality, insight into economic phenomena, and lucidity of 
 style. He subjected value, supply and demand, cost of pro- 
 duction, and international trade, to a rigid investigation, 
 which has given us actual additions to our knowledge of the 
 study. The wages-fund theory was re-examined, and was 
 stated in a new form, although Mr. Mill had given it up. 
 Cairnes undoubtedly has given it its best statement. His 
 argument on free trade (Part III, chapter iv) is the ablest and 
 strongest to be found in modern writers. This volume is, 
 however, not a systematic treatise on all the principles of 
 political economy ; but no student can properly pass by 
 these great additions for the right understanding of the 
 science. His " Logical Method of Political Economy " 
 (18T5) is a clear and able statement of the process to be 
 adopted in an economic investigation, and is a book of ex- 
 ceptional merit and usefulness, especially in view of the ris- 
 ing differences in the minds of economists as to method. 
 
 A group of English writers of ability in this period have 
 written in such a way as to win for them mention in connec- 
 tion with Cairnes and Mill. Professor ~W. Stanley Jevons l 
 
 helpless, and portended certain death in the near future. The three years 
 before his death, while working only in hopeless pain, was the period of 
 his greatest literary activity. He collected his " Essays in Political Econ- 
 omy, Theoretical and Applied " (1873), in which he traced with great ability 
 the effect of the gold-discoveries ; brought out his " Leading Principles " (1874), 
 and an enlarged edition of his "Logical Method" (second edition, 1875). The 
 first edition of this last book was the result of lectures delivered in Dublin about 
 1858. In his earlier years the interest he felt in the United States led him into 
 a very vigorous and masterly study of " The Slave Power ; its Character, Career, 
 and Probable Dangers " (1862) ; " The Revolution in America " (1862). He then 
 wrote " Colonization and Colonial Government " (1864), and " Negro Suffrage " 
 (1866). He finally succumbed to his fatal disease, and passed away prema- 
 turely, July 8, 1875. A short sketch of his personal character was written by 
 Professor Fawcett, in the " Fortnightly Review," August 1, 1875, p. 149. 
 
 1 Professor Jevons (1835-1882) was educated at University College, London, 
 and spent the years from 1854 to 1859 in the Australian Royal Mint, where he 
 became interested in the gold question. He wrote a study on " A Serious Fall 
 
A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 25 
 
 put himself in opposition to the methods of the men just 
 mentioned, and applied the mathematical process to political 
 economy, but without reaching new results. His most ser- 
 viceable work has been in the study of money, which ap- 
 pears in an excellent form, " The Money and Mechanism of 
 Exchange" (1875), and in an investigation which showed a 
 fall of the value of gold since the discoveries of 1849. In 
 this latter he has furnished a model for any subsequent 
 investigator. Like Professor Jevons, T. E. Cliffe Leslie 1 
 opposed the older English school (the so-called " orthodox "), 
 but in the different way of urging with great ability the use 
 of the historical method, of which more will be said in speak- 
 ing of later German writers.' He also distinguished himself 
 by a study of land tenures, in his "Land Systems and Industrial 
 
 in the Value of Gold ascertained" (1863), which attracted great attention. A 
 line metaphysician and mathematician, he did not give his whole time to eco- 
 nomic work. In 1866 he became Professor of Logic and Cobden Lecturer on 
 Political Economy in Owens College, Manchester, but later became Professor of 
 Political Economy in University College, London. In 1881 he gave up academic 
 teaching, to devote himself to literature. He investigated the permanence of 
 the English coal-supply in "The Coal Question" (second edition, 1866). "The 
 Theory of Political Economy" (1871) contains his application of the mathemati- 
 cal method, and a bibliography of similar attempts. " The Railways and the 
 State" are to be found in his "Essays and Addresses" (1874). He prepared 
 an elementary book, " Primer of Political Economy " (second edition, 1878). He 
 was a contributor to the journals, and especially to the "London Statistical 
 Journal." His last books were " The State in Relation to Labor " (1882), which 
 deals with the question of state interference ; and " Methods of Social Reform " 
 (1883), containing a paper on industrial partnerships. He also advanced the 
 theory that the presence of sun-spots affected agriculture unfavorably, and that, 
 coming somewhat regularly, they produced a constant succession of commercial 
 crises. (See " Nature," xix, 33, 588.) At the early age of forty-seven he was 
 unfortunately drowned while bathing near Bexhill, England (1882). 
 
 1 Like Cairnes, Thomas Edward Cliffe Leslie was a native of Ireland, and 
 educated at Trinity College, Dublin, ne was called to the bar, but gave up the 
 law when offered the professorship of Political Economy in Queen's College, 
 Belfast. Besides his discussion of land tenures, he published "Political and 
 Moral Philosophy" (1874). ne long suffered from bad health, and died Jan- 
 uary 28, 1882. His volume of " Land Systems" is now (1884) out of print, and 
 scarce. He had also devoted himself to financial reform. 
 
 J See p. 33. 
 
26 A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 
 
 Economy of Ireland, England, and Continental Countries " 
 (1870), which was a brilliant exposition of the advantages of 
 small holdings. 
 
 By far the ablest- of the group, both by reason of his 
 natural gifts and his training as a banker and financial 
 editor, was "Walter Bagehot. 1 In his " Economic Studies " 
 (1880) he has discussed with a remarkable economic insight 
 the postulates of political economy, and the position of Adam 
 Smith, Ricardo, and Malthus ; in his " Lombard Street " 
 (fourth edition, 1873), the money market is pictured with a 
 vivid distinctness which implies the possession of rare quali- 
 ties for financial writing ; indeed, it is in this practical way 
 also, as editor of the London " Economist," a that he made 
 his great reputation. 
 
 Of living English economists, Professor Henry Fawcett, 3 
 in his " Manual of Political Economy " (1865 ; sixth edi- 
 tion, 1883), is a close follower of Mill, giving special care to 
 co-operation, silver, nationalization of land, and trades-unions. 
 He is an exponent of the strict wages-fund theory, and a 
 vigorous free-trader. Professor J. E. Thorold Rogers, of 
 Oxford, also holds aloof from the methods of the old school. 
 
 1 Born 1826, died 1811. He was early made familiar with banking in con- 
 nection with the Stuckey Banking Company, in Somersetshire ; was educated at 
 University College, London. In 1858 he married the daughter of James Wilson, 
 the editor of the London " Economist," whom he succeeded. He was a political 
 student of a rare kind, as is shown by his " English Constitution " (second edi- 
 tion, 1872), "Physics and Politics" (1872), "Literary Studies" (second edition, 
 18*79). He also wrote "Depreciation of Silver" (1877). 
 
 4 Established in 1843, and unquestionably the most useful economic publica- 
 tion for English questions. 
 
 3 Born 1833. His eye-sight was lost by an accidental shot in 1858, but he was 
 chosen Professor of Political Economy at Cambridge in 1863. His " Manual " 
 and the "Economic Position of the British Laborer" (1865) gave him reputa- 
 tion, in 1865 he entered Parliament, and since 1880 he has been Postmaster- 
 General in Mr. Gladstone's administration. He has published " Pauperism, its 
 Causes and Remedies" (1871), "Speeches" (1873), "Free Trade and Protec- 
 tion" (1878). His wife (born 1847), Millicent Garret Fawcett, reduced his 
 " Manual " into " Political Economy for Beginners " (1869), and also wrote 
 "Tales in Political Economy " (1874). 
 
A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 27 
 
 His greatest contribution has been a " History of Agriculture 
 and Prices in England," from 1255 to 1793, in four volumes l 
 (1866-1882). 
 
 Of all tlie writers a since Cairnes, it may be said that, while 
 adding to the data with which political economy has to do, and 
 putting principles to the test of facts, they have made no actual 
 addition to the existing body of principles ; although ques- 
 tions of distribution and taxation are certainly not yet fully 
 settled, as is seen by the wide differences of opinion expressed 
 on subjects falling within these heads by writers of to-day. 
 
 It now remains to complete this sketch of the growth of 
 political economy by a brief account of the writers on the 
 Continent and in the United States, beginning with France. 
 About the time of the founding of the London " Economist" 
 (1841) and " The Statistical Journal " (1839) in England, there 
 was established in Paris the " Journal des Economistes " 
 (1812), which contains many valuable papers. On the whole, 
 the most popular writer since J. B. Say has been Bastiat, 3 
 who aspired to be the French Cobden. He especially urged 
 
 1 He has also published "Social Economy" (1872); a small "Manual of Po- 
 litical Economy" (third edition, 1878); and a very considerable work, "Six 
 Centuries of Work and Wages: the History of English Labor," 1250-1883 
 (1884). He has edited Adam Smith's "Wealth of Nations," and written "Cob- 
 den and Modern Political Opinion" (1873), and "The Colonial Question," in 
 the Cobden Club Essays (1872). 
 
 s Of other books, mention should be made of G. J. Goschen's most admirable 
 "Theory of Foreign Exchanges" (eighth edition, 1875); "Reports and Speeches 
 on Local Taxation" (1872); T. Brassey's "Work and Wages" (third edition, 
 1883); E. Seyd, "Bullion and the Foreign Exchanges" (1868) ; H. D. McLeod, 
 an eccentric writer, " Dictionary of Political Economy " (only one vol., A-C, 
 1863, published) ; and " Theory and Practice of Banking " (second edition, 1875- 
 1876); H. Sidgwick, "Principles of Political Economy" (1883); J. Caird, 
 "Landed Interest" (fourth edition, 1880); L. Levi, "History of British Com- 
 merce" (1872). 
 
 s Fr6deric Bastiat (1801-1850) began life in a commercial house at Bayonne, 
 but gained notice first by an article, " De l'influence des tarifs francais et 
 anglais sur l'avenir des deux peuples," in the " Journal des Economistes " of 
 1844, and consequently had a very short period of literary activity. The corn- 
 law agitation in England and the revolutionary movement of 1S48 led him 
 to write chiefly against protection and socialism. He translated Cobden's 
 
28 A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 
 
 anew 1 view of value, which he defined as the relation estab- 
 lished by an exchange of services ; that nature's products are 
 gratuitous, so that man can not exact anything except for a 
 given service. Chiefly as a foe of protection, which he re- 
 garded as qualified socialism, he has won a reputation for 
 popular and clever writing ; and he was led to believe in a 
 general harmony of interests between industrial classes ; but 
 in general he can not be said to have much influenced the 
 course of French thought. On value, rent, and population, 
 he is undoubtedly unsound. A writer of far greater depth 
 than Bastiat, with uncommon industry and wide knowledge, 
 was Michel Chevalier,' easily the first among modern French 
 economists. He has led in the discussion upon the fall of 
 gold, protection, banking, and particularly upon money ; 
 an ardent free-trader, he had influence enough to induce 
 France to enter into the commercial treaty of 18G0 with 
 England. One of the ablest writers on special topics is 
 
 speeches, "Cobden et la Ligue" (1845). His arguments against protection, 
 "Sophismes economiques" (1846-1847), have been translated and published in 
 this country ; but the more extended exposition of his doctrine of value dimin- 
 ishing with the growth of civilization, and the harmony of all interests is in the 
 "Harmonies economiques" (1860). In this his position is not much differ- 
 ent from Carey's. His other books were "Capital et rente" (1849), directed 
 against gratuitous loans ; " Protectionisme et communisme " (1849), showing 
 protection to be communism for the rich; "Propriet6 et loi" (1848), directed 
 against socialism; and"Essais sur l'economie politique" (1853); " Le Libre- 
 echange" (1855). " OEuvres completes," 7 torn. (1855-1864). 
 
 1 Carey, however, claimed, with probable truth, that Bastiat borrowed the 
 idea from him, and Bastiat did not appear well in the controversy. Almost 
 no one has followed the French writer in his theory except Professor A. L. 
 Perry, of Williams College, Massachusetts, who has shaped his general argu- 
 ment according to this view of value. Also see Cairnes, " Essays in Political 
 Economy," p. 312. 
 
 3 Chevalier (1806-1879) first drew attention in an experiment of Saint-Simon- 
 ism in 1830-1833. After traveling in the United States, and writing excellent 
 books on the country and its railways, he became professor in the College de 
 France, where his lectures were collected in a " Cours d'economie politique " 
 (1842-1850; second edition, 1855-1866). His third volume, "La Monnaie," is 
 a standard treatise on money, with an extensive bibliography. His treatise 
 " Examen du systeme commerciale connu sous le nom de systeme protecteur " 
 
A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 29 
 
 Levasseur, 1 who has given us a history of the working-classes 
 before and since the Revolution, and the best existing mono- 
 graph on John Law. The most industrious and reliable of 
 the recent writers is the well-known statistician, Maurice 
 Block,' while less profound economists were J. A. Blanqui 3 
 and Wolowski/ The latter devoted himself enthusiastically 
 
 (1851) is now somewhat out of date. In his book "De la Baisse, probable 
 de Tor" (1S59), translated by Richard Cobden, he held that, unless prevented, 
 gold would drive out the French currency, as against Faucher, who thought the 
 fall temporary, and would progressively diminish. Other books are, " De l'in- 
 dustrie manufacturiere en France," and "La liberte du travail" (1848). 
 
 1 Emile Levasseur (born 1828) was professor at Alencon, 1852-1854, and 
 elected a member of the Academy of Sciences in 1868. He has published 
 "Recherches historiques sur le systeme de Law" (1854); "La question de 
 l'or" (1858); "Histoire des classes ouvrieres en France depuis la conquete de 
 Jules Cesar jusqu'a la revolution" (1859); the same history continued, "Depuis 
 17S9 jusqu'a nos joura" (1867); "La France industriale" (1865); " Cours 
 d'economie rurale, la France et scs colonies " (1808) ; " Precis d'6conomie 
 politique" (fourth edition, 1883). 
 
 * Born in Berlin in 1816, but since 1821 living in France. He was long 
 connected with the Bureau de Statistique Generate, and the Ministry of Agricul- 
 ture and Commerce, but in 1861 he left office and gave himself wholly to private 
 work. In this year he received the Montyon prize for statistics, not given since 
 1857. His chief books are: "Des charges de l'agriculture dans les divers pays 
 de l'Europe " (1850), a work crowned by the Institute ; " Statistique de la France, 
 comparee avec les divers etats de l'Europe" (1860); "Le dictionnaire de l'ad- 
 ministration francaise " (second edition, 1878); " Les finances de la France depuis 
 1815" (1863); "Les theoriciens du socialisme en Allemagne" (1872); and in 
 connection with M. Guillaumin, " L'annuaire de l'economie politique," since 1856. 
 
 8 Jerome- Adolphe Blanqui aine (1798-1854) in 1833 succeeded to the chair 
 of J. B. Say in the Conservatoire des Arts et Metiers, and was one of the 
 founders of the " Journal des economistes." Besides his " nistoire de l'econo- 
 mie politique en l'Europe " (1837-1852), he published a " Resume de l'histoire du 
 commerce et de l'industrie" (1826); "Precis Slementaire d'economie politique" 
 (1826) ; "Rapports, histoire de l'exposition des produits de l'industrie francaise 
 en 1827" (1827); "Cours d'economie politique" (2 vols., 1837-1838), and 
 notices of Huskisson and J. B. Say. 
 
 4 Louis Wolowski (1810-1876), of Polish origin, was Chevalier's chief an- 
 tagonist, and Professor of Legislation at the Conservatoire des Arts et Metiers 
 (1839) ; founded the first Credit Foncier of Paris, and was elected to the Institute 
 in the place of Blanqui. In 1875 he was chosen senator. He was a fertile 
 writer: "Mobilisation du Credit Foncier" (1839); "De l'organisation du tra- 
 vail " (1845) ; " Eludes de l'economie politique et de statistique " (1848) ; " Henri 
 
30 A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 
 
 to banks of issue, and bimetallism. A small group gave 
 themselves up chiefly to studies on agriculture and land- 
 tenures — H. Passy, 1 Laveleye, and Lavergne. 9 The latter is 
 by far the most important, as shown by his "L'economie 
 rurale de la France depuis 1789" (1857), which gives a 
 means of comparing recent French agriculture with that 
 before the Eevolution, as described in Arthur Young's 
 "Travels in France" (1789). The best systematic treatise 
 in French is the " Precis de la science economique " (1862), 
 by Antoine-Elise Cherbuliez, 9 a Genevan. The French were 
 the first to produce an alphabetical encyclopaedia of econom- 
 
 IV, 6conomiste, introduction de l'industrie de la soie en France" (1855); "In- 
 troduction de l'economie politique en Italie" (1859); "Lea finances de la 
 Russie" (1864); "La question des banques " (1864); his testimony in the 
 "Enquete sur les principes et les faits generaux qui regissent la circulation 
 monetaire et fiduciaire" (1866); "La banque d'Angleterre et les banques 
 d'^cosse" (186T) ; "Laliberte commerciale et les resultats du traite de com- 
 merce de 1860 " (1868) ; " L'or et l'argent " (1870) ; " La change et la circula- 
 tion " ; and a translation of Roscher. 
 
 1 Hippolyte-Philibert Passy (1793-1880) was educated for the army, and 
 served at Waterloo. He was more prominent as a statesman than as an econo- 
 mist. In 1838 he entered the Academy in the place of Talleyrand, but politics 
 left him unoccupied, and he wrote " Des systemes de culture et de leur influence 
 sur l'economie sociale" (1846), and "Des causes de l'inegalite des richesses" 
 (1849). 
 
 8 M. Leonce de Lavergne (1809-1880) came from Toulouse to Paris in 1840, 
 elected deputy in 1846, a member of the Institute in 1855, and became professor 
 in the Institut agronomique of Versailles. He was also the author of " L'econo- 
 mie rurale de PAngleterre, de l'Ecosse, et de l'lrlande" (1854), translated into 
 English (1855); " L'agriculture et la population" (1857), a striking confirma- 
 tion of Malthusianism ; "Les economistes francaises du dixhuitieme siecle " 
 (1870). He also has contributed largely to the " Revue des Deux Mondes " and 
 the " Journal des Economistes." For a personal sketch by Cliffe Leslie, see 
 "Fortnightly Review," February, 1881. 
 
 1 Born at Geneva, 1797, and died at Zurich, 1869. After studying law, he 
 became an advocate, and in 1833 Professor of Law in the place of Rossi. In 
 1837 he was made Professor of Political Economy and Public Law at Geneva. 
 He was also a member of the Swiss Grand Council. Besides his treatise, he 
 wrote: "Richesse ou pauvrete" (1840); "Le socialisme, e'est la barbarie" 
 (1848) ; " Etudes sur les causes de la misere" (1853); and aided in the "Dic- 
 tionnaire de l'economie politique." 
 
A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 31 
 
 ics, by Coquelin and Guillaumin, entitled the " Dictionnaire 
 de l'economie politique" (1851-1853, third edition, 1864). 
 Courcelle-Seneuil, 1 by his "Traite theorique et pratique 
 d'economie politique " (second edition, 1867) ; and Baudril- 
 lart, by a good compendium. Joseph Garnier, Dunoyer, 8 
 Paul Leroy-Beaulieu, 3 Reybaud,* De Parieu, 6 Leon Say, 6 
 Boiteau, and others, have done excellent work in France, and 
 "Walras 7 in Switzerland. 
 
 As Cobden had an influence on Bastiat, so both had an 
 influence in Germany in creating what has been styled by 
 opponents the " Manchester school," led by Prince-Smith 
 (died 1874). They have worked to secure complete liberty of 
 
 1 J. G. Courcelle-Seneuil (born 1813) left a commercial career to become a 
 writer, first for the journals, and later for the " Dictionnaire politique " (edited 
 by Pagnerre). In 1848 he was connected with the Ministry of Finance, and 
 called to a professorship of Political Economy in Santiago, Chili, 1853-1863. 
 His chief work is a " Traite theorique et pratique d'economie politique" (1858), 
 but he has also published "La credit de banque" (1840), reforms for the bank 
 of France; "Traite" des operations de banque " (1852 ; sixth edition, 1876); 
 " Traite des entreprises industrielles, commerciales, et agricoles " (1854) ; 
 " Etudes sur la science sociale " (1862) ; " Lecons elementaires d'economie 
 politique" (1864); "La banque libre " (1867); "Liberte et socialismc " 
 (1868) ; and articles in the " Dictionnaire de l'economie politique." 
 
 9 Died 1862 ; author of " De la liberte" du travail " (1845). 
 
 8 Professor of Political Economy at the College de France, author of an ex- 
 tended and able " Traite de la science des finances " (third edition, 1883). He 
 has also published " De l'etat moral et intellectual des populations ouvrieres et 
 de son influence sur le taux des salaires" (1868); " R6cherches economiques, 
 historiques, et statistiques sur les guerres contemporaines " (1869) ; v La ques- 
 tion ouvriere au XIX e siecle " (second edition, 1882) ; " L'administration locale 
 en France et en Angleterre " (1872) ; " Lc travail des femmes au XIX e siecle " 
 (1873); " Essai sur la repartition des richesses" (1880; second edition, 1883); 
 and "De la colonisation chez les peuples modernes " (1882). 
 
 4 He published two volumes on Socialism (see list of books p. 44). In sev- 
 eral volumes on the " Regime des manufactures " he described the condition of 
 the silk, woolen, cotton, and iron industries. 
 
 6 The most vigorous advocate of monometallism in France. He also wrote 
 well on taxation, "Traite des impots" (4 vols., 1866-1867). 
 
 * His " Rapport sur l'indemnitd du guerre " to the Corps L6gislatif gives 
 the account of the most marvelous exchange operation of modern times, aris- 
 ing from the payment of the indemnity by France to Germany (1871-1873). 
 
 ' An advocate of the mathematical method. 
 
32 A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 
 
 commerce and industry, and include in their numbers many 
 men of ability and learning. Yearly congresses have been 
 organized for the purpose of disseminating liberal ideas, and 
 an excellent review, the " Vierteljahrschrift fur Yolkswirth- 
 schaf t, Politik, und Kulturgeschichte," ' has been established. 
 They have devoted themselves successfully to reforms of 
 labor-laws, interest, workingmen's dwellings, the money sys- 
 tem, and banking, and strive for the abolition of protective 
 duties. Schulze-Delitzsch has acquired a deserved reputa- 
 tion for the creation of people's banks, and other forms of 
 co-operation. The translator of Mill into German, Adolph 
 Soetbeer," is the most eminent living authority on the pro- 
 duction of the precious metals, and a vigorous monometallist. 
 The school is represented in the " Handworterbuch der Yolks- 
 wirthschaf tslehre " (1865) of Reutzsch. The other writers 
 of this group are Yon Bohmert,* Faucher, Braun, "Wolff, Mi- 
 chaelis, Emminghaus, 4 Wirth, 5 Hertzka, and Yon Holtzen- 
 dorf . The best known of the German protectionists is Fried- 
 rich List, the author of " Das nationale System der politi- 
 schen Oekonomie " (1841), whose doctrines are very similar 
 to those of H. C. Carey in this country. 6 An able writer on 
 
 1 Founded in 1863, published at Berlin, and edited by Dr. Eduard Wiss. 
 
 ' Long Secretary to the Chamber of Commerce at Hamburg, and now hon- 
 orary professor at Gottingen. 
 
 8 Professor of Political Economy at Zurich in 1866, since 1875 director of 
 statistics at Dresden, and editor of " Der Arbeiterfreund." He made a valu- 
 able study of industrial partnerships, " Die Gewinnbetheiligung " (second edi- 
 tion 18*78). He also wrote " Freiheit der Arbeit " (1858), and " Beitrage zur ge- 
 schichte des Zunftwesens" (1861). 
 
 4 His most important work is " Das Armenwesen und die Armengesetzebung 
 in Europaischen Staaten" (18*70). Selected essays from this have been trans- 
 lated into English by E. B. Eastwick, " Poor Relief in Different Parts of Eu- 
 rope" (1873). 
 
 5 Max Wirth is at Vienna, and has devoted himself to a " Geschicte der 
 Handelskrisen " (1874), including the crisis of 1873. Baron von Hock has 
 written a history of the finances of France, and of the United States — " Die Finan- 
 zen und die Finanzgeschichte der vereinigten Staaten von Amerika" (1867). 
 
 ' This book has been translated into English by G. A. Matile, with notes by 
 Stephen Colwell (1856). 
 
A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 33 
 
 administrative functions and finance 1 is Lorenz Stein, of 
 Vienna. 
 
 But German economists are of interest, inasmuch as they 
 have established a new school who urge the use of the histori- 
 cal method in political economy, and it is about the question 
 of method that much of the interest of to-day centers. In 
 1814 Savigny introduced this method into jurisprudence, 
 and about 1850 it was applied to political economy. The 
 new school claim that the English " orthodox " writers begin 
 by an a priori process, and by deductions reach conclusions 
 which are possibly true of imaginary cases, but are not true 
 of man as he really acts. They therefore assert that eco- 
 nomic laws can only be truly discovered by induction, or a 
 study of phenomena first, as the means of reaching a gen- 
 eralization. To them Bagehot ' answers that scientific book- 
 keeping, or collections of facts, in themselves give no results 
 ending in scientific laws ; for instance, since the facts of 
 banking change and vary every day, no one can by induction 
 alone reach any laws of banking ; or, for example, the study 
 of a panic from the concrete phenomena would be like trying 
 to explain the bursting of a boiler without a theory of steam. 
 More lately, 3 since it seems that the new school claim that 
 induction does not preclude deduction, and as the old school 
 never intended to disconnect themselves from " comparing 
 conclusions with external facts," there is not such a cause of 
 difference as has previously appeared. Doubtless the insist- 
 ence upon the merits of induction will be fruitful of good 
 to " orthodox " writers, in the more general resort to the 
 collection of statistics and means of verification. It is sug- 
 gestive also that the leaders of the new school in Germany 
 
 1 Mohl on administration, and Rau and A. Wagner on finance, also deserve 
 mention. Stein, besides other works, is the author of a handbook, " Die Ver- 
 waltungslehre " (1870). 
 
 » " Fortnightly Review " (1876). 
 
 8 In Ely's " The Past and Present of Political Economy" (p. 9) it is clear 
 the new school do not differ so much in reality as in seeming from the methods 
 of the English writers, like Cairnes. 
 3 
 
34: A SKETCH OF THE HISTORY OF. POLITICAL ECONOMY. 
 
 and England have reached no different results by their new 
 method, and in the main agree with the laws evolved by the 
 old English school. The economist does not pretend that 
 his assumptions are descriptions of economic conditions ex- 
 isting at a given time ; he simply considers them as forces 
 (often acting many on one point or occasion) to be inquired 
 into separately, inasmuch as concrete phenomena are the 
 resultants of several forces, not to be known until we know 
 the separate operation of each of the conjoined forces. 
 
 The most prominent of the new school is Wilhelm Rosch- 
 er, 1 of Leipsic, who wrote a systematic treatise, " System der 
 Yolkswirthschaft " (1854, sixteenth edition, 1883), in the first 
 division of which the notes contain a marvelous collection 
 of facts and authorities. He agrees in results with Adam 
 Smith, Ricardo, Malthus, and Mill, but does not seem to 
 have known much of Cairn es. This book, however, is only 
 a first of four treatises eventually intended to include the 
 political economy of (2) agriculture, (3) industry and com- 
 
 1 The first division of Roscher's (bom 1817) treatise, also known under the 
 title of " Grundlagen der Nationalokonomie," has been translated here by J. J. 
 Lalor, in two volumes, " Principles of Political Economy " (1878), with an essay 
 by Wolowski on the historical method inserted. In 1840 he was made Privat- 
 Docent at Gottingen, and professor extraordinary in 1843. In 1844 he was 
 called to a chair at Erlangen, but since 1848 he has remained at Leipsic. A list 
 of Roscher's works is as follows : 
 
 " Grundriss zu Vorlesungen fiber die Staatswirthschaf t nach geschichtlicher 
 Methode " (1843) ; " Kornhandel und Theuerungspolitik " (third edition, 1852) ; 
 " Untersuchungen fiber das Colonialwesen " ; " Verhaltniss der Nationalokonomie 
 zum klassischen Alterthume" (1849) ; "Geschichte der englischen Volkswirth- 
 schaftslehre im 16. und 17. Jahrhunderts " ; " Ein nationalokonom. Princepder 
 Forstwirthschaft " ; " Ansichten der Volkswirthschaft aus dem geschichtlichen 
 Standpunkte " (second edition, 1861); "Diedeutsche Nationalokonomie an der 
 Grenzscheide des 16. und 17. Jahrhunderts " (1862) ; " Grfindungsgeschichte des 
 Zollvereins " (1S70) ; " Betrachtungen fiber die Wiihrungsfrage der deutschen 
 Miintzreform" (1872); "Geschichte der Nationalokonomie in Deutschland" 
 (1874) ; " Nationalokonomie des Ackerbaues " (eighth edition, 1875). His histo- 
 ries of political economy in England and Germany are particularly valuable (see 
 review by Cliffe Leslie, "Fortnightly Review," July, 1875). But he does not 
 rightly estimate the English writers when he takes McLeod as a type ; and Carey 
 is the only American to whom he refers. 
 
A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 35 
 
 merce, and (4) the state and commune. The ablest contem- 
 porary of Roscher, who was probably the first to urge the his- 
 torical method, is Karl Knies, 1 in " Die politische Oekonomie 
 vom Standpunkte dergeschichtlichenMethode" (1853, second 
 edition, 1881-1883). The third of the group who founded 
 the historical school is Bruno Hildebrand, 2 of Jena, author of 
 " Die Nationalokonomie der Gegenwart und Zukunft" (184S). 
 
 The German mind has always been familiar with the in- 
 terference of the state, and a class of writers has arisen, not 
 only advocating the inductive method, but strongly imbued 
 with a belief in a close connection of the state with industry : 
 and, inasmuch as the essence of modern socialism is a resort 
 to state-help, this body of men, with Wagner at their head, 
 has received the name of " Socialists 3 of the Chair," and 
 now wield a wide influence in Germany. Of these writers,* 
 Wagner, Engel, Schmoller, Yon Scheel, Brentano, Held, 
 Schonberg, and Schaffle are the most prominent. 
 
 The historical school has received the adhesion of Emile 
 
 1 Professor at Marburg, then at the University of Fricdburg, in Breisgau, 
 and now at Heidelberg. He has also studied railways (1853), and telegraphs 
 (1857), and money and credit, " Geld und Credit " (1873-1879). 
 
 2 Died 1878. He devoted himself mainly to criticism of other systems, and 
 seems to be the least able of the three. 
 
 3 " Catheder-Socialisten," or " Professional Socialists." 
 
 4 By far the ablest is Adolph Wagner, of Berlin, editor of Rau's " Lehrbuch 
 der politischen Oekonomie " (1872). He also published " Die russische Papier- 
 wahrung" (1868); " Staatspapiergeld, Reichs-Kassen Scheine, und Banknoten" 
 (1874); "Unsere Miintzreform" (1877); " Finanzwissenschaft " (1877); and 
 "Die Communalsteuerf rage " (1878). 
 
 Dr. Eduard Engel was formerly the head of the Prussian Bureau of Statistics. 
 Professor Gustav Schonberg, of Tubingen, with the assistance of twenty-one other 
 economists, produced a large "Handbuch der politischen Oekonomie" (1882). 
 The school have expressed their peculiar doctrines in the " Zeitschrift fur die 
 gesammte Staatswissensehaft " (quarterly, founded 1844, Tubingen), and the 
 " Jahrbvicher fur Nationalokonomie " (established at Jena, 1863). Also, see 
 A. Wagner's "Rede fiber die sociale Frage " (1872), n. v. Schecl's "Die Theo- 
 rie der socialen Frage '' (1871), and G. Schmoller's " Ueber einige Grundfrage 
 des Rects und der Volkswirthscbaft " (1875). A. E. F. Schaffle, once Minister 
 of Commerce at Vienna, gained considerable reputation by " Das gescllschaft- 
 liche System der menschlichen Wirthschaft " (third edition, 1873). 
 
36 A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 
 
 de Laveleye, 1 in Belgium, and other economists in England 
 and the United States. While Cliffe Leslie has been the 
 most vigorous opponent of the methods of the old school, 
 there have been many others of less distinction. Indeed, the 
 period, the close of which is marked by J. E. McCulloch's 
 book, was one in. which the old school had seemingly come 
 to an end of its progress, from too close an adhesion to de- 
 ductions from assumed premises. Mill's great merit was 
 that he began the movement to better adapt political econ- 
 omy to society as it actually existed ; and the historical school 
 will probably give a most desirable impetus to the same 
 results, even though its exaggerated claims as to the true 
 method 2 can not possibly be admitted. 
 
 1 Emile de Laveleye (born 1822) studied law at Ghent, but since 1848 has 
 given himself up to political economy and public questions. Through the pages 
 of the " Revue des Deux Mondes " he gained attention in 1863, and the next year 
 was made Professor of Political Economy at the University of Liege. In 1869 
 he received an election as corresponding member of the Academy of Sciences. 
 While a fertile writer on political subjects, he has produced " La question 
 d'or" (1860); " Essai sur l'economie rurale de la Belgique " (1863); a study 
 on "Suisse," see "Revue des Deux Mondes," April 15, 1863; "Etudes d'eco- 
 nomie rurale, la Neerlande " (1864) ;, " La marche monetaire depuis cinquante 
 ans" (1865); "Land Systems of Belgium and Holland," in the Cobden Club 
 volume on "Land Tenures" (1870); " Bi-metallic Money," translated by G. 
 Walker (1877); "La soeialisme contemporaine " (1881); "Elements d'econo- 
 mie politique" (1882), which satisfies a certain modern demand for "ethical 
 political economy." 
 
 3 Leslie found support in a well-known paper read before the Association 
 for the Advancement of Science (see " London Statistical Journal," December, 
 1878 ; also see " Penn Monthly," 1879), by J. K. Ingram, who claimed that the 
 old school isolated the study of economic from other social phenomena, and that 
 Ricardo's system was not only too abstract, but that its conclusions were of so 
 absolute a character that they were little adapted for real use. Robert Lowe 
 (Lord Sherbrooke) replied to Leslie and Ingram (" Nineteenth Century," Novem- 
 ber, 1878). For most of this literature it will be necessary to consult the maga- 
 zines. Cliffe Leslie, "Fortnightly Review" (November, 1870), placed Adam 
 Smith among the inductive economists ; D. Syme attacked the old methods, 
 "Westminster Review," vol. xevi (1871) ; Cairnes represented the old school, 
 and discussed the new theories, " Political Economy and Comte," in the " Fort- 
 nightly Review," vol. xiii, p. 579 (1870), "Political Economy and Laissez 
 Faire," vol. xvi, p. 80 (1871), and in 1872; see also his admirable "Logical 
 
A SKETCH OF TIIE HISTORY OF POLITICAL ECONOMY. 37 
 
 Italian writers have not received hitherto the attention 
 they deserve. After 1830, besides Rossi, who went to 
 France, there was Romagnosi, who dealt more with the re- 
 lations of economics to other studies ; Cattanes, who turned 
 to , rural questions and free trade (combating the German, 
 List); Scialoja, at the University of Turin; and Francesco 
 Ferrara, also at Turin from 1849 to 1858. The latter was a 
 follower of Bastiat and Carey, as regards value and rent, and 
 at the same time was a radical believer in laissez-faire. Since 
 the union of Italy there has been a new interest in economic 
 study, as with us after our war. The most eminent living 
 Italian economist is said to be Angelo Messedaglia, holding 
 a chair at Padua since 1858. He has excelled in statistical 
 and financial subjects, and is now engaged on a treatise on 
 money, " Moneta," of which one part has been issued (1882). 
 Marco Minghetti and Fedele Lampertico stand above others, 
 the former for a study of the connection of political economy 
 
 Method"; F. Harrison discussed the limits of political economy, ibid. (1865), 
 and answered Cairnes in an article on " Cairnes on Political Economy and M. 
 Comte," "Fortnightly Review," vol. xiv, p. 39 (1870). W. Newmarch gave 
 attention to Ingram's paper, " Statistical Journal " (1871). Leslie, " Fortnightly 
 Review" (1875), and G. Cohn, ibid. (1873), wrote on political economy in Ger- 
 many. Leslie also contributed an article on " Political Economy and Sociology, 
 "Fortnightly Review," vol. xxxi, p. 25 (1879), and the "Bicentenary of Politi- 
 cal Economy," in the " Bankers' Magazine," vol. xxxii, p. 29. Leslie examined 
 the philosophical method, " Penn Monthly " (1877) ; Jevons saw the only hope 
 for the future in the mathematical method, "Fortnightly Review" (1876); 
 McLcod asks, " What is political ecomony ? " in the " Contemporary Review " 
 (1875); Maurice Block entered the discussion, "Penn Monthly" (1877), and 
 "Bankers' Magazine," March and November, 1878. Henry Sidgwick answers 
 Leslie in a paper on " Economic Method," in the " Fortnightly Review," vol. 
 xxxi (1879), p. 301. See also essay by Wolowski prefixed to Roscner's "Politi- 
 cal Economy " (English translation) ; Roscher's own statement in Chapters II 
 and III of the Introduction to his " Political Economy," and Lavcleye's " New 
 Tendencies of Political Economy" (1879). See also "Penn Monthly," vol. vii, 
 p. 190, and "Bankers' Magazine," vol. xxxiii, pp. 601, 698, 761 ; vol. xxxvi, pp. 
 349, 422 ; S. Ncwcomb for an admirable essay " On the Method and Province 
 of Political Economy," "North American Review" (1875), vol. exxi, p. 241, 
 in which the " Orthodox " method is strongly supported ; and an extreme posi- 
 tion in favor of the historical method in a pamphlet, " The Past and Present of 
 Political Economy," by R. T. Ely (1884). 
 
38 A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 
 
 with morals, and for his public career as a statesman ; the lat- 
 ter for his studies on paper money and other subjects. Carlo 
 Ferrais presented a good monograph on " Money and the 
 Forced Currency " (1879) ; and Boccardo issued a library of 
 selected works of the best economists, and a large Dictionary 
 of Political Economy, "Dizionario universale di Economia 
 Politica e di Commercio " (2 vols., second edition, 1875). 
 Luigi Luzzati is a vigorous advocate of co-operation ; and Elia 
 Lattes has made a serious study of the early Yenetian banks. 
 
 Political economy has gained little from American writ- 
 ers. Of our statesmen none have made any additions to the 
 science, and only Hamilton and Gallatin can properly be 
 called economists. Hamilton, in his famous " Report on 
 Manufactures " (1791), shared in some of the erroneous con- 
 ceptions of his day ; but this paper, together with his reports 
 on a national bank and the public credit, are evidences of a 
 real economic power. Gallatin's " Memorial in Favor of 
 Tariff Reform" (1832) is as able as Hamilton's report on 
 manufactures, and a strong argument against protection. 
 Both men made a reputation as practical financiers. 
 
 " With few exceptions, the works produced in the United 
 States have been prepared as text-books ' by authors engaged 
 in college instruction, and therefore chiefly interested in 
 bringing principles previously worked out by others within 
 the easy comprehension of undergraduate students." ' Of these 
 
 1 Daniel Raymond, " The Elements of Political Economy " (1820). Thomas 
 Cooper, "Lectures on the Elements of Political Economy " (1826); "A Manual 
 of Political Economy " (1834). Willard Phillips, " A Manual of Political Econo- 
 my" (1828); "Propositions concerning Protection and Free Trade" (1850). 
 President Francis Wayland (1*796-1865), " The Elements of Political Economy " 
 (1837). Henry Vethake, "Principles of Political Economy" (1838). From 
 1840 to the civil war there appeared F. Bowen's "Principles of Political 
 Economy " (1856), since changed to " American Political Economy " (1873), 
 which opposed the Malthusian doctrine and defended protection ; John Bas- 
 com's "Political Economy" (1859); and Stephen Col well's "Ways and Mean3 
 of Payment " (1859). After the war, " Science of Wealth " (1866), by Amasa 
 Walker, a lecturer in Amherst College, and father of F. A. Walker. 
 
 9 Prof. C. F. Dunbar, " North American Review," January, 1876, in an admi- 
 rable review of economic science in America during the last century (1776-1876). 
 
A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 39 
 
 exceptions, Alexander II. Everett's " ]STew Ideas on Popula- 
 tion " l (1822), forms a valuable part in the discussion which 
 followed the appearance of Malthus's " Essay." The writer, 
 however, who has drawn most attention, at home and abroad, 
 for a vigorous attack on the doctrines of Ricardo is Henry 
 Charles Carey. 2 Beginning with " The Rate of "Wages " 
 (1835), he developed a new theory of value (see " Principles 
 of Political Economy," 1837-1840), " which he defined as a 
 measure of the resistance to be overcome in obtaining things 
 required for use, or the measure of the power of nature over 
 man. In simpler terms, value is measured by the cost of 
 reproduction. The value of every article thus declines as 
 the arts advance, while the general command of commodities 
 constantly increases. This causes a constant fall in the value 
 of accumulated capital as compared with the results of pres- 
 ent labor, from which is inferred a tendency toward harmony 
 rather than divergence of interests between capitalist and 
 laborer." This theory of value 3 he applied to land, and even 
 to man, in his desire to give it universality. He next claimed 
 to have discovered a law of increasing production from land 
 in his " Past, Present, and Future " (1848), which was dia- 
 metrically opposed to Ricardo's law of diminishing returns. 
 His proof was an historical one, that in fact the poorer, not 
 the richer lands, were first taken into cultivation. This, 
 however, did not explain the fact that different grades of 
 
 1 See supra, p. 16. 
 
 s Carey (1793-1879) was the son of an Irish exile, and began a business ca- 
 reer at the age of twelve. At twenty-eight he was the leading partner in the pub- 
 lishing firm of Carey & Lea, Philadelphia, from which he retired in 1835, to de- 
 vote himself wholly to political economy. His leading works have been trans- 
 lated into French, Italian, Portuguese, German, Swedish, Russian, Magyar, and 
 Japanese. He has written thirteen octavo volumes, three thousand pages in 
 pamphlet form, and twice that amount for the newspaper press. See " Pro- 
 ceedings of the American Academy of Science" (1881-1882, p. 417), and W. 
 Elder's " Memoir of Henry C. Carey " (January 5, 1880). The latter gives a 
 list of his books. 
 
 'Bastiat's "Harmonies dconomiques " appeared in 1850, and the question 
 of his indebtedness to Carey was discussed, rather unfavorably to Bastiat, in a 
 series of letters in the " Journal des dconomistes" for 1851. 
 
40 A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 
 
 land are simultaneously under cultivation, on which Ricardo's 
 doctrine of rent is based. The constantly increasing produc- 
 tion of land naturally led Carey to believe in the indefinite 
 increase of population. He, however, was logically brought 
 to accept the supposed law of an ultimate limit to numbers 
 suggested by Herbert Spencer, based on a diminution of hu- 
 man fertility. He tried to identify physical and social laws, 
 and fused his political economy in a system of " Social Sci- 
 ence " (1853), and his " Unity of Law " (1872). Since about 
 1845 he has been a protectionist, and his writings are vigor- 
 ously controversial. In his doctrines on money he is dis- 
 tinctly a mercantilist ; ' but, by his earnest attacks on all that 
 has been gained in the science up to his day, he has done a 
 great service in stimulating inquiry and causing a better 
 statement of results. While undoubtedly the best known 
 of American writers, yet, because of a prolix style and an 
 illogical habit of mind, he has had no extended influence on 
 his countrymen. 8 
 
 The effect of the civil war is now beginning to show 
 itself in an unmistakable drift toward the investigation of 
 economic questions, and there is a distinctly energetic tone 
 which may bring new contributions from American writers. 
 General Francis A. "Walker, 3 in his study on " The Wages 
 Question " (1876), has combated the wages-fund theory, and 
 
 1 See an able study, by Adolphe Held, " Carey's Socialwissenschaft und das 
 Merkantilsystem " (1866). 
 
 1 His system appears also in the books of disciples : E. Peshine Smith, " A. 
 Manual of Political Economy " (1853), William Elder's " Questions of the Day " 
 (18*71), and of Robert E. Thompson's " Social Science and National Economy " 
 (18*75). A condensation of Carey's " Social Science " has been made by Kate 
 McKean, in one volume, octavo. 
 
 3 The son of Amasa Walker, and formerly Professor of Political Economy 
 and History in the Sheffield Scientific School of Yale College, he has become 
 well known for his statistical work in connection with the United States census. 
 His "Statistical Atlas of the United States " (18*74) is unequaled. He has also 
 published "Money" (18*78); "Money, Trade, and Industry " (1879); "Political 
 Economy" (1883); and "Land and Rent" (1884). The last book replies to 
 various attacks on Ricardo's doctrine of rent, and particularly to Henry George's 
 
A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 41 
 
 proposed in its place a doctrine that wages are paid out of the 
 product, and not out of accumulated capital. Professor "W. 
 G. Sumner ' is a vigorous writer in the school of Mill and 
 Cairnes, and has done good work in the cause of sound money 
 doctrines. Both General Walker and Professor Sumner hold 
 to the method of economic investigation as expounded by 
 Mr. Cairnes ; although several younger economists show the 
 influence of the German school. Professor A. L. Perry,* of 
 "Williams College, adopted Bastiat's theory of value. He also 
 accepts the wages-fund theory, rejects the law of Malthus, 
 and, although believing in the law of diminishing returns 
 from land, regards rent as the reward for a service rendered. 
 Another writer, Henry George, 3 has gained an abnormal 
 prominence by a plausible book, " Progress and Poverty " 
 (1880), which rejects the doctrine of Malthus, and argues 
 that the increase of production of any kind augments the 
 
 " Progress and Poverty." General Walker in 1883 became President of the 
 Massachusetts Institute of Technology in Boston. He is also well known as an 
 advocate of bimetallism. 
 
 1 Professor of Political and Social Science in Yale College, and author of a 
 "History of American Currency " (1874) ; " Lectures on the History of Protec- 
 tion in the United States" (1877); "What Social Classes owe to Each Other" 
 (1883). He is a monometallist, and has devoted himself vigorously to the ad- 
 vocacy of free trade. His last book is a study in sociology, not in political 
 economy. 
 
 * He has written "Political Economy" (eighteenth edition, 1883), and also 
 " Introduction to Political Economy," an elementary work on the same basis as 
 the former. 
 
 3 Henry George was born in Philadelphia, 1839, ran away to sea, and in 
 1857 entered a printing-office in San Francisco. In 1871 he was one of the 
 founders of the " San Francisco Post," which he gave up in 1875, and received 
 a public office. He first began to agitate his views in a pamphlet entitled 
 "Our Land and Land Policy" (1871), but not until the comparative leisure of 
 his occupation (1875) gave him opportunity did he seriously begin the study 
 which resulted in his " Progress and Poverty." This volume was begun in the 
 Bummer of 1877, and finished in the spring of 1879. The sale of the book, it 
 is needless to say, has been phenomenal. He has also applied his doctrine of 
 land to Ireland, in a pamphlet entitled " The Irish Land Question " (1882). His 
 last book is a collection of essays entitled "Social Problems" (1884). His 
 home is now in New York. 
 
42 A SKETCH OF THE HISTORY OF POLITICAL ECONOMY. 
 
 demand for land, and so raises its value. His conclusions 
 lead him to advocate the nationalization of land. Although 
 in opposition to almost all that political economy has yet 
 produced, his writing has drawn to him very unusual notice. 
 The increasing interest in social questions, and the general 
 lack of economic training, which prevents a right estimate of 
 his reasoning by people in general, sufficiently account for 
 the wide attention he has received. 
 
 Of late, however, new activity has been shown in the 
 establishment of better facilities for the study of political 
 economy in the principal seats of learning — Harvard, Yale, 
 Cornell, Columbia, Michigan, and Pennsylvania : and a 
 " Cyclopsedia of Political Science " (1881-1884, three vol- 
 umes) has been published by J. J. Lalor, after the example 
 of the French dictionaries. 
 
BOOKS FOR CONSULTATION 
 
 FROM ENGLISH, FRENCH, AND GERMAN A UTHORS. 
 
 General Treatises forming a Parallel Course of Reading with 
 
 Mill. 
 
 Professor Fawcett's "Manual of Political Economy" (London, sixth 
 edition, 1883) is a brief statement of Mill's book, with additional matter 
 on the precious metals, slavery, trades-unions, co-operation, local taxa- 
 tion, etc. 
 
 Antoine-Elise Cberbuliez's " Precis de la science economique " 
 (Paris, 1862, 2 vols.) follows the same arrangement as Mill, and is con- 
 sidered the best treatise on economic science in the French language. 
 He is methodical, profound, and clear, and separates' pure from applied 
 political economy. 
 
 Other excellent books in French are : Courcelle-Seneuil's " Traite 
 th6orique et pratique d'econoraie politique " (1858), (Paris, second edi- 
 tion, 1867, 2 vols.), and a compendium by Llenri Baudrillart, " Manuel 
 d'6conomie politique" (third edition, 1872). 
 
 Roscher's "Principles of Political Economy" is a good example of 
 the German historical method ; its notes are crowded with facts ; but 
 the English translation (New York, 1878) is badly done. There is an 
 excellent translation of it into French by Wolowski. 
 
 A desirable elementary work, " The Economics of Industry " (Lon- 
 don, 1879), was prepared by Mr. and Mrs. Marshall. 
 
 Professor Jevons wrote a " Primer of Political Economy " (1878), 
 which is a simple, bird's-eye view of the subject in a very narrow 
 compass. 
 
 Important General Works. 
 
 Adam Smith's " Wealth of Nations " (1776). The edition of McOul- 
 loch is perhaps more serviceable than that of J. E. T. Rogers. 
 
44 BOOKS FOR CONSULTATION. 
 
 Kicardo's "Principles of Political Economy and Taxation" (1817). 
 
 J. S. Mill's " Principles of Political Economy " (2 vols., 1848— sixth 
 edition, 1865). 
 
 Schonberg's "Handbuch der politiscben Oekonomie" (1882). This 
 is a large co-operative treatise by twenty-one writers from the histori- 
 cal school. 
 
 Cairnes's " Leading Principles of Political Economy " (1874) ; " Logi- 
 cal Method" (1875), lectures first delivered in Dublin about 1858. 
 
 Carey's "Social Science" (1877). This has been abridged in one 
 volume by Kate McKean. 
 
 F. A. Walker's "Political Economy" (1883). This author differs 
 from other economists, particularly on wages and questions of distri- 
 bution. 
 
 H.George's "Progress and Poverty" (1879). In connection with 
 this, read F. A. Walker's "Land and Pent" (1884). 
 
 Treatises on Special Subjects. 
 
 W. T. Tbornton's " On Labor " (1869). 
 
 McLeod's "Theory and Practice of Banking" (second edition, 1875- 
 1876). 
 
 M. Block's "Traite theorique et pratique de statistique" (1878). 
 
 Goschen's "Theory of Foreign Exchanges" (eighth edition, 1875). 
 
 J. Caird's "Landed Interest" (fourth edition, 1880), treating of Eng- 
 lish land and the food-supply. 
 
 W. G. Sumner's "History of American Currency" (1874). 
 
 John Jay Knox's "United States Notes" (1884). 
 
 Jevons's "Money and the Mechanism of Exchange" (1875). 
 
 Tooke and Hewmarch's "History of Prices" (1837-1856), in six 
 volumes. 
 
 Leroy-Beaulieu's " Traite de la science des finances " (1883). This 
 is an extended work, in two volumes, on taxation and finance ; " Essai 
 sur la repartition des richesses " (second edition, 1883). 
 
 F. A. Walker's "The Wages Question " (1876); "Money" (1878). 
 
 L. Reybaud's " Etudes sur les reformateurs contemporains, ou 
 socialistes modernes" (seventh edition, 1864). 
 
 Dictionaries. 
 
 McCulloch's " Commercial Dictionary " (new and enlarged edition, 
 1882). 
 
 Lalor's " Cyclopaedia of Political Science " (1881-84) is devoted to 
 articles on political science, political economy, and American history. 
 
 Coquelin and Guillaumin's " Dictionnaire de l'economie politique" 
 (1851-1853, third edition, 1864), in two large volumes. 
 
BOOKS FOR CONSULTATION. 45 
 
 Repobts and Statistics. 
 
 The " Oompendiums of the Census" for 1840, 1850, 1860, and 1870, 
 are desirable. The volumes of the tenth census (1880) are of great 
 value for all questions; as is also F. A. "Walker's "Statistical Atlas" 
 (1874). 
 
 The United States Bureau of Statistics issues quarterly statements; 
 and annually a report on "Commerce and Navigation," and another on 
 the " Internal Commerce of the United States." 
 
 The " Statistical Abstract " is an annual publication, by the same 
 department, compact and useful. It dates only from 1878. 
 
 The Director of the Mint issues an annual report dealing -with the 
 precious metals and the circulation. Its tables are important. 
 
 The Comptroller of the Currency (especially during the administra- 
 tion of J. J. Knox) has given important annual reports upon the bank- 
 ing systems of the United States. 
 
 The reports of the Secretary of the Treasury deal with the general 
 finances of the United States. These, with the two last mentioned, 
 are bound together in the volume of "Finance Reports," but often 
 shorn of their tables. 
 
 There are valuable special reports to Congress of commissioners on 
 the tariff, shipping, and other subjects, published by the Government. 
 
 The report on the " International Monetary Conference of 1878 " 
 contains a vast quantity of material on monetary questions. 
 
 The British parliamentary documents contain several annual "Sta- 
 tistical Abstracts " of the greatest value, of which the one relating to 
 other European states is peculiarly convenient and useful. These can 
 always be purchased at given prices. 
 
 A. R. Spoff ord's " American Almanac " is an annual of great use- 
 fulness. 
 
J. S. MILL'S 
 PRINCIPLES OF POLITICAL ECONOMY. 
 
 PRELIMINARY REMARKS. 
 
 "Writers on Political Economy profess to teach, or to 
 investigate, the nature of "Wealth, and the laws of its produc- 
 tion and distribution; including, directly or remotely, the 
 operation of all the causes by which the condition of man- 
 kind, or of any society of human beings, in respect to this 
 universal object of human desire, is made prosperous or the 
 reverse. 
 
 It will be noticed that political economy does not include 
 ethics, legislation, or the science of government. The results 
 of political economy are offered to the statesman, who reaches 
 a conclusion after weighing them in connection with moral and 
 political considerations. Political Economy is distinct from 
 Sociology ; although it is common to include in the former 
 everything which concerns social life. Some writers distin- 
 guish between the pure, or abstract science, and the applied 
 art, and we can speak of a science of political economy only in 
 the sense of a body of abstract laws or formulas. This, how- 
 ever, does not make political economy less practical than phys- 
 ics, for, after a principle is ascertained, its operation is to be 
 observed in the same way that we study the force of gravitation 
 in a falling stone, even when retarded by opposing forces. 
 An economic force, or tendency, can be likewise distinctly ob- 
 served, although other influences, working at the same time, 
 prevent the expected effect from following its cause. It is, in 
 short, the aim of -'political economy to investigate the laws 
 which govern the phenomena of material wealth. / (Cf . Cossa, 
 "Guide," chap, iii.) 
 
 "While the [Mercantile] system prevailed, it was assumed, 
 either expressly or tacitly, in the whole policy of nations. 
 
48 PRELIMINARY REMARKS. 
 
 that wealth consisted solely of money; or of the precious 
 metals, which, when not already in the state of money, are 
 capable of being directly converted into it. According to 
 the doctrines then prevalent, whatever tended to heap up 
 money or bullion in a country added to its wealth. 
 
 More correctly the Mercantilists (in the sixteenth and sev- 
 enteenth centuries) held that where money was most plentiful, 
 there would be found the greatest abundance of the necessaries 
 of life. 1 
 
 Whatever sent the precious metals out of a country im- 
 poverished it. If a country possessed no gold or silver 
 mines, the only industry by which it could be enriched was 
 foreign trade, being the only one which could bring in 
 money. Any branch of trade which was supposed to send 
 out more money than it brought in, however ample and 
 valuable might be the returns in another shape, was looked 
 upon as a losing trade. Exportation of goods was favored 
 and encouraged (even by means extremely onerous to the 
 real resources of the country), because, the exported goods 
 being stipulated to be paid for in money, it was hoped that 
 the returns would actually be made in gold and silver. Im- 
 portation of anything, other than the precious metals, was 
 regarded as a loss to the nation of the whole price of the 
 things imported ; unless they were brought in to be re-ex- 
 ported at a profit, or unless, being the materials or instru- 
 ments of some industry practiced in the country itself, they 
 gave the power of producing exportable articles at smaller 
 cost, and thereby effecting a larger exportation. The com- 
 merce of the world was looked upon as a struggle among 
 nations, which could draw to itself the largest share of the 
 gold and silver in existence; and in this competition no 
 nation could gain anything, except by making others lose 
 as much, or, at the least, preventing them from gaining it. 
 
 The Mercantile Theory could not fail to be seen in its 
 true character when men began, even in an imperfect man- 
 
 1 Cf. p. 4, supra. 
 
PRELIMINARY REMARKS. 49 
 
 ner, to explore into the foundations of tilings. Money, as 
 money, satisfies no want ; its worth to any one consists in 
 its being a convenient shape in which to receive his incom- 
 ings of all sorts, which incomings he afterwards, at the times 
 which suit him best, converts into the forms in which they 
 can be useful to him. The difference between a country 
 with money, and a country altogether without it, would be 
 only one of convenience ; a saving of time and trouble, like 
 grinding by water instead of by hand, or (to use Adam 
 Smith's illustration) like the benefit derived from roads ; 
 and to mistake money for wealth is the same sort of error 
 as to mistake the highway, which may be the easiest way of 
 getting to your house or lands, for the house and lands them- 
 selves. 
 
 Money, being the instrument of an important public and 
 private purpose, is rightly regarded as wealth; but every- 
 thing else which serves any human purpose, and which 
 nature does not afford gratuitously, is wealth also. To be 
 wealthy is to have a large stock of useful articles, or the 
 means of purchasing them. Everything forms, therefore, a 
 part of wealth, which has a power of purchasing ; for which 
 anything useful or agreeable would be given in exchange. 
 Things for which nothing could be obtained in exchange, 
 however useful or necessary they may be, are not wealth in 
 the sense in which the term is used in Political Economy. 
 Air, for example, though the most absolute of necessaries, 
 bears no price in the market, because it can be obtained 
 gratuitously; to accumulate a stock of it would yield no 
 profit or advantage to any one ; and the laws of its produc- 
 tion and distribution are the subject of a very different study 
 from Political Economy. It is possible to imagine circum- 
 stances in which air would be a part of wealth. If it became 
 customary to sojourn long in places where the air does not 
 naturally penetrate, as in diving-bells sunk in the sea, a sup- 
 ply of air artificially furnished would, like water conveyed 
 into houses, bear a price : and, if from any revolution in 
 nature the atmosphere became too scanty for the consump- 
 
 4 
 
50 PRELIMINARY REMARKS. 
 
 tion, or could be monopolized, air might acquire a very high 
 marketable value. In such a case, the possession of it, be- 
 yond his own wants, would be, to its owner, wealth ; and the 
 general wealth of mankind might at first sight appear to be 
 increased, by what would be so great a calamity to them. 
 The error would lie in not considering that, however rich 
 the possessor of air might become at the expense of the rest 
 of the community, all persons else would be poorer by all 
 that they were compelled to pay for what they had before 
 obtained without payment. 
 
 Wealth, then, may be defined, all useful or agreeable 
 things which possess exchangeable value; or, in other 
 words, all useful or agreeable things except those which can 
 be obtained, in the quantity desired, without labor or sacri- 
 fice. 
 
 This is the usual definition of wealth. Henry George (see 
 "Progress and Poverty," pp. 34-37) regards wealth as consist- 
 ing " of natural products that have been secured, moved, com- 
 bined, separated, or in other ways modified by human exertion^ 
 so as to fit them for the gratification of human desires. . . . 
 Nothing which Nature supplies to man without his labor is 
 wealth. . . . All things which have an exchange value are, 
 therefore, not wealth. Only such things can be wealth the 
 production of which increases and the destruction of which 
 decreases the aggregate of wealth. . . . Increase in land values 
 does not represent increase in the common wealth, for what 
 land-owners gain by higher prices the tenants or purchasers who 
 must pay them will lose." Jevons ("Primer," p. 13) defines 
 wealth very properly as what is transferable, limited in supply, 
 and useful. F. A. Walker defines wealth as comprising "all 
 articles of value and nothing else " (" Political Economy," p. 5). 
 Levasseur's definition ("Precis," p. 15) is, "all material objects 
 possessing utility " (i. e., the power to satisfy a want). (Cf. 
 various definitions in Roscher's " Political Economy," section 
 9, note 3.) Perry (" Political Economy," p. 99) rejects the term 
 wealth as a clog to progress in the science, and adopts -property 
 in its stead, defining it as that " which can be bought or sold." 
 Cherbuliez ("Precis," p. 70) defines wealth as the material 
 product of nature appropriated by labor for the wants of man. 
 Carey (" Social Science," i, 186) asserts that wealth consists in 
 the power to command Nature's services, including in wealth 
 such intangible things as mental qualities. 
 
BOOK I. 
 
 PRODUCTION. 
 
BOOK I. 
 
 PEODUCTIOI. 
 
 CHAPTEK I. 
 
 OF THE REQUISITES OF PRODUCTION. 
 
 § 1. The requisites of production are two : labor, and 
 appropriate natural objects. 
 
 There is a third requisite of production, capital (see page 
 58). Since the limitation to only two requisites applies solely 
 to a primitive condition of existence, so soon as the element 
 of time enters into production, then a store of capital becomes 
 necessary ; that is, so soon as production requires such a term 
 that during the operation the laborer can not at the same time 
 provide himself with subsistence, then capital is a requisite of 
 production. This takes place also under any general division 
 of labor in a community. When one man is making a pin- 
 head, he must be supplied with food by some person until the 
 pins are finished and exchanged. 
 
 Labor is either bodily or mental ; or, to express the dis- 
 tinction more comprehensively, either muscular or nervous ; 
 and it is necessary to include in the idea, not solely the exer- 
 tion itself, but all feelings of a disagreeable kind, all bodily 
 inconvenience or mental annoyance, connected with the em- 
 ployment of one's thoughts, or muscles, or both, in a particu- 
 lar occupation. 
 
 The word " sacrifice " conveys a just idea of what the laborer 
 undergoes, and it corresponds to the abstinence of the capitalist. 
 
54: PRODUCTION. 
 
 Of the other requisite — appropriate natural objects — it is 
 to be remarked that some objects exist or grow up sponta- 
 neously, of a kind suited to the supply of human wants. 
 There are caves and hollow trees capable of affording shel- 
 ter ; fruits, roots, wild honey, and other natural products, on 
 which human life can be supported ; but even here a consid- 
 erable quantity of labor is generally required, not for the 
 purpose of creating, but of finding and appropriating them. 
 
 Of natural powers, some are unlimited, others limited in 
 quantity. By an unlimited quantity is of course not meant 
 literally, but practically unlimited : a quantity beyond the 
 use which can in any, or at least in present circumstances, 
 be made of it. Land is, in some newly settled countries, 
 practically unlimited in quantity : there is more than can be 
 used by the existing population of the country, or by any ac- 
 cession likely to be made to it for generations to come. But, 
 even there, land favorably situated with regard to markets, 
 or means of carriage, is generally limited in quantity: there 
 is not so much of it as persons would gladly occupy and cul- 
 tivate, or otherwise turn to use. In all old countries, land 
 capable of cultivation, land at least of any tolerable fertility, 
 must be ranked among agents limited in quantity. Coal, 
 metallic ores, and other useful substances found in the earth, 
 are still more limited than land. 
 
 For the present I shall only remark that, so long as the 
 quantity of a natural agent is practically unlimited, it can 
 not, unless susceptible of artificial monopoly, bear any value 
 in the market, since no one will give anything for what can 
 be obtained gratis. But as soon as a limitation becomes 
 practically operative — as soon as there is not so much of the 
 thing to be had as would be appropriated and used if it could 
 be obtained for asking — the ownership or use of the natural 
 agent acquires an exchangeable value. 
 
 Rich lands in our Western Territories a few years ago could 
 be had practically for the asking ; but now, since railways and 
 an increase of population have brought them nearer to the mar- 
 kets, they have acquired a distinct exchange value. The value 
 
THE REQUISITES OF PRODUCTION. 
 
 55 
 
 of a commodity (it may be anticipated) is the quantity of other 
 things for which it can be exchanged. 
 
 "When more water-power is wanted in a particular dis- 
 trict than there are falls of water to supply it, persons will 
 give an equivalent for the use of a fall of water. When 
 there is more land wanted for cultivation than a place pos- 
 sesses, or than it possesses of a certain quality and certain 
 advantages of situation, land of that quality and situation 
 may be sold for a price, or let for an annual rent. 
 
 § 2. It is now our purpose to describe the second requisite 
 of production, labor, and point out that it can be either direct 
 or indirect. This division and subdivision can be seen from 
 the classification given below.' Under the head of indirect 
 labor are to be arranged all the many employments subsidiary 
 to the production of any one article, and which, as they furnish 
 but a small part of labor for the one article (e. g., bread), are 
 subsidiary to the production of a vast number of other arti- 
 cles ; and hence we see the interdependence of one employment 
 on another, which comes out so conspicuously at the time of a 
 commercial depression. 
 
 " We think it little to sit down to a table covered with arti- 
 cles from all quarters of the globe and from the remotest isles 
 of the sea — with tea from China, coffee from Brazil, spices 
 from the East, and sugar from the West Indies ; knives from 
 Sheffield, made with iron from Sweden and ivory from Africa ; 
 with silver from Mexico and cotton from South Carolina ; all 
 being lighted with oil brought from New Zealand or the Arc- 
 tic Circle. Still less do we think of the great number of per- 
 sons whose united agency is required to bring any one of these 
 
 '1. Natural agents — e. g., land. 
 
 ' 1. Direct — e. g., baker of bread. 
 1 
 
 1 Production 
 requires — 
 
 2. Labor. - 
 
 2. Indirect. 
 
 In producing materials — e. g., as 
 coal-miner for fuel, and miller 
 for flour, or farmer for wheat. 
 
 2. In producing implements — e. g., 
 
 oven-maker. 
 
 3. For protection — e. g., as police 
 
 against rioters. 
 
 4. For transportation — e. g., team- 
 
 ster and railway employees. 
 
 5. In training human beings — e. g., 
 
 teachers. 
 G. Of inventors — e. g., improvers of 
 flues and ovens. 
 
 3. Subsistence during the operation — i. e., capital. 
 
56 PRODUCTION. 
 
 finished products to our homes — of the merchants, insurers, 
 sailors, ship-builders, cordage and sail makers, astronomical- 
 instrument makers, men of science, and others, before a pound 
 of tea can appear in our market." l 
 
 The labor* which terminates in the production of an 
 article fitted for some human use is either employed directly 
 about the thing, or in previous operations destined to facili- 
 tate, perhaps essential to the possibility of, the subsequent 
 ones. In making bread, for example, the labor employed 
 about the thing itself is that of the baker ; but the labor of 
 the miller, though employed directly in the production not 
 of bread but of flour, is equally part of the aggregate sum 
 of labor by which the bread is produced; as is also the 
 labor of the sower, and of the reaper. Some may think that 
 all these persons ought to be considered as employing their 
 labor directly about the thing ; the corn, the flour, and the 
 bread being one substance in three different states. "With- 
 out disputing about this question of mere language, there is 
 still the plowman, who prepared the ground for the seed, 
 and whose labor never came in contact with the substance 
 in any of its states ; and the plow-maker, whose share in 
 the result was still more remote. We must add yet another 
 kind of labor ; that of transporting the produce from the 
 place of its production to the place of its destined use : the 
 labor of carrying the corn to market, and from market to 
 the miller's, the flour from the miller's to the baker's, and 
 the bread from the baker's to the place of its final consump- 
 tion. 
 
 Besides the two classes of indirect laborers here mentioned, 
 those engaged in producing materials and those in transporta- 
 tion, there are several others whd are paid fractions out of the 
 bread. Subsidiary to the direct labor of the bread-maker is the 
 labor of all those who make the instruments employed in the 
 process (as, e. g., the oven). Materials are completely changed 
 in character by one use, as when the coal is burned, or the 
 flour baked into bread ; while an instrument, like an oven, is 
 
 1 Bowen, " American Political Economy," p. 25. 
 
 2 This is the beginning of Chapter II in the original treatise. 
 
THE REQUISITES OF PRODUCTION. 57 
 
 capable of remaining intact throughout many operations. The 
 producer of materials and the transporter are paid by the 
 bread-maker in the price of his coal and flour when left at his 
 door, so that the price of the loaf is influenced by these pay- 
 ments. Those persons, moreover, who, like the police and offi- 
 cers of our government, act to protect property and life, are 
 also to be classed as laborers indirectly aiding in the production 
 of the given article, bread (and by his taxes the bread-maker 
 helps pay the wages of these officials). Shading off into a more 
 distant, although essential, connection is another class — that 
 of those laborers who train human beings in the branches of 
 knowledge necessary to the attainment of proper skill in man- 
 aging the processes and instruments of an industry. The ac- 
 quisition of the rudiments of education, and, in many cases, 
 the most profound knowledge of chemistry, physics and recon- 
 dite studies, are essential to production ; and teachers are indi- 
 rect laborers in producing almost every article in the market. 
 In this country, especially, are inventors a class of indirect 
 laborers essential to all ultimate production as it now goes on. 
 The improvements in the instruments of production are the 
 results of an inventive ability which has made American ma- 
 chinery known all over the world. They, too, as well as the 
 teacher, are paid (a small fraction, of course) out of the ulti- 
 mate result, by an indirect path, and materially change the ease 
 or difficulty, cheapness or dearness, of production in nearly 
 every branch of industry. In the particular illustration given 
 they have improved the ovens, ranges, and stoves, so that the 
 same or better articles are produced at a less cost than former- 
 ly. All these indirect laborers receive, in the way of remuner- 
 ation, a fraction, some more, some less (the farther they are re- 
 moved from the direct process), of the value of the final result. 
 
 § 3. But another set of laborers are to be placed in distinct 
 contrast with these, so far as the grounds on which they receive 
 their remuneration is concerned. These are the men engaged 
 previously in providing the subsistence, and articles by which 
 the former classes of labor can carry on their operations. 
 
 The previous employment of labor is an indispensable 
 condition to every productive operation, on any other than 
 the very smallest scale. Except the labor of the hunter and 
 fisher, there is scarcely any kind of labor to which the re- 
 turns are immediate. Productive operations require to be 
 continued a certain time before their fruits are obtained. 
 Unless the laborer, before commencing his work, possesses a 
 
58 PRODUCTION. 
 
 store of food, or can obtain access to the stores of some one 
 else, in sufficient quantity to maintain him until the produc- 
 tion is completed, he can undertake no labor but such as can 
 be carried on at odd intervals, concurrently with the pursuit 
 of his subsistence. 
 
 The possession of capital is thus a third requisite of pro- 
 duction, together with land and labor, as noted above. Henry- 
 George ("Progress and Poverty," chap, iv) holds an opposite 
 opinion : " The subsistence of the laborers who built the Pyra- 
 mids was drawn, not from a previously hoarded stock " (does he 
 not forget the story of Joseph's store of corn ?), " but from the 
 constantly recurring crops of the Nile Valley." 
 
 He can not obtain food itself in any abundance ; for every 
 mode of so obtaining it requires that there be already food in 
 store. Agriculture only brings forth food after the lapse of 
 months ; and, though the labors of the agriculturist are not 
 necessarily continuous during the whole period, they must 
 occupy a considerable part of it. Not only is agriculture im- 
 possible without food produced in advance, but there must 
 be a very great quantity in advance to enable any consider- 
 able community to support itself wholly by agriculture. A 
 country like England or the United States is only able to 
 carry on the agriculture of the present year because that of 
 past years has provided, in those countries or somewhere 
 else, sufficient food to support their agricultural population 
 until the next harvest. They are only enabled to produce 
 so many other things besides food, because the food which 
 was in store at the close of the last harvest suffices to main- 
 tain not only the agricultural laborers, but a large industri- 
 ous population besides. 
 
 The claim to remuneration founded on the possession of 
 food, available for the maintenance of laborers, is of another 
 kind ; remuneration for abstinence, not for labor. If a per- 
 son has a store of food, he has it in his power to consume it 
 himself in idleness, or in feeding others to attend on him, or 
 to fight for him, or to sing or dance for him. If, instead of 
 these things, he gives it to productive laborers to support 
 
THE REQUISITES OF PRODUCTION. 59 
 
 them during their work, he can, and naturally will, claim a 
 remuneration from the produce. He will not be content 
 with simple repayment; if he receives merely that, he is 
 only in the same situation as at first, and has derived no ad- 
 vantage from delaying to apply his savings to his own bene- 
 fit or pleasure. He will look for some equivalent for this 
 forbearance : ' he will expect his advance of food to come 
 back to him with an increase, called, in the language of 
 business, a profit ; and the hope of this profit will generally 
 have been a part of the inducement which made him accumu- 
 late a stock, by economizing in his own consumption ; or, at 
 any rate, which made him forego the application of it, when 
 accumulated, to his personal ease or satisfaction. 
 
 1 This is his " sacrifice," which corresponds to the exertion of the laborer. 
 
CHAPTEE II. 
 
 OF UNPRODUCTIVE LABOR. 
 
 § 1. Labor is indispensable to production, but has not 
 always production for its effect. There is much labor, and 
 of a high order of usefulness, of which production is not the 
 object. Labor has accordingly been distinguished into Pro- 
 ductive and Unproductive. Productive labor means labor 
 productive of wealth. "We are recalled, therefore, to the 
 question touched upon in our [Preliminary Kemarks], what 
 "Wealth is. 
 
 By Unproductive Labor, on the contrary, will be under- 
 stood labor which does not terminate in the creation of 
 material wealth. And all labor, according to our present 
 definition, must be classed as unproductive, which termi- 
 nates in a permanent benefit, however important, provided 
 that an increase of material products forms no part of that 
 benefit. The labor of saving a friend's life is not produc- 
 tive, unless the friend is a productive laborer, and produces 
 more than he consumes. 
 
 The principle on which the distinction is made is perfectly 
 clear, but in many cases persons may be misled chiefly in re- 
 gard to matters of fact. A clergyman may at first sight be 
 classed as an unproductive laborer ; but, until we know the 
 facts, we can not apply the principle of our definition. Unless 
 we know that no clergyman, by inculcating rules of morality 
 and self-control, ever caused an idler or wrong-doer to become 
 a steady laborer, can we say that a clergyman is a laborer un- 
 productive of material wealth. Likewise the army, or the 
 officers of our government at Washington, may or may not 
 have aided in producing material wealth according as they do 
 or do not, in fact, accomplish the protective purposes for which 
 
UNPRODUCTIVE LABOR. 61 
 
 they exist. So with teachers. There is, however, no dispar- 
 agement implied in the word unproductive ; it is merely an 
 economic question, and has to do only with forces affecting the 
 production of wealth. 
 
 Unproductive may be as useful as productive labor; it 
 may be more useful, even in point of permanent advantage ; 
 or its use may consist only in pleasurable sensation, which 
 when gone leaves no trace ; or it may not afford even this, 
 but may be absolute waste. In any case, society or mankind 
 grow no richer by it, but poorer. All material products 
 consumed by any one while he produces nothing are so 
 much subtracted, for the time, from the material products 
 which society would otherwise have possessed. 
 
 To be wasted, however, is a liability not confined to un- 
 productive labor. Productive labor may equally be waste, 
 if more of it is expended than really conduces to production. 
 If defect of skill in laborers, or of judgment in those who 
 direct them, causes a misapplication of productive industry, 
 labor is wasted. Productive labor may render a nation 
 poorer, if the wealth it produces, that is, the increase it makes 
 in the stock of useful or agreeable things, be of a kind not 
 immediately wanted : as when a commodity is unsalable, 
 because produced in a quantity beyond the present demand ; 
 or when speculators build docks and warehouses before there 
 is any trade. 
 
 § 2. The distinction of Productive and Unproductive is 
 applicable to Consumption as well as to Labor. All the 
 members of the community are not laborers, but all are con- 
 sumers, and consume either unproductively or productively. 
 "Whoever contributes nothing directly or indirectly to pro- 
 duction is an unproductive consumer. The only productive 
 consumers are productive laborers; the labor of direction 
 being of course included, as well as that of execution. But 
 the consumption even of productive laborers is not all of it 
 Productive Consumption. There is unproductive consump- 
 tion by productive consumers. What they consume in 
 keeping up or improving their health, strength, and capaci- 
 
62 PRODUCTION. 
 
 ties of work, or in rearing other productive laborers to suc- 
 ceed them, is Productive Consumption. But consumption 
 on pleasures or luxuries, whether by the idle or by the indus- 
 trious, since production is neither its object nor is in any 
 way advanced by it, must be reckoned Unproductive : with 
 a reservation, perhaps, of a certain quantum of enjoyment 
 which may be classed among necessaries, since anything 
 short of it would not be consistent with the greatest effi- 
 ciency of labor. That alone is productive consumption 
 which goes to maintain and increase the productive powers 
 of the community; either those residing in its soil, in its 
 materials, in the number and efficiency of its instruments of 
 production, or in its people. 
 
 I grant that no labor really tends to the enrichment of 
 society, which is employed in producing things for the use 
 of unproductive consumers. The tailor who makes a coat 
 for a man who produces nothing is a productive laborer; but 
 in a few weeks or months the coat is worn out, while the 
 wearer has not produced anything to replace it, and the com- 
 munity is then no richer by the labor of the tailor than if 
 the same sum had been paid for a stall at the opera. Never- 
 theless, society has been richer by the labor while the coat 
 lasted. These things also [such as lace and pine-apples] are 
 wealth until they have been consumed. 
 
 § 3. We see, however, by this, that there is a distinction 
 more important to the wealth of a community than even that 
 between productive and unproductive labor ; the distinction, 
 namely, between labor for the supply of productive, and for 
 the supply of unproductive, consumption ; between labor 
 employed in keeping up or in adding to the productive re- 
 sources of the country, and that which is employed otherwise. 
 Of the produce of the country, a part only is destined to be 
 consumed productively ; the remainder supplies the unpro- 
 ductive consumption of producers, and the entire consump- 
 tion of the unproductive class. Suppose that the proportion 
 of the annual produce applied to the first purpose amounts 
 to half ; then one half the productive laborers of the coun- 
 
UNPRODUCTIVE LABOR. 63 
 
 try are all that are employed in the operations on which the 
 permanent wealth of the country depends. The other half 
 are occupied from year to year and from generation to gen- 
 eration in producing things which are consumed and dis- 
 appear without return ; and whatever this half consume is 
 as completely lost, as to any permanent effect on the national 
 resources, as if it were consumed unproductively. Suppose 
 that this second half of the laboring population ceased to 
 work, and that the government maintained them in idleness 
 for a whole year : the first half would suffice to produce, as 
 they had done before, their own necessaries and the neces- 
 saries of the second half, and to keep the stock of materials 
 and implements undiminished : the unproductive classes, in- 
 deed, would be either starved or obliged to produce their 
 own subsistence, and the whole community would be re- 
 duced during a year to bare necessaries ; but the sources of 
 production would be unimpaired, and the next year there 
 would not necessarily be a smaller produce than if no such 
 interval of inactivity had occurred ; while if the case had 
 been reversed, if the first half of the laborers had suspended 
 their accustomed occupations, and the second half had con- 
 tinued theirs, the country at the end of the twelvemonth 
 would have been entirely impoverished. It would be a great 
 error to regret the large proportion of the annual produce, 
 which in an opulent country goes to supply unproductive 
 consumption. That so great a surplus should be available 
 for such purposes, and that it should be applied to them, can 
 only be a subject of congratulation. 
 
 This principle may be seen by the following classification : 
 
 '(A) Idlers; or unproductive ( TT , 
 
 laborers— e. g., actors, j Un P r °ductive consumers. 
 
 The world con- 
 sists of — 
 
 (B) Productive laborers — 
 e. g., farmers. 
 
 '(C) Producing wealth for produc- 
 tive consumption, one half the 
 annual produce. 
 
 (D) Producing wealth for unpro- 
 ductive consumption (A), one 
 half the annual produce. 
 
64 PRODUCTION. 
 
 Group D are productive laborers, and their oicn necessaries 
 are productively consumed, but they are supplied by C, who 
 keep themselves and D in existence. So long as C work, both 
 C and D can go on producing. If D stopped working, they 
 could be still subsisted as before by C, and only A would be 
 forced to produce for themselves. But, if C stopped working, 
 D would be left without the necessaries of life, and would be 
 obliged to cease their usual work. In this way it may be seen 
 how much more important to the increase of material wealth 
 C are than D, who labor " for the supply of unproductive con- 
 sumption." Of course, group D are desirable on other than 
 economic grounds, because their labor represents what can be 
 enjoyed beyond the necessities of life. 
 
CHAPTER III. 
 
 OF CAPITAL. 
 
 § 1. It has been seen in the preceding chapters that be- 
 sides the primary and universal requisites of production, 
 labor and natural agents, there is another requisite without 
 which no productive operations beyond the rude and scanty 
 beginnings of primitive industry are possible — namely, a 
 stock, previously accumulated, of the products of former la- 
 bor. This accumulated 6tock of the produce of labor is 
 termed Capital. What capital does for production is, to 
 afford the shelter, protection, tools, and materials which the 
 work requires, and to feed and otherwise maintain the labor- 
 ers during the process. These are the services which pres- 
 ent labor requires from past, and from the produce of past, 
 labor. "Whatever things are destined for this use — destined 
 to supply productive labor with these various prerequisites 
 — are Capital. 
 
 Professor Fawcett, "Manual" (chap, ii), says : "Since the 
 laborer must be fed by previously accumulated food, . . . some 
 of the results of past labor are required to be set aside to sus- 
 tain the laborer while producing. The third requisite of pro- 
 duction, therefore, is a fund reserved from consumption, and 
 devoted to sustain those engaged in future production. . . . 
 Capital is not confined to the food which feeds the laborers, 
 but includes machinery, buildings, and, in fact, every product 
 due to man's labor which can be applied to assist his industry " 
 (chap. iv). General Walker (" Political Economy," pages Q8- 
 70) defines capital as that portion of wealth (excluding unim- 
 proved land and natural agents) which is employed in the 
 production of new forms of wealth. Henry George (" Prog- 
 ress and Poverty," page 41) returns to Adam Smith's defini- 
 5 
 
QQ PRODUCTION. 
 
 tion : " That part of a man's stock which he expects to yield 
 him a revenue is called his capital." Cherbuliez ("Precis," 
 page 70) points out the increasing interdependence of industrial 
 operations as society increases in wealth, and that there is not 
 a single industry which does not demand the use of products 
 obtained by previous labor. " These auxiliary products accu- 
 mulated with a view to the production to which they are sub- 
 servient " form what is called capital. Carey (" Social Sci- 
 ence," iii, page 48) regards as capital all things which in any 
 way form the machinery by which society obtains wealth. 
 Roscher's definition is, " Every product laid by for purposes 
 of further production." ("Political Economy," section 42.) 
 By some, labor is regarded as capital. 1 
 
 A manufacturer, for example, has one part of his capital 
 in the form of buildings, fitted and destined for carrying on 
 this branch of manufacture. Another part he has in the 
 form of machinery. A third consists, if he be a spinner, of 
 raw cotton, flax, or wool; if a weaver, of flaxen, woolen, 
 silk, or cotton thread ; and the like, according to the nature 
 of the manufacture. Pood and clothing for his operatives 
 it is not the custom of the present age that he should directly 
 provide ; and few capitalists, except the producers of food 
 or clothing, have any portion worth mentioning of their capi- 
 tal in that shape. Instead of this, each capitalist has money, 
 which he pays to his work-people, and so enables them to 
 supply themselves. What, then, is his capital? Precisely 
 that part of his possessions, whatever it be, which he de- 
 signs to employ in carrying on fresh production. It is of 
 no consequence that a part, or even the whole of it, is in a 
 form in which it can not directly supply the wants of laborers. 
 
 Care should be taken to distinguish between wealth, 
 capital, and money. Capital may be succinctly defined as 
 saved wealth devoted to reproduction, and the relations of the 
 three terms mentioned may be illustrated by the following 
 figure : The area of the circle, A, represents the wealth of a 
 country ; the area of the inscribed circle, B, the quantity out 
 of the whole wealth which is saved and devoted to reproduc- 
 tion and called capital. But money is only one part of capital, 
 as shown by the area of circle C. Wherefore, it can be plainly 
 
 1 See Roscher's note 1, section 42, for various definitions of capital. 
 
CAPITAL. 67 
 
 seen that not all capital, B, is money ; that not all wealth, A, 
 is capital, although all capital is necessarily wealth as included 
 within it. It is not always understood that 
 money is merely a convenient article by 
 which other forms of wealth are exchanged 
 against each other, and that a man may 
 have capital without ever having any ac- 
 tual money in his possession. In times of 
 commercial depression, that which is capi- 
 tal to-day may not to-morrow satisfy any 
 desires (i. e., not be in demand), and so 
 for the time it may, so to speak, drop en- 
 tirely out of our circles above. For the 
 moment, not having an exchange value, it can not be wealth, 
 and so can the less be capital. 
 
 Suppose, for instance, that the capitalist is a hardware 
 manufacturer, and that his stock in trade, over and above 
 his machinery, consists at present wholly in iron goods. 
 Iron goods can not feed laborers. Nevertheless, by a mere 
 change of the destination of the iron goods, he can cause 
 laborers to be fed. Suppose that [the capitalist changed into 
 wages what he had before spent] in buying plate and jewels ; 
 and, in order to render the effect perceptible, let us suppose 
 that the change takes place on a considerable scale, and that 
 a large sum is diverted from buying plate and jewels to em- 
 ploying productive laborers, whom we shall suppose to have 
 been previously, like the Irish peasantry, only half employed 
 and half fed. The laborers, on receiving their increased 
 wages, will not lay them out in plate and jewels, but in food. 
 There is not, however, additional food in the country ; nor 
 any unproductive laborers or animals, as in the former case, 
 whose food is set free for productive purposes. Food will 
 therefore be imported if possible ; if not possible, the labor- 
 ers will remain for a season on their short allowance: but 
 the consequence of this change in the demand for commodi- 
 ties, occasioned by the change in the expenditure of capital- 
 ists from unproductive to productive, is that next year more 
 food will be produced, and less plate and jewelry. So that 
 again, without having had anything to do with the food of 
 
68 PRODUCTION. 
 
 the laborers directly, the conversion by individuals of a por- 
 tion of their property, no matter of what sort, from an un- 
 productive destination to a productive, has had the effect of 
 causing more food to be appropriated to the consumption of 
 productive laborers. The distinction, then, between Capital 
 and Not-capital, does not lie in the kind of commodities, but 
 in the mind of the capitalist — in his will to employ them for 
 one purpose rather than another ; and all property, however 
 ill adapted in itself for the use of laborers, is a part of capi- 
 tal, so soon as it, or the value to be received from it, is set 
 .apart for productive reinvestment. 
 
 § 2. As whatever of the produce of the country is de- 
 voted to production is capital, so, conversely, the whole of 
 the capital of the country is devoted to production. This 
 second proposition, however, must be taken with some limi- 
 tations and explanations. (1) A fund may be seeking for 
 productive employment, and find none adapted to the inclina- 
 tions of its possessor : it then is capital still, but unemployed 
 capital. (2) Or the stock may consist of unsold goods, not 
 susceptible of direct application to productive uses, and not, 
 at the moment, marketable : these, until sold, are in the con- 
 dition of unemployed capital. 
 
 This is not an important distinction. The goods are doubt- 
 less marketable at some price, if offered low enough. If no 
 one wants them, then, by definition, they are not wealth so 
 long as that condition exists. 
 
 (3) [Or] suppose that the Government lays a tax on the 
 production in one of its earlier stages, as, for instance, by tax- 
 ing the material. The manufacturer has to advance the tax, 
 before commencing the manufacture, and is therefore under 
 a necessity of having a larger accumulated fund than is re- 
 quired for, or is actually employed in, the production which 
 he carries on. He must have a larger capital to maintain the 
 same quantity of productive labor ; or (what is equivalent) 
 with a given capital he maintains less labor. (4) For another 
 example : a farmer may enter on his farm at such a time of 
 the year that he may be required to pay one, two, or even 
 
CAPITAL. (19 
 
 three quarters' rent before obtaining any return from the 
 produce. This, therefore, must be paid out of his capital. 
 
 (5) Finally, that large portion of the productive capital of a 
 country which is employed in paying the wages and salaries 
 of laborers, evidently is not, all of it, strictly and indispensa- 
 bly necessary for production. As much of it as exceeds the 
 actual necessaries of life and health (an excess which in the 
 case of skilled laborers is usually considerable) is not ex- 
 pended in supporting labor, but in remunerating it, and the 
 laborers could wait for this part of their remuneration until 
 the production is completed. 
 
 The previous accumulation of commodities requisite for 
 production must inevitably be large enough to cover neces- 
 saries, but need not be more, if the laborer is willing to wait 
 for the additional amount of his wages (the amount of his un- 
 productive consumption) until the completion of the industrial 
 operation. In fact, however, the accumulation must be suf- 
 ficient to pay the laborer all his wages from week to week, by 
 force of custom (wherever there is any considerable division of 
 labor), and also sufficient to purchase tools and materials. The 
 various elements of capital are materials, instruments, and sub- 
 sistence, giving "instruments" its wide signification which 
 includes money (the tool of exchange), and other necessary 
 appliances of each special kind of production. 
 
 In truth, it is only after an abundant capital had already 
 been accumulated that the practice of paying in advance any 
 remuneration of labor beyond a bare subsistence could pos- 
 sibly have arisen: since whatever is so paid is not really 
 applied to production, but to the unproductive consumption 
 of productive laborers, indicating a fund for production suf- 
 ficiently ample to admit of habitually diverting a part of it 
 to a mere convenience. 
 
 It will be observed that I have assumed that the labor- 
 ers are always subsisted from capital : l and this is obviously 
 the fact, though the capital need not necessarily be furnished 
 by a person called a capitalist. 
 
 1 General Walker ("Political Economy," Part II, Chap, iv) adopts the same 
 position, although seemingly inconsistent with his doctrine on the rate of wages. 
 
70 PRODUCTION. 
 
 The peasant does not subsist this year on the produce 
 of this year's harvest, but on that of the last. The artisan 
 is not living on the proceeds of the work he has in hand, 
 but on those of work previously executed and disposed of. 
 Each is supported by a small capital of his own, which he 
 periodically replaces from the produce of his labor. The 
 large capitalist is, in like manner, maintained from funds 
 provided in advance. 
 
 § 3. That which is virtually capital to the individual is or 
 is not capital to the nation, according as the fund which by 
 the supposition he has not dissipated has or has not been 
 dissipated by somebody else. 
 
 Let the reader consider, in the four following suppositions, 
 whether or not the given capital has wholly dropped out of the 
 circle in the diagram, page 67. In (3) and (4) the wealth is 
 entirely dissipated ; as it can not longer be in circle A, it can 
 not, of course, be in circle B. 
 
 (1.) For example, let property of the value of ten thousand 
 pounds, belonging to A, be lent to B, a farmer or manufact- 
 urer, and employed profitably in B's occupation. It is as 
 much capital as if it belonged to B. A is really a farmer 
 or manufacturer, not personally, but in respect of his prop- 
 erty. Capital worth ten thousand pounds is employed in 
 production — in maintaining laborers and providing tools and 
 materials — which capital belongs to A, while B takes the 
 trouble of employing it, and receives for his remuneration 
 the difference between the profit which it yields and the in- 
 terest he pays to A. This is the simplest case. 
 
 (2.) Suppose next that A's ten thousand pounds, instead 
 of being lent to B, are lent on mortgage to C, a landed 
 proprietor, by whom they are employed in improving the 
 productive powers of his estate, by fencing, draining, 
 road-making, or permanent manures. This is productive 
 employment. The ten thousand pounds are sunk, but not 
 
 The " rate of wages " is, however, a different thing from the source of a labor- 
 er's subsistence. See Book II, Chapter II, § 2. 
 
CAPITAL. 71 
 
 dissipated. They yield a permanent return ; the land now 
 affords an increase of produce, sufficient in a few years, if 
 the outlay has been judicious, to replace the amount, and in 
 time to multiply it manifold. Here, then, is a value of ten 
 thousand pounds, employed in increasing the produce of the 
 country. This constitutes a capital, for which C, if he lets 
 his land, receives the returns in the nominal form of in- 
 creased rent ; and the mortgage entitles A to receive from 
 these returns, in the shape of interest, such annual sum as 
 has been agreed on. 
 
 (3.) Suppose, however, that C, the borrowing landlord, is 
 a spendthrift, who burdens his land not to increase his for- 
 tune but to squander it, expending the amount in equipages 
 and entertainments. In a year or two it is dissipated, and 
 without return. A is as rich as before ; he has no longer 
 his ten thousand pounds, but he has a lien on the land, 
 which he could still sell for that amount. C, however, is ten 
 thousand pounds poorer than formerly ; and nobody is richer. 
 It may be said that those are richer who have made profit 
 out of the money while it was being spent. No doubt if C 
 lost it by gaming, or was cheated of it by his servants, that 
 is a mere transfer, not a destruction, and those who have 
 gained the amount may employ it productively. But if C 
 has received the fair value for his expenditure in articles of 
 subsistence or luxury, which he has consumed on himself, or 
 by means of his servants or guests, these articles have ceased 
 to exist, and nothing has been produced to replace them : 
 while if the same sum had been employed in farming or 
 manufacturing, the consumption which would have taken 
 place would have been more than balanced at the end of the 
 year by new products, created by the labor of those who 
 would in that case have been the consumers. By C's prodi- 
 gality, that which would have been consumed with a return 
 is consumed without return. C's tradesmen may have made 
 a profit during the process ; but, if the capital had been ex- 
 pended productively, an equivalent profit would have been 
 made by builders, fencers, tool-makers, and the tradespeo- 
 
72 PRODUCTION. 
 
 pie who supply the consumption of the laboring-classes; 
 while, at the expiration of the time (to say nothing of an 
 increase), C would have had the ten thousand pounds or 
 its value replaced to him, which now he has not. There is, 
 therefore, on the general result, a difference, to the disad- 
 vantage of the community, of at least ten thousand pounds, 
 being the amount of C's unproductive expenditure. To A, 
 the difference is not material, since his income is secured to 
 him, and while the security is good, and the market rate of 
 interest the same, he can always sell the mortgage at its 
 original value. To A, therefore, the lien of ten thousand 
 pounds on C's estate is virtually a capital of that amount ; 
 but is it so in reference to the community ? It is not. A 
 had a capital of ten thousand pounds, but this has been ex- 
 tinguished — dissipated and destroyed by C's prodigality. A 
 now receives his income, not from the produce of his capital, 
 but from some other source of income belonging to C, prob- 
 ably from the rent of his land, that is, from payments made 
 to him by farmers out of the produce of their capital. 
 
 (4.) Let us now vary the hypothesis still farther, and 
 suppose that the money is borrowed, not by a landlord, but 
 by the state. A lends his capital to Government to carry 
 on a war : he buys from the state what are called govern- 
 ment securities ; that is, obligations on the Government to 
 pay a certain annual income. If the Government employed 
 the money in making a railroad, this might be a productive 
 employment, and A's property would still be used as capital ; 
 but since it is employed in war, that is, in the pay of officers 
 and soldiers who produce nothing, and in destroying a quan- 
 tity of gunpowder and bullets without return, the Govern- 
 ment is in the situation of C, the spendthrift landlord, and 
 A's ten thousand pounds are so much national capital which 
 once existed, but exists no longer — virtually thrown into the 
 sea, as far as wealth or production is concerned ; though for 
 other reasons the employment of it may have been justifi- 
 able. A's subsequent income is derived, not from the prod- 
 uce of his own capital, but from taxes drawn from the prod- 
 
CAPITAL. 73 
 
 uce of the remaining capital of the community ; to whom 
 his capital is not yielding any return, to indemnify them for 
 the payment ; it is all lost and gone, and what he now pos- 
 sesses is a claim on the returns to other people's capital 
 and industry. 
 
 The breach in the capital of the country was made when 
 the Government spent A's money : whereby a value of ten 
 thousand pounds was withdrawn or withheld from productive 
 employment, placed in the fund for unproductive consump- 
 tion, and destroyed without equivalent. 
 
 The United States had borrowed in the late civil war, by Au- 
 gust 31, 1865, $2,845,907,626 ; and, to June 30, 1881, the Gov- 
 ernment had paid in interest on its bonds, " from taxes drawn 
 from the produce of the remaining capital," $1,270,596,784, 
 as an income to bondholders. From this can be seen the 
 enormous waste of wealth to the United States during the war, 
 and consequently the less existing capital to-day in this coun- 
 try; since, under the same inducements to save, the smaller the 
 outside circle (wealth), the less the inside circle (capital) must 
 be. 
 
CHAPTEE IT. 
 
 FUNDAMENTAL PROPOSITIONS RESPECTING CAPITAL. 
 
 § 1. The first of these propositions is, that industry is 
 limited by capital. To employ labor in a manufacture is to 
 invest capital in the manufacture. This implies that indus- 
 try can not be employed to any greater extent than there 
 is capital to invest. The proposition, indeed, must be as- 
 sented to as soon as it is distinctly apprehended. The ex- 
 pression " applying capital " is of course metaphorical : what 
 is really applied is labor ; capital being an indispensable 
 condition. The food of laborers and the materials of pro- 
 duction have no productive power ; but labor can not exert 
 its productive power unless provided with them. There can 
 be no more industry than is supplied with materials to work 
 up and food to eat. Self-evident as the thing is, it is often 
 forgotten that the people of a country are maintained and 
 have their wants supplied, not by the produce of present 
 labor, but of past. 
 
 Therefore, as capital increases, more labor can be employed. 
 When the Pittsburg rioters, in 1877, destroyed property, or 
 the product of past labor, they did not realize then that that 
 property might, but now could never again, be employed for 
 productive purposes, and thereby support laborers. 
 
 They consume what has been produced, not what is about 
 to be produced. Now, of what has been produced, a part 
 only is allotted to the support of productive labor ; and there 
 will not and can not be more of that labor than the portion 
 
FUNDAMENTAL PROPOSITIONS RESPECTING CAPITAL. 75 
 
 60 allotted (which is the capital of the country) can feed, and 
 provide with the materials and instruments of production. 
 
 Because industry is limited by capital, we are not, how- 
 ever, to infer that it always reaches that limit. There may not 
 be as many laborers obtainable as the capital would maintain and 
 employ. This has been known to occur in new colonies, where 
 capital has sometimes perished uselessly for want of labor. 
 
 In the farming districts of our Middle and Western States, 
 in harvest-time, crops have been often of late years ruined 
 because farm-hands could not be obtained. In earlier days, 
 President John Adams was unable to hire a man in "Washing- 
 ton to cut wood in the surrounding forests with which to warm 
 the White House. 
 
 The unproductive consumption of productive laborers, 
 the whole of which is now supplied by capital, might cease, 
 or be postponed, until the produce came in ; and additional 
 productive laborers might be maintained with the amount. 
 
 [Governments] can create capital. They may lay on 
 taxes, and employ the amount productively. They may do 
 what is nearly equivalent : they may lay taxes on income or 
 expenditure, and apply the proceeds toward paying off the 
 public debts. The fund-holder, when paid off, would still 
 desire to draw an income from his property, most of which, 
 therefore, would find its way into productive employment, 
 while a great part of it would have been drawn from the 
 fund for unproductive expenditure, since people do not 
 wholly pay their taxes from what they would have saved, 
 but partly, if not chiefly, from what they would have spent. 
 
 § 2. While, on the one hand, industry is limited by capi- 
 tal, so, on the other, every increase of capital gives, or is 
 capable of giving, additional employment to industry ; and 
 this without assignable limit. I do not mean to deny that 
 the capital, or part of it, may be so employed as not to sup- 
 port laborers, being fixed in machinery, buildings, improve- 
 ment of land, and the like. In any large increase of capital 
 a considerable portion will generally be thus employed, and 
 will only co-operate with laborers, not maintain them. 
 
76 PRODUCTION. 
 
 It will be remembered, however, that subsistence is but 
 one part or element of capital ; that instruments and mate- 
 rials form a large part of capital. But still the question of 
 mere maintenance is rightfully discussed, because it is asserted 
 to-day that, while the rich are growing richer, the poor lack 
 even the food to keep them alive ; and throughout this discus- 
 sion Mr. Mill has in view the fact that laborers may exist in 
 the community either " half fed or unemployed." 
 
 "What I do intend to assert is, that the portion which is 
 destined to their maintenance may (supposing no alteration 
 in anything else) be indefinitely increased, without creating 
 an impossibility of finding the employment : in other words, 
 that if there are human beings capable of work, and food to 
 feed them, they may always be employed in producing some- 
 thing. It is very much opposed to common doctrines. 1 There 
 is not an opinion more general among mankind than this, 
 that the unproductive expenditure of the rich is necessary to 
 the employment of the poor. 
 
 It is to be noticed that, in fact, after the arts have so 
 far advanced in a community that mankind can obtain by their 
 exertion more than the amount of the mere necessaries of life 
 sufficient on the average for the subsistence of all, any further 
 production rendered possible to the human race by new discov- 
 eries and processes is inevitably unproductively consumed, and 
 that consequently a demand for labor for unproductive con- 
 sumption is essential for the employment of all existing labor- 
 ers. This, however, can be done, because enough capital has 
 been brought into existence to create the demand for the labor. 
 Yet it is clear that it is not expenditure, but capital, by which 
 employment is given to the poor. 
 
 Suppose that every capitalist came to be of opinion that, 
 not being more meritorious than a well-conducted laborer, 
 he ought not to fare better ; and accordingly laid by, from 
 conscientious motives, the surplus of his profits ; unproduc- 
 tive expenditure is now reduced to its lowest limit : and it is 
 asked, How is the increased capital to find employment ? 
 
 1 The opinion mentioned above in the text is that of the believers in over- 
 production, of whom the most distinguished are Mr. Malthus, Dr. Chalmers, and 
 Sismondi. 
 
FUNDAMENTAL PROPOSITIONS RESPECTING CAPITAL. 77 
 
 "Who is to buy the goods which it will produce ? There are 
 no longer customers even for those which were produced 
 before. The goods, therefore (it is said), will remain unsold ; 
 they will perish in the warehouses, until capital is brought 
 down to what it was originally, or rather to as much less as 
 the demand of the customers has lessened. But this is see- 
 ing only one half of the matter. In the case supposed, there 
 would no longer be any demand for luxuries on the part of 
 capitalists and land-owners. But, when these classes turn 
 their income into capital, they do not thereby annihilate 
 their power of consumption ; they do but transfer it from 
 themselves to the laborers to whom they give employment. 
 Now, there are two possible suppositions in regard to the 
 laborers : either there is, or there is not, an increase of their 
 numbers proportional to the increase of capital. (1.) If there 
 is, the case offers no difficulty. The production of neces- 
 saries for the new population takes the place of the pro- 
 duction of luxuries for a portion of the old, and supplies 
 exactly the amount of employment which has been lost. 
 (2.) But suppose that there is no increase of population. 
 The whole of what was previously expended in luxuries, by 
 capitalists and landlords, is distributed among the existing 
 laborers, in the form of additional wages. We will assume 
 them to be already sufficiently supplied with necessaries. 
 
 "What follows ? That the laborers become consumers of 
 luxuries ; and the capital previously employed in the pro- 
 duction of luxuries is still able to employ itself in the same 
 manner ; the difference being, that the luxuries are shared 
 among the community generally, instead of being confined 
 to a few, supposing that the power of their labor were 
 physically sufficient to produce all this amount of indul- 
 gences for their whole number. Thus the limit of wealth 
 is never deficiency of consumers, but of producers and pro- 
 ductive power. Every addition to capital gives to labor 
 either additional employment or additional remuneration. 
 
 That laborers should get more (a) by capitalists abstain- 
 ing from unproductive expenditure than (b) by expenditure 
 
78 PRODUCTION. 
 
 in articles unproductively consumed is a question difficult for 
 many to comprehend, and needs all the elucidation possible. 
 To start with, no one ever knew of a community all of whose 
 wants were satisfied : in fact, civilization is constantly leading 
 us into new fields of enjoyment, and results in a constant differ- 
 entiation of new desires. To satisfy these want3 is the spring 
 to nearly all production and industry. There can, therefore, 
 be no stop to production arising from lack of desire for com- 
 modities. " The limit of wealth is never deficiency of con- 
 sumers," but of productive power. 
 
 Now, in supposition (2) of the text, remember that the 
 laborers are supposed not be employed up to their full produc- 
 tive power. If all capitalists abstain from unproductive con- 
 sumption, and devote that amount of wealth to production, 
 then, since there can be no production without labor, the same 
 number of laborers have offered to them in the aggregate a 
 larger sum of articles for their exertions, which is equivalent 
 to saying they receive additional wages. 
 
 But some persons want to see the process in the concrete, 
 and the same principle may be illustrated by a practical case. 
 It is supposed that all laborers have the necessaries of life 
 only, but none of the comforts, decencies, and luxuries. Let A 
 be a farmer in New York, who can also weave carpets, and B 
 a lumberman in Maine. A begins to want a better house, and 
 B wishes a carpet, both having food, clothing, and shelter. 
 One of the capitalists abstaining from unproductive consump- 
 tion, as above, is X, who, knowing the two desires of A and 
 B, presents himself as a middle-man (i. e., he gives a market 
 for both men, as is found in every center of trade, as well as in 
 a country store), furnishing A the tools, materials, etc., and 
 giving him the promise of lumber if he will create the carpet, 
 and promising B the carpet if he will likewise produce the ad- 
 ditional lumber. To be more matter of fact, X buys the car- 
 pet of A, and sells it to B for the lumber. Thus two new 
 articles have been created, and for their exertions A has re- 
 ceived additional wages (either in the form of lumber, or of the 
 money paid him for the carpet), and B has received additional 
 wages (either in the form of a carpet, or the money paid him 
 by X for the lumber). If A and B are regarded as typifying 
 all the laborers, and X all the above capitalists, in the mul- 
 tiplicity of actual exchanges, it will be seen that A and B 
 are creating new articles to satisfy their own demand, instead 
 of meeting the demands of X. If their primary wants are 
 already supplied, then they take their additional wages in 
 the form of comforts and decencies. When Class X forego 
 their consumption, but add that amount to capital, they do not 
 give up their title to that capital, but they transfer the use of 
 
FUNDAMENTAL PROPOSITIONS RESPECTING CAPITAL. 79 
 
 it, or their consuming power, to others for the time being. 
 This question will he more fully discussed in § 6. 
 
 § 3. A second fundamental theorem respecting capital 
 relates to the source from which it is derived. It is the re- 
 sult of saving. 
 
 If all persons were to expend in personal indulgences all 
 that they produce, and all the income that they receive from 
 what is produced by others, capital could not increase. Some 
 saving, therefore, there must have been, even in the simplest 
 of all states of economical relations ; people must have pro- 
 duced more than they used, or used less than they produced. 
 Still more must they do so before they can employ other 
 laborers, or increase their production beyond what can be 
 accomplished by the work of their own hands. If it were 
 said, for instance, that the only way to accelerate the increase 
 of capital is by increase of saving, the idea would probably 
 be suggested of greater abstinence and increased privation. 
 But it is obvious that whatever increases the productive 
 power of labor, creates an additional fund to make savings 
 from, and enables capital to be enlarged, not only without 
 additional privation, but concurrently with an increase of 
 personal consumption. Nevertheless, there is here an in- 
 crease of saving, in the scientific sense. Though there is 
 more consumed, there is also more spared. There is a greater 
 excess of production over consumption. To consume less 
 than is produced is saving ; and that is the process by which 
 capital is increased ; not necessarily by consuming less, ab- 
 solutely. 
 
 The economic idea of saving involves, of course, the inten- 
 tion of using the wealth in reproduction. Saving, without this 
 meaning, results only in hoarding of wealth, and while hoarded 
 this amount is not capital. To explain the process by which 
 capital comes into existence, Bastiat has given the well-known 
 illustration of the plane in his " Sophisms of Protection." ' 
 
 A fundamental theorem respecting capital, closely con- 
 nected with the one last discussed, is, that although saved, 
 
 1 Page 371, English translation, N. Y. (1871). 
 
80 PRODUCTION. 
 
 and the result of saving, it is nevertheless consumed. The 
 word saving does not imply that what is saved is not con- 
 sumed, nor even necessarily that its consumption is de- 
 ferred ; but only that, if consumed immediately, it is not con- 
 sumed by the person who saves it. If merely laid by for 
 future use, it is said to be hoarded ; and, while hoarded, is 
 not consumed at all. But, if employed as capital, it is all 
 consumed, though not by the capitalist. Part is exchanged 
 for tools or machinery, which are worn out by use; part 
 for seed or materials, which are destroyed as such by being 
 sown or wrought up, and destroyed altogether by the con- 
 sumption of the ultimate product. The remainder is paid 
 in wages to productive laborers, who consume it for their 
 daily wants ; or if they in their turn save any part, this also 
 is not, generally speaking, hoarded, but (through savings- 
 banks, benefit clubs, or some other channel) re-employed as 
 capital, and consumed. To the vulgar, it is not at all appar- 
 ent that what is saved is consumed. To them, every one 
 who saves appears in the light of a person who hoards. The 
 person who expends his fortune in unproductive consump- 
 tion is looked upon as diffusing benefits all around, and is 
 an object of so much favor, that some portion of the same 
 popularity attaches even to him who spends what does not 
 belong to him ; who not only destroys his own capital, if he 
 ever had any, but, under pretense of borrowing, and on 
 promise of repayment, possesses himself of capital belonging 
 to others, and destroys that likewise. 
 
 This popular error comes from attending to a small por- 
 tion only of the consequences that flow from the saving or 
 the spending ; all the effects of either, which are out of sight, 
 being out of mind. There is, in the one case, a wearing out 
 of tools, a destruction of material, and a quantity of food 
 and clothing supplied to laborers, which they destroy by use ; 
 in the other case, there is a consumption, that is to say, a 
 destruction, of wines, equipages, and furniture. Thus far, 
 the consequence to the national wealth has been much the 
 same ; an equivalent quantity of it has been destroyed in 
 
FUNDAMENTAL PROPOSITIONS RESPECTING CAPITAL. 81 
 
 both cases. But in the spending, this first stage is also the 
 final stage ; that particular amount of the produce of labor 
 has disappeared, and there is nothing left ; while, on the 
 contrary, the saving person, during the whole time that the 
 destruction was going on, has had laborers at work repairing 
 it ; who are ultimately found to have replaced, with an in- 
 crease, the equivalent of what has been consumed. 
 
 Almost all expenditure being carried on by means of 
 money, the money comes to be looked upon as the main feat- 
 ure in the transaction ; and since that does not perish, but 
 only changes hands, people overlook the destruction which 
 takes place in the case of unproductive expenditure. The 
 money being merely transferred, they think the wealth also 
 has only been handed over from the spendthrift to other 
 people. But this is simply confounding money with wealth. 
 The wealth which has been destroyed was not the money, 
 but the wines, equipages, and furniture which the money 
 purchased ; and, these having been destroyed without return, 
 society collectively is poorer by the amount. In proportion 
 as any class is improvident or luxurious, the industry of the 
 country takes the direction of producing luxuries for their 
 use ; while not only the employment for productive laborers 
 is diminished, but the subsistence and instruments which are 
 the means of such employment do actually exist in smaller 
 quantity. 
 
 § 4. To return to our fundamental theorem. Everything 
 which is produced is consumed — both what is saved and 
 what is said to be spent — and the former quite as rapidly as 
 the latter. All the ordinary forms of language tend to dis- 
 guise this. When people talk of the ancient wealth of a 
 country, of riches inherited from ancestors, and similar ex- 
 pressions, the idea suggested is, that the riches so transmitted 
 were produced long ago, at the time when they are said to 
 have been first acquired, and that no portion of the capital 
 of the country was produced this year, except as much as 
 may have been this year added to the total amount. The 
 fact is far otherwise. The greater part, in value, of the 
 
 G 
 
82 PRODUCTION. 
 
 wealth now existing [in the United States] has been produced 
 by human hands within the last twelve months. 
 
 " In the State of Massachusetts it is estimated that the capi- 
 tal, on the average, belonging to each individual does not ex- 
 ceed $600, and that the average annual product per capita is 
 about 1200 ; so that the total capital is the product of only two 
 or three years' labor." * 
 
 The land subsists, and the land is almost the only thing 
 that subsists. Everything which is produced perishes, and 
 most things very quickly. Most kinds of capital are not 
 fitted by their nature to be long preserved. "Westminster 
 Abbey has lasted many centuries, with occasional repairs ; 
 some Grecian sculptures have existed above two thousand 
 years ; the Pyramids perhaps double or treble that time. 
 But these were objects devoted to unproductive use. Capi- 
 tal is kept in existence from age to age not by preservation, 
 but by perpetual reproduction ; every part of it is used and 
 destroyed, generally very soon after it is produced, but those 
 who consume it are employed meanwhile in producing more. 
 The growth of capital is similar to the growth of population. 
 Every individual who is born, dies, but in each year the 
 number born exceeds the number who die ; the population, 
 therefore, always increases, though not one person of those 
 composing it was alive until a very recent date. 
 
 This perpetual consumption and reproduction of capital 
 afford the explanation of what has so often excited wonder, 
 the great rapidity with which countries recover from a state 
 of devastation. The possibility of a rapid repair of their 
 disasters mainly depends on whether the country has been 
 depopulated. If its effective population have not been ex- 
 tirpated at the time, and are not starved afterward, then, 
 with the same skill and knowledge which they had before, 
 with their land and its permanent improvements undestroyed, 
 and the more durable buildings probably unimpaired, or only 
 partially injured, they have nearly all the requisites for their 
 
 1 Edward Atkinson, " Labor and Capital, Allies not Enemies," p. 60. 
 
FUNDAMENTAL PROPOSITIONS RESPECTING CAPITAL. 83 
 
 former amount of production. If there is as much of food 
 left to them, or of valuables to buy food, as enables them by 
 any amount of privation to remain alive and in working con- 
 dition, they will, in a short time, have raised as great a prod- 
 uce, and acquired collectively as great wealth and as great a 
 capital, as before, by the mere continuance of that ordinary 
 amount of exertion which they are accustomed to employ in 
 their occupations. Nor does this evince any strength in the 
 principle of saving, in the popular sense of the term, since 
 what takes place is not intentional abstinence, but involun- 
 tary privation. 
 
 The world has at any given period the power, under exist- 
 ing conditions of production and skill, to create a certain 
 amount of wealth, as represented by the inner rectangle, W. 
 Each increased power of production arising from conquests 
 over Nature's forces, as the use of steam and labor-saving ma- 
 chinery, permits the total wealth 
 to be enlarged, as, in the figure, to 
 rectangle W. For the produc- 
 tion of wealth are required labor, 
 capital, and land ; therefore, if 
 the labor and land are not de- 
 stroyed by war, there need not 
 necessarily be in existence all the 
 previous capital. If there are 
 the necessaries for all, and only sufficient tools to accomplish 
 the work, they will, in a few years, again recreate all the 
 wealth that formerly existed, regain the same position as be- 
 fore, and go on slowly increasing the total wealth just as fast 
 as improvements in the arts of production render it possible. 
 
 § 5. [An application of this truth has been made to the 
 question of raising government supplies for war purposes.] 
 Loans, being drawn from capital (in lieu of taxes, which 
 would generally have been paid from income, and made 
 up in part or altogether by increased economy), must, ac- 
 cording to the principles we have laid down, tend to impov- 
 erish the country: yet the years in which expenditure of 
 this sort has been on the greatest scale have often been years 
 of great apparent prosperity : the wealth and resources of the 
 country, instead of diminishing, have given every sign of 
 
84: PRODUCTION. 
 
 rapid increase during the process, and of greatly expanded 
 dimensions after its close. 
 
 During our civil war, at the same time that wealth was 
 being destroyed on an enormous scale, there was a very gen- 
 eral feeling that trade was good, and large fortunes were 
 made. At the close of the war a period of speculation and 
 overtrading continued until it was brought to a disastrous 
 close by the panic of 1873. Much of this speculation, however, 
 was due to an inflated paper currency. 
 
 We will suppose the most unfavorable case possible : that 
 the whole amount borrowed and destroyed by the Govern- 
 ment was abstracted by the lender from a productive em- 
 ployment in which it had actually been invested. The capi- 
 tal, therefore, of the country, is this year diminished by so 
 much. But, unless the amount abstracted is something enor- 
 mous, there is no reason in the nature of the case why next 
 year the national capital should not be as great as ever. The 
 loan can not have been taken from that portion of the capi- 
 tal of the country which consists of tools, machinery, and 
 buildings. It must have been wholly drawn from the por- 
 tion employed in paying laborers : and the laborers will suf- 
 fer accordingly. But if none of them are starved, if their 
 wages can bear such an amount of reduction, or if charity 
 interposes between them and absolute destitution, there is no 
 reason that their labor should produce less in the next year 
 than in the year before. If they produce as much as usual, 
 having been paid less by so many millions sterling, these 
 millions are gained by their employers. The breach made 
 in the capital of the country is thus instantly repaired, but 
 repaired by the privations and often the real misery of the 
 laboring-class. 
 
 As Mr. Mill points out, during the Napoleonic wars, in 
 France the withdrawal of laborers from industry into the army 
 was so large that it caused a rise of wages, and a fall in the 
 profits of capital ; while in England, inasmuch as capital, 
 rather than men, was sent to the Continent in the war, the very 
 reverse took place : the diversion of " hundreds of millions of 
 capital from productive employment " caused a fall of wages, 
 
FUNDAMENTAL PROPOSITIONS RESPECTING CAPITAL. 85 
 
 and the prosperity of the capitalist class, while the permanent 
 productive resources did not fall off. 
 
 This leads to the vexed question to which Dr. Chalmers 
 has very particularly adverted : whether the funds required 
 by a government for extraordinary unproductive expendi- 
 ture are best raised by loans, the interest only being pro- 
 vided by taxes, or whether taxes should be at once laid on 
 to the whole amount ; which is called, in the financial vo- 
 cabulary, raising the whole of the supplies within the year. 
 Dr. Chalmers is strongly for the latter method. He says 
 the common notion is that, in calling for the whole amount 
 in one year, you require what is either impossible, or very 
 inconvenient; that the people can not, without great hard- 
 ship, pay the whole at once out of their yearly income ; and 
 that it is much better to require of them a small payment 
 every year in the shape of interest, than so great a sacrifice 
 once for all. To which his answer is, that the sacrifice is 
 made equally in either case. Whatever is spent can not but 
 be drawn from yearly income. The whole and every part 
 of the wealth produced in the country forms, or helps to 
 form, the yearly income of somebody. The privation which 
 it is supposed must result from taking the amount in the 
 shape of taxes is not avoided by taking it in a loan. The 
 suffering is not averted, but only thrown upon the laboring- 
 classes, the least able, and who least ought, to bear it : while 
 all the inconveniences, physical, moral, and political, pro- 
 duced by maintaining taxes for the perpetual payment of 
 the interest, are incurred in pure loss. "Whenever capital is 
 withdrawn from production, or from the fund destined for 
 production, to be lent to the state and expended unproduc- 
 tively, that whole sum is withheld from the laboring-classes : 
 the loan, therefore, is in truth paid off the same year ; the 
 whole of the sacrifice necessary for paying it off is actually 
 made : only it is paid to the wrong persons, and therefore 
 does not extinguish the claim ; and paid by the very worst 
 of taxes, a tax exclusively on the laboring-class. And, after 
 having, in this most painful and unjust of ways, gone through 
 
86 PRODUCTION. 
 
 the whole effort necessary for extinguishing the debt, the 
 country remains charged with it, and with the payment of its 
 interest in perpetuity. 
 
 The United States, for example, borrows capital from A, with 
 which it buys stores from B. If the loan all comes from with- 
 in the country, A's capital is borrowed, when the United States 
 should have taken that amount outright by taxation. When the 
 money is borrowed of A, the laborers undergo the sacrifice, the 
 title to the whole sum remains in A's hands, and the claim against 
 the Government by A still exists ; while, if the amount were 
 taken by taxation, the title to the sum raised is in the state, 
 and it is paid to the right person. 
 
 The experience of the United States during the civil war 
 is an illustration of this principle. It is asserted that, as a 
 matter of fact, the total expenses of the war were defrayed by 
 the Northern States, during the four years of its continuance, 
 out of surplus earnings ; and yet at the close of the conflict a 
 debt of $2,800,000,000 was saddled on the country. 
 
 The United States borrowed $2,400,000,000 
 
 Revenue during that time 1,700,000,000 
 
 Total cost of the war $4,100,000,000 
 
 In reality we borrowed only about $1,500,000,000 instead 
 of $2,400,000,000, since (1) the Government issued paper which 
 depreciated, and yet received it at par in subscriptions for loans. 
 Moreover, the total cost would have been much reduced had 
 we issued no paper and (2) thereby not increased the prices of 
 goods to the state, and (3) if no interest account had been created 
 by borrowing. But could the country have raised the whole 
 sum each year by taxation ? In the first fiscal year after the 
 war the United States paid in war taxes $650,000,000. At the 
 beginning of the struggle, to June 30, 1862, the expenditure 
 was $515,000,000, and by June 30, 1863, it had amounted to 
 $1,098,000,000 ; so that $600,000,000 of taxes a year would 
 have paid the war expenses, and left us free of debt at the close. 
 A confirmatory experience is that of England during the 
 Continental wars, 1793-1817 : 
 
 Total war expenditures £1,060,000,000 
 
 Interest charge on the existing debt . . 235,000,000 
 
 Total amount required £1,295,000,000 
 
 Revenue for that period 1,145,000,000 
 
 Deficit £150,000,000 
 
 To provide for this deficit, the Government actually in- 
 
FUNDAMENTAL PROPOSITIONS RESPECTING CAPITAL. 87 
 
 creased its debt by £600,000,000. A slight additional exertion 
 would have provided £150,000,000 more of revenue, and saved 
 £450,000,000 to the taxpayers. 1 
 
 The practical state of the case, however, seldom exactly 
 corresponds with this supposition. The loans of the less 
 wealthy countries are made chiefly with foreign capital, 
 which would not, perhaps, have been brought in to be in- 
 vested on any less security than that of the Government : 
 while those of rich and prosperous countries are generally 
 made, not with funds withdrawn from productive employ- 
 ment, but with the new accumulations constantly making 
 from income, and often with a part of them which, if not 
 so taken, would have migrated to colonies, or sought other 
 investments abroad. 
 
 § 6. Mr. Mill's statement of the theorem respecting capital, 
 discussed in the argument that " demand for commodities is 
 not demand for labor," needs some simplification. For this 
 purpose represent by the letters of the alphabet, A, B, C, . . . 
 X, Y, Z, the different kinds of commodities produced in the 
 world which are exchanged against each other in the process of 
 reaching the consumers. This exchange of commodities for 
 each other, it need hardly be said, does not increase the num- 
 ber or quantity of commodities already in existence ; since 
 their production, as we have seen, requires labor and capital in 
 connection with natural agents. Mere exchange does not alter 
 the quantity of commodities produced. 
 
 To produce a plow, for example, the maker must have capi- 
 tal (in the form of subsistence, tools, and materials) of which 
 some one has foregone the use by a process of saving in order 
 that something else, in this case a plow, may be produced. 
 This saving must be accomplished first to an amount sufficient 
 to keep production going on from day to day. This capital is 
 all consumed, but in a longer or shorter term (depending on the 
 particular industrial operation) it is reproduced in new forms 
 adapted to the existing wants of man. Moreover, without any 
 new exertion of abstinence, this amount of capital may be again 
 consumed and reproduced, and so go on forever, after once 
 being saved (if never destroyed in the mean while, thereby 
 passing out of the category not only of capital, but also of 
 wealth). The total capital of the country, then, is not the sum 
 
 1 Cf. Bowen, " American Political Economy," p. 399. 
 
88 PRODUCTION. 
 
 of one year's capital added to that of another ; but that of last 
 year reproduced in a new form this year, plus a fractional in- 
 crease arising from new savings. But, once saved, capital can 
 go on constantly aiding in production forever. This plow when 
 made is exchanged (if a plow is wanted, and the production is 
 properly adjusted to meet desires) for such other products, 
 food, means for repairing tools, etc., as give back to the plow- 
 maker all the commodities consumed in its manufacture (with 
 an increase, called profit). 
 
 Returning to our illustration of the alphabet, it is evident 
 that a certain amount of capital united with labor (constituting 
 what may be called a productive engine) lies behind the pro- 
 duction of A (such as the plow, for example), and to which its 
 existence is due. The same is true of Z. Suppose that 5,000 
 of Z is produced, of which 4,000 is enough to reimburse the 
 capital used up by labor in the operation, and that the owner 
 of commodity Z spends the remaining 1,000 Z in exchange for 
 1,000 of commodity A. It is evident (no money being used aa 
 yet) that this exchange of goods is regulated entirely by the 
 desires of the two parties to the transaction. No more goods 
 are created simply by the exchange ; the simple process of ex- 
 change does not keep the laborers engaged on A occupied. And 
 yet the owner of Z had a demand for commodity A ; his de- 
 mand was worthless, except through the fact of his production, 
 which gave him actual wealth, or purchasing power, in the form 
 of Z. His demand for commodity A was not the thing which 
 employed the laborers engaged in producing A, although the 
 demand (if known beforehand) would cause them to produce A 
 rather than some other article — that is, the demand of one 
 quantity of wealth for a certain thing determines the direction 
 taken by the owner of capital A. But, since the exchange is 
 merely the form in which the demand manifests itself, it is clear 
 that the demand does not add to production, and so of itself 
 does not employ labor. Of course, if there were no desires, 
 there would be no demand, and so no production and employ- 
 ment of labor. But we may conclude by formulating the propo- 
 sition, that wealth (Z) offered for commodities (A) necessitates 
 the use of other wealth (than Z) as capital to support the op- 
 eration by which those commodities (A) are produced. It 
 makes no difference to the existing employment of labor what 
 want is supplied by the producers of A, whether it is velvet 
 (intended for unproductive consumption) or plows (intended 
 for productive consumption). Even if Z is no longer offered 
 in exchange for A, and if then A is no longer to be made, the 
 laborers formerly occupied in producing A — if warning is 
 given of the coming change ; if not, loss results — having the 
 plant, can produce something else wanted by the owner of Z. 
 
FUNDAMENTAL PROPOSITIONS RESPECTING CAPITAL. 89 
 
 Now into a community, as here pictured, all laborers sup- 
 posed to be occupied, and all capital employed in producing 
 A, B, C, . . . X, Y, Z, imagine the coming of a shipwrecked 
 crew. Instead of exchanging Z for A, as before, the owner of 
 Z may offer his wealth to the crew to dance for him. The 
 essential question is, Is more employment offered to labor by 
 this action than the former exchange for A? That is, it is a 
 question merely of distribution of wealth among the members 
 of a community. The labor engaged on A is not thrown out 
 of employment (if they have warning). There is no more 
 wealth in existence, but it is differently distributed than be- 
 fore : the crew, instead of the former owner, now have 1,000 
 of Z. So far as the question of employment is concerned, it 
 makes no difference on what terms the crew got it : they 
 might have been hired to stand in a row and admire the owner 
 of Z when he goes out. But yet it may naturally be assumed 
 that the crew were employed productively. In this case, after 
 they have consumed the wealth Z, they have brought into 
 existence articles in the place of those they consumed. But, 
 although this last operation is economically more desirable for 
 the future growth of wealth, yet no more laborers for the time 
 were employed than if the crew had merely danced. The ad- 
 vantages or disadvantages of productive consumption are not 
 to be discussed here. It is intended, however, to establish the 
 proposition that wealth paid out in wages, or advanced to pro- 
 ducers, itself supports labor ; that wealth offered directly to 
 laborers in this way employs more labor than when merely 
 offered in exchange for other goods, or, in other words, by a 
 demand for commodities ; that an increased demand for com- 
 modities does not involve an increased demand for labor, since 
 this can only be created by capital. The essential difference 
 is, that the owner of Z in one case, by exchanging goods for 
 A, did not forego his consuming power ; in the other case, by 
 giving Z to the unemployed crew, he actually went through the 
 process of saving by foregoing his personal consumption, and 
 handing it over to the crew. If the crew use it unproduc- 
 tively, it is in the end the same as if the owner of Z had done 
 it ; but meanwhile the additional laborers were employed. If 
 the crew be employed productively, then the saving once made 
 will go on forever, as explained above, and the world will be 
 the richer by the wealth this additional capital can create. 
 
 It may now be objected that, if A is no longer in demand, 
 the laborers in that industry will be thrown out of employ- 
 ment. Out of that employment certainly, but not out of every 
 other. One thousand of Z was able to purchase certain results 
 of labor and capital in industry A, when in the hands of its 
 former owner ; and now when in the hands of the crew it will 
 
90 PRODUCTION. 
 
 control, as purchasing power, equivalent results of labor and 
 capital. The crew may not want the same articles as the former 
 owner of Z, but they will want the equivalents of 1,000 of Z in 
 something, and that something will be produced now instead 
 of A. The whole process may be represented by this diagram. 
 
 1. Z is exchanged 
 
 against A, and the crew 
 C j \ 1 M I \^ remain unemployed. 
 
 Crew 
 
 (2) _[A] 
 
 Crew 
 
 ^\~\ . 2. Here the crew pos- 
 
 sess Z, and they them- 
 selves exchange Z for 
 whatever A may produce 
 in satisfaction of their 
 wants, and the crew are 
 then employed. 
 
 It is possible that the 
 
 ^ I _ i intervention of money 
 
 "^ I I blinds some minds to a 
 
 proper understanding of 
 the operations described above. The supposition, as given, 
 applies to a condition of barter, but is equally true if money is 
 used. 1 Imagine a display of all the industries of the world, A, 
 B, C, . . . X, Y, Z, presented within sight on one large field, 
 and at the central spot the producer of gold and silver. When 
 Z is produced, it is taken to the gold-counter, and exchanged 
 for money ; when A is produced, the same is done. Then the 
 former money is given for A, and the latter for Z, so that in 
 truth A is exchanged against Z through the medium of money, 
 just as before money was considered. Now, it may be said by 
 an objector, " If A is not wanted, after it is produced, and can 
 not be sold, because the demand from Z has been withdrawn, 
 then the capital used for A will not be returned, and the labor- 
 ers in A will be thrown out of employment." The answer is, 
 of course, that the state of things here contemplated is a per- 
 manent and normal one wherein production is correctly adapt- 
 ed to human desires. If A is found not to be wanted, after the 
 production of it, an industrial blunder has been committed, and 
 wealth is wasted just as when burned up. It is ill-assorted pro- 
 duction. The trouble is not in a lack of demand for what A 
 may produce (of something else), but with the producers of A 
 in not making that for which there were desires, from igno- 
 rance or lack of early information of the disposition of wealth 
 Z. In practice, however, it will be found that most goods are 
 made upon " orders," and, except under peculiar circumstances, 
 
 1 The functions of money are discussed later in the volume, and it is not pro- 
 posed to unfold them here. 
 
FUNDAMENTAL PROPOSITIONS RESPECTING CAPITAL. 91 
 
 not actually produced unless a market is foreseen. Indeed, as 
 every man knows, the most important function of a successful 
 business man is the adaptation of production to the market, 
 that is, to the desires of consumers. 
 
 One other form of this question needs brief mention. It is 
 truly remarked that a large portion of industrial activity is en- 
 gaged to-day, not in supplying productive consumption, such 
 as food, shelter, and clothing, but in supplying the comforts 
 and luxuries of low and high alike, or unproductive consump- 
 tion ; now, if there were not a demand for luxuries and com- 
 forts, many vast industries would cease to exist, and labor 
 would be thrown out of employment. Is not a demand for 
 such commodities, then, a cause of the present employment of 
 labor ? No, it is not. Luxuries and comforts are of course 
 the objects of human wants ; but a desire alone, without pur- 
 chasing power, can not either buy or produce these commodi- 
 ties. To obtain a piano, one must produce goods, and this 
 implies the possession of capital, by which to bring into exist- 
 ence goods, or purchasing power, to be offered for a piano. 
 Nor is this sufficient. Even after a man, A, for example, offers 
 purchasing power, he will not get a piano unless there exists an 
 accumulation of unemployed capital, together with labor ready 
 to manufacture the instrument. If capital were all previously 
 occupied, no piano could be made, although A stood offering 
 an equivalent in valuable goods. It may be said that A him- 
 self has the means. He has the wealth, and if he is willing to 
 forego the use of this wealth, or, in other words, save it by de- 
 voting it to reproduction in the piano industry — that is, create 
 the capital necessary for the purpose — then the piano can be 
 made. But this shows again that, not a mere desire, but the 
 existence of capital, is necessary to the production, and so to 
 the employment of labor. An increased demand for commodi- 
 ties, therefore, does not give additional employment to labor, 
 unless there be capital to support the labor. 
 
 Some important corollaries result from this proposition : 
 (a.) When a country by legislation creates a home demand for 
 commodities, that does not of itself give additional employ- 
 ment to labor. If the goods had before been purchased abroad, 
 under free discretion, then if produced at home they must re- 
 quire more capital and labor, or they would not have been 
 brought from foreign countries. If produced at home, it would 
 require, to purchase them, more of what was formerly sent 
 abroad ; or some must do without. The legislation can not, 
 ipso facto, create capital, and only by an increase of capital 
 can more employment result. It is possible, however, that 
 legislation might cause a more effective use of existing capital; 
 but that must be a question of fact, to be settled by circum- 
 
92 PKODUCTION. 
 
 stances in each particular case. It is not a thing to be gov- 
 erned by principles. 
 
 (b.) It follows from the above proposition also that taxes 
 levied on the rich, and paid by a saving from their consumption 
 of luxuries, do not fall on the poor because of a lessened demand 
 for commodities ; since, as we have seen, that demand does not 
 create or diminish the demand for labor. But, if the taxes 
 levied on the rich are paid by savings from what the rich would 
 have expended in wages, then if the Government spends the 
 amount of revenue thus taken in the direct purchase of labor, 
 as of soldiers and sailors, the tax does not fall on the laboring- 
 class taken as a whole. When the Government takes that 
 wealth which was formerly capital, burns it up, or dissipates it 
 in war, it ceases to exist any longer as a means of again pro- 
 ducing wealth, or of employing labor. 
 
CHAPTER V. 
 
 ON CIRCULATING AND FIXED CAPITAL. 
 
 § 1. Or the capital engaged in the production of any com- 
 modity, there is a part which, after being once used, exists 
 no longer as capital ; is no longer capable of rendering serv- 
 ice to production, or at least not the same service, nor to the 
 same sort of production. Such, for example, is the portion 
 of capital which consists of materials. The tallow and alkali 
 of which soap is made, once used in the manufacture, are de- 
 stroyed as alkali and tallow. In the same division must be 
 placed the portion of capital which is paid as the wages, or 
 consumed as the subsistence, of laborers. That part of the 
 capital of a cotton-spinner which he pays away to his work- 
 people, once so paid, exists no longer as his capital, or as a 
 cotton-spinner's capital. Capital which in this manner ful- 
 fills the whole of its office in the production in which it is 
 engaged, by a single use, is called Circulating Capital. The 
 term, which is not very appropriate, is derived from the cir- 
 cumstance that this portion of capital requires to be con- 
 stantly renewed by the sale of the finished product, and 
 when renewed is perpetually parted with in buying materials 
 and paying wages ; so that it does its work, not by being 
 kept, but by changing hands. 
 
 Another large portion of capital, however, consists in 
 instruments of production, of a more or less permanent char- 
 acter ; which produce their effect not by being parted with, 
 but by being kept ; and the efficacy of which is not ex- 
 hausted by a single use. To this class belong buildings, 
 
94 PRODUCTION. 
 
 machinery, and all or most things known by the name of im- 
 plements or tools. The durability of some of these is con- 
 siderable, and their function as productive instruments is 
 prolonged through many repetitions of the productive opera- 
 tion. In this class must likewise be included capital sunk 
 (as the expression is) in permanent improvements of land. 
 So also the capital expended once for all, in the commence- 
 ment of an undertaking, to prepare the way for subsequent 
 operations : the expense of opening a mine, for example ; of 
 cutting canals, of making roads or docks. Other examples 
 might be added, but these are sufficient. Capital which ex- 
 ists in any of these durable shapes, and the return to which 
 is spread over a period of corresponding duration, is called 
 Fixed Capital. 
 
 Of fixed capital, some kinds require to be occasionally 
 or periodically renewed. Such are all implements and 
 buildings : they require, at intervals, partial renewal by 
 means of repairs, and are at last entirely worn out. In other 
 cases the capital does not, unless as a consequence of some 
 unusual accident, require entire renewal. A dock or a ca- 
 nal, once made, does not require, like a machine, to be made 
 again, unless purposely destroyed. The most permanent of 
 all kinds of fixed capital is that employed in giving increased 
 productiveness to a natural agent, such as land. 
 
 To return to the theoretical distinction between fixed and 
 circulating capital. Since all wealth which is destined to be 
 employed for reproduction comes within the designation of 
 capital, there are parts of capital which do not agree with 
 the definition of either species of it ; for instance, the stock 
 of finished goods which a manufacturer or dealer at any time 
 possesses unsold in his warehouses. But this, though capital 
 as to its destination, is not yet capital in actual exercise ; it is 
 not engaged in production, but has first to be sold or ex- 
 changed, that is, converted into an equivalent value of some 
 other commodities, and therefore is not yet either fixed or 
 circulating capital, but will become either one or the other, 
 or be eventually divided between them. 
 
CIRCULATING AND FIXED CAPITAL. 95 
 
 § 2. There is a great difference between the effects of 
 circulating and those of fixed capital, on the amount of the 
 gross produce of the country. Circulating capital being 
 destroyed as such, the result of a single use must be a repro- 
 duction equal to the whole amount of the circulating capital 
 used, and a profit besides. This, however, is by no means 
 necessary in the case of fixed capital. Since machinery, for 
 example, is not wholly consumed by one use, it is not neces- 
 sary that it should be wholly replaced from the product of 
 that use. The machine answers the purpose of its owner if 
 it brings in, during each interval of time, enough to cover 
 the expense of repairs, and the deterioration in value which 
 the machine has sustained during the same time, with a sur- 
 plus sufficient to yield the ordinary profit on the entire 
 value of the machine. 
 
 From this it follows that all increase of fixed capital, 
 when taking place at the expense of circulating, must be, at 
 least temporarily, prejudicial to the interests of the laborers. 
 This is true, not of machinery alone, but of all improve- 
 ments by which capital is sunk ; that is, rendered perma- 
 nently incapable of being applied to the maintenance and 
 remuneration of labor. 
 
 It is highly probable that in the twenty-five years preceding 
 the panic of 1873, owing to the progress of invention, those 
 industries in the United States employing much machinery 
 were unduly stimulated in comparison with other industries, 
 and that the readjustment was a slow and painful process. 
 After the collapse vast numbers left the manufacturing to 
 enter the extractive industries. 
 
 The argument relied on by most of those who contend 
 that machinery can never be injurious to the laboring-class 
 is, that by cheapening production it creates such an increased 
 demand for the commodity as enables, ere long, a greater 
 number of persons than ever to find employment in pro- 
 ducing it. The argument does not seem to me to have 
 the weight commonly ascribed to it. The fact, though too 
 broadly stated, is, no doubt, often true. The copyists who 
 were thrown out of employment by the invention of print- 
 
96 PRODUCTION. 
 
 ing were doubtless soon outnumbered by the compositors 
 and pressmen who took their place ; and the number of la- 
 boring persons now employed in the cotton manufacture is 
 many times greater than were so occupied previously to the 
 inventions of Hargreaves and Arkwright, which shows that, 
 besides the enormous fixed capital now embarked in the 
 manufacture, it also employs a far larger circulating capital 
 than at any former time. But if this capital was drawn 
 from other employments, if the funds which took the place 
 of the capital sunk in costly machinery were supplied not 
 by any additional saving consequent on the improvements, 
 but by drafts on the general capital of the community, what 
 better are the laboring-classes for the mere transfer ? 
 
 There is a machine used for sizing the cotton yarn to pre- 
 pare it for weaving, by which it is dried over a steam cylinder, 
 the wages for attendance on which were only two dollars per 
 day, as compared with an expenditure for labor of fourteen 
 dollars per day to accomplish the same ends before the machine 
 was invented. 
 
 All attempts to make out that the laboring-classes as a 
 collective body can not suffer temporarily by the introduc- 
 tion of machinery, or by the sinking of capital in perma- 
 nent improvements, are, I conceive, necessarily fallacious. 1 
 That they would suffer in the particular department of in- 
 dustry to which the change applies is generally admitted, 
 and obvious to common sense; but it is often said that, 
 though employment is withdrawn from labor in one depart- 
 ment, an exactly equivalent employment is opened for it in 
 others, because what the consumers save in the increased 
 cheapness of one particular article enables them to augment 
 their consumption of others, thereby increasing the demand 
 for other kinds of labor. This is plausible, but, as was 
 shown in the last chapter, involves a fallacy ; demand for 
 commodities being a totally different thing from demand 
 
 1 See, for the argument that machinery necessarily injures labor, " Land and 
 Labor," William Godwin Moody (1883) ; and for the answer, " North American 
 Review," May, 1884, p. 510. 
 
CIRCULATING AND FIXED CAPITAL. 
 
 97 
 
 for labor. It is true, the consumers have now additional 
 means of buying other things ; but this will not create the 
 other things, unless there is capital to produce them, and the 
 improvement has not set at liberty any capital, even if it has 
 not absorbed some from other employments. 
 
 If the improvement has lowered the cost of production, it 
 has often required less capital (as well as less labor) to produce 
 the same quantity of goods ; or, what is the same thing, an 
 increased product with the same capital. 
 
 § 3. Nevertheless, I do not believe that, as things are 
 actually transacted, improvements in production are often, if 
 ever, injurious, even temporarily, to the laboring-classes in 
 the aggregate. They would be so if they took place sud- 
 denly to a great amount, because much of the capital sunk 
 must necessarily in that case be provided from funds already 
 employed as circulating capital. But improvements are 
 always introduced very gradually, and are seldom or never 
 made by withdrawing circulating capital from actual pro- 
 duction, but are made by the employment of the annual 
 increase. I doubt if there would be found a single example 
 of a great increase of fixed capital, at a time and place where 
 circulating capital was not rapidly increasing likewise. 
 
 In the United States, while the cost per yard of the manu- 
 factured goods has decreased, and so made accessible to poorer 
 classes than before, the capital engaged in manufactures has in- 
 creased so as to allow a vastly greater number of persons to be 
 employed, as will be seen by the following comparison of 1860 
 with 1880 taken from the last census returns. (Compendium, 
 1880, pp. 928, 930.) 
 
 
 Number of 
 
 establishments. 
 
 Capital. 
 
 Average 
 
 IlUlllbiT 
 
 of hands 
 employed. 
 
 Total amount 
 
 paid in wages 
 
 during the 
 
 year. 
 
 I860 
 
 140,433 
 253,852 
 
 81,009,855,715 
 2,790,272,606 
 
 1,311,210 
 2,732,595 
 
 8378,878,960 
 947,953,795 
 
 1880 
 
 "A hundred years ago, one person in every family of five 
 or six must have been absolutely needed to spin and weave by 
 
 7 
 
98 PRODUCTION. 
 
 hand the fabrics required for the scanty clothing of the peo- 
 ple ; now each person in two hundred or two hundred and fifty 
 only need work in the factory to produce the cotton and woolen 
 fabrics of the most amply clothed nation of the world." 1 
 
 To these considerations must be added, that, even if im- 
 provements did for a time decrease the aggregate produce 
 and the circulating capital of the community, they would 
 not the less tend in the long run to augment both. This 
 tendency of improvements in production to cause increased 
 accumulation, and thereby ultimately to increase the gross 
 produce, even if temporarily diminishing it, will assume a 
 still more decided character if it should appear that there 
 are assignable limits both to the accumulation of capital and 
 to the increase of production from the land, which limits 
 once attained, all further increase of produce must stop ; but 
 that improvements in production, whatever may be their 
 other effects, tend to throw one or both of these limits far- 
 ther off. Now, these are truths which will appear in the 
 clearest light in a subsequent stage of our investigation. It 
 will be seen that the quantity of capital which will, or even 
 which can, be accumulated in any country, and the amount 
 of gross produce which will, or even which can, be raised, 
 bear a proportion to the state of the arts of production there 
 existing ; and that every improvement, even if for the time it 
 diminish the circulating capital and the gross produce, ulti- 
 mately makes room for a larger amount of both than could 
 possibly have existed otherwise. It is this which is the con- 
 clusive answer to the objections against machinery ; and the 
 proof thence arising of the ultimate benefit to laborers of 
 mechanical inventions, even in the existing state of society, 
 will hereafter be seen to be conclusive. 2 
 
 1 Edward Atkinson, " Labor and Capital, Allies not Enemies," p. 33. 
 
 2 See book iv, chap. iv. 
 
CHAPTER VI. 
 
 OF CAUSES AFFECTING- THE EFFICIENCY OF PRODUCTION. 
 
 § 1. The most evident cause of superior productiveness 
 is what are called natural advantages. These are various. 
 Fertility of soil is one of the principal. The influence of 
 climate [is another advantage, and] consists in lessening the 
 physical requirements of the producers. 
 
 In spinning very fine cotton thread, England's natural cli- 
 mate gives in some parts of the country such advantages in 
 proper moisture and electric conditions that the operation can 
 be carried on out-of-doors ; while in the United States it is 
 generally necessary to create an artificial atmosphere. In 
 ordinary spinning in our country more is accomplished when 
 the wind is in one quarter than in another. The dry north- 
 west wind in New England reduces the amount of product*, 
 while the dry northeast wind in England has a similar effect, 
 and it is said has practically driven the cotton-spinners from 
 Manchester to Oldham, where the climate is more equably 
 moist. The full reasons for these facts are not yet ascertained. 
 
 Experts in the woolen industry, also, explain that the quality 
 and fiber of wool depend upon the soil and climate where the 
 sheep are pastured. When Ohio sheep are transferred to Texas, 
 in a few years their wool loses the distinctive quality it formerly 
 possessed, and takes on a new character belonging to the breeds 
 of Texas. The wool produced by one set of climatic conditions 
 is quite different from that of another set, and is used by the 
 manufacturers for different purposes. 
 
 In hot regions, mankind can exist in comfort with less 
 perfect housing, less clothing; fuel, that absolute necessary 
 of life in cold climates, they can almost dispense with, ex- 
 cept for industrial uses. They also require less aliment. 
 Among natural advantages, besides soil and climate, must be 
 
100 PRODUCTION". 
 
 mentioned abundance of mineral productions, in convenient 
 situations, and capable of being worked with moderate labor. 
 Such are the coal-fields of Great Britain, which do so much 
 to compensate its inhabitants for the disadvantages of cli- 
 mate ; and the scarcely inferior resource possessed by this 
 country and the United States, in a copious supply of an 
 easily reduced iron-ore, at no great depth below the earth's 
 surface, and in close proximity to coal-deposits available for 
 working it. But perhaps a greater advantage than all these 
 is a maritime situation, especially when accompanied with 
 good natural harbors ; and, next to it, great navigable rivers. 
 These advantages consist indeed wholly in saving of cost of 
 carriage. But few, who have not considered the subject, 
 have any adequate notion how great an extent of economical 
 advantage this comprises. 
 
 As the second of the [general] causes of superior produc- 
 tiveness, we may rank the greater energy of labor. By this 
 is not to be understood occasional, but regular and habitual 
 energy. The third element which determines the produc- 
 tiveness of the labor of a community is the skill and knowl- 
 edge therein existing, whether it be the skill and knowledge 
 of the laborers themselves or of those who direct their labor. 
 That the productiveness of the labor of a people is limited 
 by their knowledge of the arts of life is self-evident, and 
 that any progress in those arts, any improved application of 
 the objects or powers of nature to industrial uses, enables the 
 same quantity and intensity of labor to raise a greater prod- 
 uce: One principal department of these improvements 
 consists in the invention and use of tools and machinery. 1 v 
 
 The deficiency of practical good sense, which renders the 
 majority of the laboring-class such bad calculators — which 
 makes, for instance, their domestic economy so improvident, 
 lax, and irregular — -must disqualify them for any but a low 
 grade of intelligent labor, and render their industry far less 
 productive than with equal energy it otherwise might be. 
 
 1 See Mr. Babbage's " Economy of Machinery and Manufactures." 
 
CAUSES AFFECTING THE EFFICIENCY OF PRODUCTION. 1Q1 
 
 The moral qualities of the laborers are fully as important to 
 the efficiency and worth of their labor as the intellectual. 
 Independently of the effects of intemperance upon their bod- 
 ily and mental faculties, and of nighty, unsteady habits upon 
 the energy and continuity of their work (points so easily 
 understood as not to require being insisted upon), it is well 
 worthy of meditation how much of the aggregate effect of 
 their labor depends on their trustworthiness. 
 
 Among the secondary causes which determine the pro- 
 ductiveness of productive agents, the most important is Se- 
 curity. By security I mean the completeness of the protec- 
 tion which society affords to its members. 
 
 § 2. In the enumeration of the circumstances which pro- 
 mote the productiveness of labor, we have left one untouched, 
 which is co-operation, or the combined action of numbers. 
 Of this great aid to production, a single department, known 
 by the name of Division of Labor, has engaged a large share 
 of the attention of political economists ; most deservedly, in- 
 deed, but to the exclusion of other cases and exemplifications 
 of the same comprehensive law. In the lifting of heavy 
 weights, for example, in the felling of trees, in the sawing 
 of timber, in the gathering of much hay or corn during a 
 short period of fine weather, in draining a large extent of 
 land during the short season when such a work may be prop- 
 erly conducted, in the pulling of ropes on board ship, in the 
 rowing of large boats, in some mining operations, in the 
 erection of a scaffolding for building, and in the breaking of 
 stones for the repair of a road, so that the whole of the road 
 shall always be kept in good order : in all these simple op- 
 erations, and thousands more, it is absolutely necessary that 
 many persons should work together, at the same time, in the 
 same place, and in the same way. [But] in the present state of 
 society, the breeding and feeding of sheep is the occupation 
 of one set of people ; dressing the wool to prepare it for the 
 spinner is that of another ; spinning it into thread, of a third ; 
 weaving the thread into broadcloth, of a fourth ; dyeing the 
 cloth, of a fifth ; making it into a coat, of a sixth ; without 
 
IQ2 PRODUCTION. 
 
 counting the multitude of carriers, merchants, factors, and 
 retailers put in requisition at the successive stages of this 
 progress. 
 
 Without some separation of employments, very few things 
 would be produced at all. Suppose a set of persons, or a 
 number of families, all employed precisely in the same man- 
 ner ; each family settled on a piece of its own land, on which 
 it grows by its labor the food required for its own sustenance, 
 and, as there are no persons to buy any surplus produce where 
 all are producers, each family has to produce within itself 
 whatever other articles it consumes. In such circumstances, 
 if the soil was tolerably fertile, and population did not tread 
 too closely on the heels of subsistence, there would be, no 
 doubt, some kind of domestic manufactures ; clothing for the 
 family might, perhaps, be spun and woven within it, by the 
 labor, probably, of the women (a first step in the separation 
 of employments) ; and a dwelling of some sort would be 
 erected and kept in repair by their united labor. But beyond 
 simple food (precarious, too, from the variations of the sea- 
 sons), coarse clothing, and very imperfect lodging, it would 
 be scarcely possible that the family should produce anything 
 more. 
 
 Suppose that a company of artificers, provided with tools, 
 and with food sufficient to maintain them for a year, arrive in 
 the country and establish themselves in the midst of the popu- 
 lation. These new settlers occupy themselves in producing 
 articles of use or ornament adapted to the taste of a simple 
 people ; and before their food is exhausted they have pro- 
 duced these in considerable quantity, and are ready to ex- 
 change them for more food. The economical position of 
 the landed population is now most materially altered. They 
 have an opportunity given them of acquiring comforts and 
 luxuries. Things which, while they depended solely upon 
 their own labor, they never could have obtained, because 
 they could not have produced, are now accessible to them if 
 they can succeed in producing an additional quantity of food 
 and necessaries. They are thus incited to increase the pro- 
 
CAUSES AFFECTING THE EFFICIENCY OF PRODUCTION. 103 
 
 ductiveness of their industry. The new settlers constitute 
 what is called a market for surplus agricultural produce ; and 
 their arrival has enriched the settlement, not only by the 
 manufactured articles which they produce, but by the food 
 which would not have been produced unless they had been 
 there to consume it. 
 
 There is no inconsistency between this doctrine and the 
 proposition we before maintained, 1 that a market for commodi- 
 ties does not constitute employment for labor. The labor of 
 the agriculturists was already provided with employment; 
 they are not indebted to the demand of the new-comers for 
 being able to maintain themselves. What that demand does 
 for them is to call their labor into increased vigor and effi- 
 ciency ; to stimulate them, by new motives, to new exertions. 
 
 From these considerations it appears that a country will 
 seldom have a productive agriculture unless it has a large 
 town population, or, the only available substitute, a large ex- 
 port trade in agricultural produce to supply a population 
 elsewhere. I use the phrase " town population " for short- 
 ness, to imply a population non-agricultural. 
 
 It is found that the productive power of labor is in- 
 creased by carrying the separation further and further ; by 
 breaking down more and more every process of industry 
 into parts, so that each laborer shall confine himself to an 
 ever smaller number of simple operations. And thus, in 
 time, arise those remarkable cases of what is called the divis- 
 ion of labor, with which all readers on subjects of this na- 
 ture are familiar. Adam Smith's illustration from pin-mak- 
 ing, though so well known, is so much to the point that I 
 will venture once more to transcribe it : " The business of 
 making a pin is divided into about eighteen distinct opera- 
 tions. One man draws out the wire, another straights it, a 
 third cuts it, a fourth points it, a fifth grinds it at the top 
 for receiving the head ; to make the head requires two or 
 three distinct operations ; to put it on, is a peculiar business ; 
 
 1 Book i, chap, iv, § 6. 
 
104 PRODUCTION. 
 
 to whiten the pins is another ; it is even a trade by itself 
 to put them into the paper. ... I have seen a small manu- 
 factory where ten men only were employed, and where some 
 of them, consequently, performed two or three distinct oper- 
 ations. But though they were very poor, and therefore but 
 indifferently accommodated with the necessary machinery, 
 they could, when they exerted themselves, make among 
 them about twelve pounds of pins in a day. There are in a 
 pound upward of four thousand pins of a middling size. 
 Those ten persons, therefore, could make among them up- 
 ward of forty-eight thousand pins in a day. Each person, 
 therefore, making a tenth part of forty-eight thousand pins, 
 might be considered as making four thousand eight hun- 
 dred pins in a day. But if they had all wrought separately 
 and independently, and without any of them having been 
 educated to this peculiar business, they certainly could not 
 each of them have made twenty, perhaps not one pin in a 
 day." 
 
 § 3. The causes of the increased efficiency given to labor 
 by the division of employments are some of them too famil- 
 iar to require specification ; but it is worth while to attempt 
 a complete enumeration of them. By Adam Smith they 
 are reduced to three : " First, the increase of dexterity in 
 every particular workman ; secondly, the saving of the time 
 which is commonly lost in passing from one species of work 
 to another ; and, lastly, the invention of a great number of 
 machines which facilitate and abridge labor, and enable one 
 man to do the work of many." 
 
 (1.) Of these, the increase of dexterity of the individual 
 workman is the most obvious and universal. It does not fol- 
 low that because a thing has been done oftener it will be 
 done better. That depends on the intelligence of the work- 
 man, and on the degree in which his mind works along with 
 his hands. But it will be done more easily. This is as true 
 of mental operations as of bodily. Even a child, after much 
 practice, sums up a column of figures with a rapidity which 
 resembles intuition. The act of speaking any language, of 
 
CAUSES AFFECTING THE EFFICIENCY OF PRODUCTION. 105 
 
 reading fluently, of playing music at sight, are cases as re- 
 markable as they are familiar. Among bodily acts, dancing, 
 gymnastic exercises, ease and brilliancy of execution on a 
 musical instrument, are examples of the rapidity and facility 
 acquired by repetition. In simpler manual operations the 
 effect is, of course, still sooner produced. 
 
 (2.) The second advantage enumerated by Adam Smith as 
 arising from the division of labor is one on which I can not 
 help thinking that more stress is laid by him and others than 
 it deserves. To do full justice to his opinion, I will quote 
 his own exposition of it : " It is impossible to pass very 
 quickly from one kind of work to another, that is carried on 
 in a different place, and with quite different tools. A coun- 
 try weaver, who cultivates a small farm, must lose a good 
 deal of time in passing from his loom to the field, and from 
 the field to his loom. When the two trades can be carried 
 on in the same workhouse, the loss of time is no doubt much 
 less. It is even in this case, however, very considerable. A 
 man commonly saunters a little in turning his hand from one 
 sort of employment to another." I am very far from im- 
 plying that these considerations are of no weight; but I 
 think there are counter-considerations which are overlooked. 
 If one kind of muscular or mental labor is different from 
 another, for that very reason it is to some extent a rest from 
 that other ; and if the greatest vigor is not at once obtained 
 in the second occupation, neither could the first have been 
 indefinitely prolonged without some relaxation of energy. 
 It is a matter of common experience that a change of occu- 
 pation will often afford relief where complete repose would 
 otherwise be necessary, and that a person can work many 
 more hours without fatigue at a succession of occupations, 
 than if confined during the whole time to one. 1 Different 
 occupations employ different muscles, or different energies 
 of the mind, some of which rest and are refreshed while 
 
 1 Constant use of the same muscles, as by gold-beaters or writers, very often 
 produces paralysis. 
 
106 PRODUCTION. 
 
 others work. Bodily labor itself rests from mental, and 
 conversely. The variety itself has an invigorating effect on 
 what, for want of a more philosophical appellation, we must 
 term the animal spirits — so important to the efficiency of 
 all work not mechanical, and not unimportant even to that. 
 
 (3.) The third advantage attributed by Adam Smith to the 
 division of labor is, to a certain extent, real. Inventions 
 tending to save labor in a particular operation are more likely 
 to occur to any one in proportion as his thoughts are in- 
 tensely directed to that occupation, and continually employed 
 upon it. 
 
 This also can not be wholly true. " The founder of the 
 cotton manufacture was a barber. The inventor of the power- 
 loom was a clergyman. A farmer devised the application of the 
 screw-propeller. A fancy-goods shopkeeper is one of the most 
 enterprising experimentalists in agriculture. The most remark- 
 able architectural design of our day has been furnished by a 
 gardener. The first person who supplied London with water 
 was a goldsmith. The first extensive maker of English roads 
 was a blind man, bred to no trade. The father of English inland 
 navigation was a duke, and his engineer was a millwright. The 
 first great builder of iron bridges was a stone-mason, and the 
 greatest railway engineer commenced his life as a colliery en- 
 gineer." * 
 
 (4.) The greatest advantage (next to the dexterity of the 
 workmen) derived from the minute division of labor which 
 takes place in modern manufacturing industry, is one not 
 mentioned by Adam Smith, but to which attention has been 
 drawn by Mr. Babbage : the more economical distribution of 
 labor by classing the work-people according to their capacity. 
 Different parts of the same series of operations require un- 
 equal degrees of skill and bodily strength ; and those who 
 have skill enough for the most difficult, or strength enough 
 for the hardest parts of the labor, are made much more use- 
 ful by being employed solely in them ; the operations which 
 everybody is capable of being left to those who are fit for 
 no others. 
 
 1 Hearn's " Plutology," p. 279. 
 
CAUSES AFFECTING TEE EFFICIENCY OF PRODUCTION. 107 
 
 The division of labor, as all writers on the subject have 
 remarked, is limited by the extent of the market. If, by 
 the separation of pin-making into ten distinct employments, 
 forty-eight thousand pins can be made in a day, this separa- 
 tion will only be advisable if the number of accessible con- 
 sumers is such as to require, every day, something like 
 forty-eight thousand pins. If there is only a demand for 
 twenty-four thousand, the division of labor can only be ad- 
 vantageously carried to the extent which will every day pro- 
 duce that smaller number. The increase of the general 
 riches of the world, when accompanied with freedom of 
 commercial intercourse, improvements in navigation, and in- 
 land communication by roads, canals, or railways, tends to 
 give increased productiveness to the labor of every nation 
 in particular, by enabling each locality to supply with its 
 special products so much larger a market that a great exten- 
 sion of the division of labor in their production is an ordi- 
 nary consequence. The division of labor is also limited, in 
 many cases, by the nature of the employment. Agriculture, 
 for example, is not susceptible of so great a division of occu- 
 pations as many branches of manufactures, because its dif- 
 ferent operations can not possibly be simultaneous. 
 
 (5.) " In the examples given above the advantage obtained 
 was derived from the mere fact of the separation of employ- 
 ments, altogether independently of the mode in which the 
 separated employments were distributed among the persons 
 carrying them on, as well as of the places in which they were 
 conducted. But a further gain arises when the employments 
 are of a kind which, in order to their effective performance, 
 call for special capacities in the workman, or special natural 
 resources in the scene of operation. There would be a mani- 
 fest waste of special power in compelling to a mere mechanical 
 or routine pursuit a man who is fitted to excel in a ])rofessional 
 career ; and similarly, if a branch of industry were established 
 on some site which offered greater facilities to an industry of 
 another sort, a waste, analogous in character, would be in- 
 curred. In a word, while a great number of the occupations 
 in which men engage are such as, with proper preparation for 
 them, might equally well be carried on by any of those en- 
 gaged in them, or in any of the localities in which they are 
 respectively established, there are others which demand for 
 
108 PRODUCTION. 
 
 their effective performance special personal qualifications and 
 special local conditions ; and the general effectiveness of pro- 
 ductive industry will, other things being equal, be proportioned 
 to the completeness with which the adaptation is accomplished 
 between occupation on the one hand and individuals and locali- 
 ties on the other." ' 
 
 § 4t. "Whenever it is essential to the greatest efficiency of 
 labor that many laborers should combine, the scale of the 
 enterprise must be such as to bring many laborers together, 
 and the capital must be large enough to maintain them. 
 Still more needful is this when the nature of the employ- 
 ment allows, and the extent of the possible market encour- 
 ages, a considerable division of labor. The larger the 
 enterprise the further the division of labor may be car- 
 ried. This is one of the principal causes of large manu- 
 factories. Every increase of business would enable the 
 whole to be carried on with a proportionally smaller amount 
 of labor. 
 
 As a general rule, the expenses of a business do not in- 
 crease by any means proportionally to the quantity of busi- 
 ness. Let us take as an example a set of operations which we 
 are accustomed to see carried on by one great establishment, 
 that of the Post-Office. Suppose that the business, let us 
 say only of the letter-post, instead of being centralized in a 
 single concern, were divided among five or six competing 
 companies. Each of these would be obliged to maintain 
 almost as large an establishment as is now sufficient for the 
 whole. Since each must arrange for receiving and deliver- 
 ing letters in all parts of the town, each must send letter- 
 carriers into every street, and almost every alley, and this, 
 too, as many times in the day as is now done by the Post- 
 Office, if the service is to be as well performed. Each must 
 have an office for receiving letters in every neighborhood, 
 with all subsidiary arrangements for collecting the letters 
 from the different offices and redistributing them. To this 
 must be added the much greater number of superior officers 
 
 1 Cairnes, "Leading Principles," pp. 299, 300. 
 
CAUSES AFFECTING THE EFFICIENCY OF PRODUCTION. 109 
 
 who would be required to check and control the subordinates, 
 implying not only a greater cost in salaries for such respon- 
 sible officers, but the necessity, perhaps, of being satisfied in 
 many instances with an inferior standard of qualification, 
 and so failing in the object. 
 
 "Whether or not the advantages obtained by operating on 
 a large scale preponderate in any particular case over the 
 more watchful attention and greater regard to minor gains 
 and losses usually found in small establishments, can be ascer- 
 tained, in a state of free competition, by an unfailing test. 
 Wherever there are large and small establishments in the 
 same business, that one of the two which in existing circum- 
 stances carries on the production at greatest advantage will 
 be able to undersell the other. The power of permanently 
 underselling can only, generally speaking, be derived from 
 increased effectiveness of labor ; and this, when obtained by 
 a more extended division of employment, or by a classifica- 
 tion tending to a better economy of skill, always implies a 
 greater produce from the same labor, and not merely the 
 same produce from less labor ; it increases not the surplus 
 only, but the gross produce of industry. If an increased 
 quantity of the particular article is not required, and part of 
 the laborers in consequence lose their employment, the capi- 
 tal which maintained and employed them is also set at 
 liberty, and the general produce of the country is increased 
 by some other application of their labor. 
 
 A considerable part of the saving of labor effected by 
 substituting the large system of production for the small, is 
 the saving in the labor of the capitalists themselves. If a 
 hundred producers with small capitals carry on separately 
 the same business, the superintendence of each concern will 
 probably require the whole attention of the person conduct- 
 ing it, sufficiently, at least, to hinder his time or thoughts 
 from being disposable for anything else ; while a single 
 manufacturer possessing a capital e(Jual to the sum of theirs, 
 with ten or a dozen clerks, could conduct the whole of their 
 amount of business, and have leisure, too, for other occupations. 
 
HO PRODUCTION. 
 
 Production on a large scale is greatly promoted by the 
 practice of forming a large capital by the combination of 
 many small contributions ; or, in other words, by the forma- 
 tion of stock companies. The advantages of the principle are 
 important, [since] (1) many undertakings require an amount 
 of capital beyond the means of the richest individual or pri- 
 vate partnership. [Of course] the Government can alone be 
 looked to for any of those works for which a great combina- 
 tion of means is requisite, because it can obtain those means 
 by compulsory taxation, and is already accustomed to the 
 conduct of large operations. For reasons, however, which 
 are tolerably well known, government agency for the con- 
 duct of industrial operations is generally one of the least 
 eligible of resources when any other is available. Of [the 
 advantages referred to above] one of the most important is 
 (2) that which relates to the intellectual and active qualifi- 
 cations of the directing head. The stimulus of individual 
 interest is some security for exertion, but exertion is of little 
 avail if the intelligence exerted is of an inferior order, which 
 it must necessarily be in the majority of concerns carried 
 on by the persons chiefly interested in them. "Where the 
 concern is large, and can afford a remuneration sufficient to 
 attract a class of candidates superior to the common average, 
 it is possible to select for the general management, and for all 
 the skilled employments of a subordinate kind, persons of a 
 degree of acquirement and cultivated intelligence which more 
 than compensates for their inferior interest in the result. It 
 must be further remarked that it is not a necessary conse- 
 quence of joint-stock management that the persons em- 
 ployed, whether in superior or in subordinate offices, should 
 be paid wholly by fixed salaries. In the case of the mana- 
 gers of joint-stock companies, and of the superintending and 
 controlling officers in many private establishments, it is a 
 common enough practice to connect their pecuniary interest 
 with the interest of their employers, by giving them part 
 of their remuneration in the form of a percentage on the 
 profits. 
 
CAUSES AFFECTING THE EFFICIENCY OF PRODUCTION, m 
 
 The possibility of substituting the large system of pro- 
 duction for the small depends, of course, in the first place, on 
 the extent of the market. The large system can only be ad- 
 vantageous when a large amount of business is to be done : 
 it implies, therefore, either a populous and flourishing com- 
 munity, or a great opening for exportation. 
 
 In the countries in which there are the largest markets, 
 the widest diffusion of commercial confidence and enterprise, 
 the greatest annual increase of capital, and the greatest num- 
 ber of large capitals owned by individuals, there is a tend- 
 ency to substitute more and more, in one branch of industry 
 after another, large establishments for small ones. These 
 are almost always able to undersell the smaller tradesmen, 
 partly, it is understood, by means of division of labor, and 
 the economy occasioned by limiting the employment of 
 skilled agency to cases where skill is required ; and partly, 
 no doubt, by the saving of labor arising from the great scale 
 of the transactions ; as it costs no more time, and not much 
 more exertion of mind, to make a large purchase, for exam- 
 ple, than a small one, and very much less than to make a 
 number of small ones. "With a view merely to production, 
 and to the greatest efficiency of labor, this change is wholly 
 beneficial. % 
 
 A single large company very often, instead of being a 
 monopoly, is generally better than two large companies ; for 
 there is little likelihood of competition andlower prices when 
 the competitors are so few as to be able to agree not to compete. 
 As Mr. Mill says in regard to parallel railroads : " No one can 
 desire to see the enormous waste of capital and land (not to 
 speak of increased nuisance) involved in the construction of a 
 second railway to connect the same places already united by 
 an existing one ; while the two would not do the work better 
 than it could be done by one, and after a short time would 
 probably be amalgamated." The actual tendency of charges 
 to diminish on the railways, before the matter of parallel rail- 
 ways was suggested is clearly seen by reference to Chart V 
 (p. 137). 
 
CHAPTER VII. 
 
 OF THE LAW OF THE INCREASE OF LABOR. 
 
 § 1. Production is not a fixed but an increasing thing. 
 "When not kept back by bad institutions, or a low state of 
 the arts of life, the produce of industry has usually tended to 
 increase ; stimulated not only by the desire of the producers 
 to augment their means of consumption, but by the increas- 
 ing number of the consumers. 
 
 We have seen that the essential requisites of production 
 are three — labor, capital, and natural agents ; the term capi- 
 tal including all external and physical requisites which are 
 products of labor, the term natural agents all those which are 
 not. The increase of production, therefore, depends on the 
 properties of these elements. It is a result of the increase 
 either of the elements themselves, or of their productiveness. 
 We proceed to consider the three elements successively, with 
 reference to this effect ; or, in other words, the law of the 
 increase of production, viewed in respect of its dependence, 
 first on Labor, secondly on Capital, and lastly on Land. 
 
 § 2. The increase of labor is the increase of mankind ; of 
 population. The power of multiplication inherent in all 
 organic life may be regarded as infinite. There are many 
 species of vegetables of which a single plant will produce in 
 one year the germs of a thousand ; if only two come to ma- 
 turity, in fourteen years the two will have multiplied to six- 
 teen thousand and more. It is but a moderate case of fecun- 
 dity in animals to be capable of quadrupling their numbers 
 in a single year ; if they only do as much in half a century, 
 
PRODUCTION. 113 
 
 ten thousand will have swelled within two centuries to up- 
 ward to two millions and a half. The capacity of increase is 
 necessarily in a geometrical progression : the numerical ratio 
 alone is different. 
 
 To this property of organized beings, the human species 
 forms no exception. Its power of increase is indefinite, and 
 the actual multiplication would be extraordinarily rapid, if 
 the power were exercised to the utmost. It never is exer- 
 cised to the utmost, and yet, in the most favorable circum- 
 stances known to exist, which are those of a fertile region 
 colonized from an industrious and civilized community, 
 population has continued, for several generations, independ- 
 ently of fresh immigration, to double itself in not much 
 more than twenty years. 
 
 By this table it will be seen that if 
 population can double itself in twenty- 
 five years, and if food can only be in- 
 creased by as much as x (the subsistence 
 of eleven millions) by additional applica- 
 tion of another equal quantity of labor on 
 the same land in each period, then at the 
 end of one hundred years there would be 
 the disproportion of one hundred and sev- 
 - enty-six millions of people, with subsist- 
 ence for only fifty-five millions. Of course, this is prevented 
 either by checking population to the amount of the subsist- 
 ence ; by sending off the surplus population ; or by bringing in 
 food from new lands. 
 
 In the United States to 18G0 population has doubled itself 
 about every twenty years, while in France there is practically 
 no increase of population. It is stated that the white popula- 
 tion of the United States between 1790 and 1840 increased 
 400*4 per cent, deducting immigration. The extraordinary 
 advance of population with us, where subsistence is easily at- 
 tainable, is to be seen in the chart on the next page (No. Ill), 
 which shows the striking rapidity of increase in the United 
 States when compared with the older countries of Europe. The 
 steady demand for land can be seen by the gradual westward 
 movement of the center of population, as seen in chart No. IV 
 (p. 116), and by the rapid settlement of the distant parts of 
 our country, as shown by the two charts (frontispieces), which 
 represent to the eye by heavier colors the areas of the more 
 densely settled districts in 1830 and in 1880. 
 
 TEARS. 
 
 Popula- 
 tion. 
 
 Food. 
 
 25 -j 
 
 11 mills 
 22 " 
 
 X 
 
 2x 
 
 21 
 
 44 " 
 
 3 x 
 
 25 
 
 88 " 
 
 4 x 
 
 25 
 
 176 " 
 
 6 x 
 
114: 
 
 PRODUCTION. 
 
 CHART III. 
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 1800 1810 1820 1830 1840 1850 1860 1870 1880 
 
THE LAW OF THE INCREASE OF LABOR. H5 
 
 § 3. The obstacle to a just understanding of the subject 
 arises from too confused a notion of the causes which, at 
 most times and places, keep the actual increase of mankind 
 so far behind the capacity. 
 
 The conduct of human creatures is more or less influenced 
 by foresight of consequences, and by some impulses superior 
 to mere animal instincts ; and they do not, therefore, propa- 
 gate like swine, but are capable, though in very unequal 
 degrees, of being withheld by prudence, or by the social 
 affections, from giving existence to beings born only to mis- 
 ery and premature death. 
 
 Malthus found an explanation of the anomaly that in the 
 Swiss villages, with the longest average duration of life, there 
 were the fewest births, by noting that no one married until a 
 cow-herd's cottage became vacant, and precisely because the 
 tenants lived so long were the new-comers long kept out of a 
 place. 
 
 In proportion as mankind rise above the condition of the 
 beast, population is restrained by the fear of want, rather 
 than by want itself. Even where there is no question of 
 starvation, many are similarly acted upon by the apprehen- 
 sion of losing what have come to be regarded as the decen- 
 cies of their situation in life. Among the middle classes, in 
 many individual instances, there is an additional restraint 
 exercised from the desire of doing more than maintaining 
 their circumstances — of improving them ; but such a desire 
 is rarely found, or rarely has that effect, in the laboring- 
 classes. If they can bring up a family as they were them- 
 selves brought up, even the prudent among them are usually 
 satisfied. Too often they do not think even of that, but rely 
 on fortune, or on the resources to be found in legal or volun- 
 tary charity. 
 
 This, in effect, is the well-known Malthusian doctrine. The 
 thorough reader will also consult the original " Essay " of Mal- 
 thus. Mr. Bowen ' and other writers oppose it, saying it has 
 
 ' "American Political Economy," p. 134. See also an article, "Malthusian- 
 ism, Darwinism, and Pessimism," "North American Review," November, 1879. 
 
116 
 
 PRODUCTION. 
 
 "no relation to the times 
 in which we live, or to any 
 which are near at hand." 
 He thinks the productive 
 power of the whole world 
 prevents the necessity of 
 considering the pressure of 
 population upon subsistence 
 as an actuality now or in 
 the future. This, however, 
 does not deny the existence 
 of Malthus's principles, but 
 opposes them only on the 
 methods of their action. Mr. 
 Bickards 1 holds that man's 
 food — as, e. g., wheat — has 
 the power to increase geo- 
 metrically faster than man ; 
 but he omits to consider that 
 for the growth of this food 
 land is demanded; that land 
 is not capable of 6uch geo- 
 metrical increase ; and that 
 without it the food can not 
 be grown. Of course, any 
 extension of the land area, 
 as happened when England 
 abolished the corn laws and 
 drew her food from our prai- 
 ries, removes the previous 
 pressure of population on 
 subsistence. No believer in 
 the Malthusian doctrine is 
 so absurd as to hold that 
 the growth of population 
 actually exceeds subsist- 
 ence, but that there is a 
 " constant tendency in all animated life to increase beyond the 
 nourishment prepared for it," no one can possibly doubt. This 
 is not inconsistent with the fact that subsistence has at any time 
 increased faster than population. It is as if a block of wood 
 on the floor were acted on by two opposing forces, one tending 
 to move it forward, one backward : if it moves backward, that 
 does not prove the absence of any force working to move it for- 
 ward, but only that the other force is the stronger of the two, 
 
 1 See Cairnes, " Logical Method," pp. 110-111. 
 
THE LAW OF THE INCREASE OF LABOR. H7 
 
 and that the final motion is the resultant of the two forces. It 
 is only near-sighted generalization to say that since the block 
 moves forward, there is therefore no opposing force to its ad- 
 vance. 1 Mr. Doubleday maintains that, as people become better 
 fed, they become unprolific. Mr. Mill's answer, referring to 
 the large families of the English peerage, is unfortunate.* In 
 Sweden the increase of the peasantry is six times that of the 
 middle classes, and fourteen times that of the nobility. The 
 diminishing fertility of New England families gives a truer 
 explanation, when it is seen that with the progress in material 
 wealth later marriages are the rule. When New-Englanders 
 emigrate to the Western States, where labor is in demand and 
 where it is less burdensome to have large families, there is no 
 question as to their fertility.* 
 
 (1.) In a very backward state of society, like that of 
 Europe in the middle ages, and many parts of Asia at pres- 
 ent, population is kept down by actual starvation. The 
 starvation does not take place in ordinary years, but in sea- 
 sons of scarcity, which in those states of society are much 
 more frequent and more extreme than Europe is now accus- 
 tomed to. (2.) In a more improved state, few, even among 
 the poorest of the people, are limited to actual necessaries, 
 and to a bare sufficiency of those : and the increase is kept 
 within bounds, not by excess of deaths, but by limitation of 
 births.* The limitation is brought about in various ways. 
 In some countries, it is the result of prudent or conscientious 
 self-restraint. There is a condition to which the laboring- 
 people are habituated; they perceive that, by having too 
 numerous families, they must sink below that condition, or 
 fail to transmit it to their children ; and this they do not 
 choose to submit to. 
 
 There are other cases in which the prudence and fore- 
 thought, which perhaps might not be exercised by the people 
 
 1 See also " Walker's *' Wages Question," chap, vi, and Roscher, " Political 
 Economy," book v, chaps, i, ii, iii. 
 
 8 See Galton's "Hereditary Genius," p. 131-135. 
 
 8 See also Edward Jarvis, "Atlantic Monthly," 1872, and F. A.Walker, 
 "Social Science Journal," vol. v, 1873, p. 71. For other literature, see " Sketch 
 of the History of Political Economy," p. 16. 
 
 * This is the " preventive check " of Mr. Malthus, while the limitation through 
 war, starvation, etc., is the " positive check." 
 
11$ PRODUCTION. 
 
 themselves, are exercised by the state for their benefit ; mar- 
 riage not being permitted until the contracting parties can 
 show that they have the prospect of a comfortable support. 
 There are places, again, in which the restraining cause seems 
 to be not so much individual prudence, as some general 
 and perhaps even accidental habit of the country. In the 
 rural districts of England, during the last century, the 
 growth of population was very effectually repressed by the 
 difficulty of obtaining a cottage to live in. It was the cus- 
 tom for unmarried laborers to lodge and board with their 
 employers ; it was the custom for married laborers to have a 
 cottage : and the rule of the English poor-laws, by which a 
 parish was charged with the support of its unemployed poor, 
 rendered land-owners averse to promote marriage. About 
 the end of the century, the great demand for men in war 
 and manufactures made it be thought a patriotic thing to 
 encourage population : and about the same time the growing 
 inclination of farmers to live like rich people, favored as it 
 was by a long period of high prices, made them desirous of 
 keeping inferiors at a greater distance, and, pecuniary mo- 
 tives arising from abuses of the poor-laws being superadded, 
 they gradually drove their laborers into cottages, which the 
 landowners now no longer refused permission to build. 
 
 It is but rarely that improvements in the condition of 
 the laboring-classes do anything more than give a temporary 
 margin, speedily filled up by an increase of their numbers. 
 Unless, either by their general improvement in intellectual 
 and moral culture, or at least by raising their habitual stand- 
 ard of comfortable living, they can be taught to make a bet- 
 ter use of favorable circumstances, nothing permanent can 
 be done for them ; the most promising schemes end only in 
 having a more numerous but not a happier people. There 
 is no doubt that [the standard] is gradually, though slowly, 
 rising in the more advanced countries of Western Europe. 1 
 
 1 This is fully confirmed by the inaugural address of Mr. Giffen as President 
 of the London Statistical Society, November 20, 1883, infra, book iv, chap, v, 
 § 1. (See the London "Statistical Journal," 1883.) 
 
THE LAW OF THE INCREASE OF LABOR. H9 
 
 Subsistence and employment in England have never in- 
 creased more rapidly than in the last forty years, but every 
 census since 1821 showed a smaller proportional increase of 
 population than that of the period preceding ; and the prod- 
 uce of French agriculture and industry is increasing in a pro- 
 gressive ratio, while the population exhibits, in every quin- 
 quennial census, a smaller proportion of births to the popu- 
 lation. 
 
 This brings forward the near connection between land-ten- 
 ures and population. France is pre-eminently a country of 
 small holdings, and it is undoubtedly true that the system has 
 checked the thoughtless increase of numbers. On his few hec- 
 tares, the French peasant sees in the size of his farm and the 
 amount of its produce the limit of subsistence for himself and 
 his family ; as in no other way does he see beforehand the re- 
 sults of any lack of food from his lack of prudence. 1 From 
 1790 to 1815 the average yearly increase of population was 
 120,000 ; from 1815 to 1846, the golden age of French agri- 
 culture, 200,000 ; from 1846 to 1856, when agriculture was not 
 prosperous, 60,000 ; from 1856 to 1880 the increase has been 
 not more than 36,000 yearly. In France the question shapes 
 itself to the peasant proprietor, How many can be subsisted by 
 the amount of produce, not on an unlimited area of land in 
 other parts of the world, but on this particular property of a 
 small size ? While in England there are ten births to six deaths, 
 in France there are about ten births to every nine deaths. 8 In 
 no country has the doctrine of Malthus been more attacked 
 than in France, and yet in no other country has there been a 
 more marked obedience to its principles in actual practice. 
 Since the French are practically not at all an emigrating peo- 
 ple, population has strictly adapted itself to subsistence. For 
 the relative increase of population in France and the United 
 States, see also the movement of lines indicating the increase 
 of population in chart No. Ill (p. 114). 
 
 1 See Lavergne's "Agriculture et Population," pp. 305-316. 
 8 For tables of relative births and deaths, see " Statesman's Year-Book," p. 
 253. 
 
CHAPTER Till. 
 
 OF THE LAW OF THE INCREASE OF CAPITAL. 
 
 § 1. The requisites of production being labor, capital, and 
 land, it has been seen from the preceding chapter that the 
 impediments to the increase of production do not arise from 
 the first of these elements. But production has other requi- 
 sites, and, of these, the one which we shall next consider is 
 Capital. There can not be more people in any country, or 
 in the world, than can be supported from the produce of 
 past labor until that of present labor comes in [although it 
 is not to be supposed that capital consists wholly of food]. 
 We have next, therefore, to inquire into the conditions of the 
 increase of capital : the causes by which the rapidity of its 
 increase is determined, and the necessary limitations of that 
 increase. 
 
 Since all capital is the product of saving, that is, of absti- 
 nence from present consumption for the sake of a future 
 good, the increase of capital must depend upon two things 
 — the amount of the fund from which saving can be made, 
 and the strength of the dispositions which prompt to it. 
 
 The operating causes may be more clearly seen by the use 
 of the following classification : 
 
 1. In unhealthy climates and 
 occupations — e. g., sail- 
 ors. 
 
 2. Where there is little law 
 and order — e. g., Bur- 
 mah. 
 
 3. Because of no proper esti- 
 mate of the future good, 
 in comparison with the 
 present sacrifice — e. g., 
 Indians of the St. Law- 
 rence. 
 
 4. Because of want of in- 
 terest in others — e. g., 
 later Rome. 
 
 Increase of capi- 
 t a 1 depends 
 upon — 
 
 1. The amount of surplus 
 wealth over necessaries. 
 
 The strength of the de 
 sire to save — which is - 
 less : — 
 
THE LAW OF THE INCREASE OF CAPITAL. 121 
 
 (1.) The fund from which saving can be made is the sur- 
 plus of the produce of labor, after supplying the necessaries 
 of life to all concerned in the production (including those 
 employed in replacing the materials, and keeping the fixed 
 capital in repair). More than this surplus can not be saved 
 under any circumstances. As much as this, though it never 
 is saved, always might be. This surplus is the fund from 
 which the enjoyments, as distinguished from the necessaries 
 of the producers, are provided ; it is the fund from which all 
 are subsisted who are not themselves engaged in produc- 
 tion, and from which all additions are made to capital. The 
 capital of the employer forms the revenue of the laborers, 
 and, if this exceeds the necessaries of life, it gives them a 
 surplus which they may either expend in enjoyments or save. 
 
 It is evident that the whole unproductive consumption of the 
 laborer can be saved. When it is considered how enormous a 
 sum is spent by the working-classes in drink alone (and also 
 in the great reserves of the Trades-Unions collected for pur- 
 poses of strikes), it is indisputable that the laborers have the 
 margin from which savings can be made, and by which they 
 themselves may become capitalists. The great accumulations 
 in the savings-banks by small depositors in the United States 
 also show somewhat how much is actually saved. In 1882-1883 
 there were 2,876,438 persons who had deposited in the savings- 
 banks of the United States $1,024,856,787, with an average to 
 each depositor of $356.29. The unproductive consumption, 
 however, of all classes — not merely that of the working-men — 
 is the possible fund which may be saved. That being the 
 amount which can be saved, how much will be saved depends 
 on the strength of the desire to save. 
 
 The greater the produce of labor after supporting the 
 laborers, the more there is which can be saved. The same 
 thing also partly contributes to determine how much will be 
 saved. A part of the motive to saving consists in the pros- 
 pect of deriving an income from savings ; in the fact that 
 capital, employed in production, is capable of not only re- 
 producing itself but yielding an increase. The greater the 
 profit that can be made from capital, the stronger is the mo- 
 tive to its accumulation. 
 
122 PRODUCTION. 
 
 § 2. But the disposition to save does not wholly depend 
 on the external inducement to it ; on the amount of profit 
 to be made from savings. With the same pecuniary induce- 
 ment, the inclination is very different, in different persons, 
 and in different communities. 
 
 (2.) All accumulation involves the sacrifice of a present, 
 for the sake of a future good. 
 
 This is the fundamental motive underlying the effective 
 desire of accumulation, and is far more important than any 
 other. It is, in short, the test of civilization. In order to in- 
 duce the laboring-classes to improve their condition and save 
 capital, it is absolutely necessary to excite in them (by educa- 
 tion or religion) a belief in a future gain greater than the pres- 
 ent sacrifice. It is, to be sure, the whole problem of creating 
 character, and belongs to sociology and ethics rather than to 
 political economy. 
 
 In weighing the future against the present, the uncer- 
 tainty of all things future is a leading element ; and that un- 
 certainty is of very different degrees. " All circumstances," 
 therefore, " increasing the probability of the provision 
 we make for futurity being enjoyed by ourselves or others, 
 tend" justly and reasonably "to give strength to the effect- 
 ive desire of accumulation. Thus a healthy climate or oc- 
 cupation, by increasing the probability of life, has a tend- 
 ency to add to this desire. When engaged in safe occupa- 
 tions and living in healthy countries, men are much more 
 apt to be frugal, than in unhealthy or hazardous occupations 
 and in climates pernicious to human life. Sailors and sol- 
 diers are prodigals. In the West Indies, New Orleans, the 
 East Indies, the expenditure of the inhabitants is profuse. 
 The same people, coming to reside in the healthy parts of 
 Europe, and not getting into the vortex of extravagant fash- 
 ion, live economically. War and pestilence have always 
 waste and luxury among the other evils that follow in their 
 train. Eor similar reasons, whatever gives security to the 
 affairs of the community is favorable to the strength of this 
 principle. In this respect the general prevalence of law and 
 
THE LAW OF TIIE INCREASE OF CAPITAL. 123 
 
 order and the prospect of the continuance of peace and tran- 
 quillity have considerable influence." * 
 
 It is asserted that the prevalence of homicide in certain 
 parts of the United States has had a vital influence in retarding 
 the material growth of those sections. The Southern States 
 have received but a very small fraction (from ten to thirteen 
 per cent) of foreign immigration. " A country where law and 
 order prevail to perfection may find its material prosperity 
 checked by a deadly and fatal climate ; or, on the other 
 hand, a people may destroy all the advantages accruing from 
 matchless natural resources and climate by persistent disregard 
 of life and property. A rather startling confirmation of this 
 economic truth is afforded by the fact that homicide has been 
 as destructive of life in the South as yellow fever. Although 
 there have been forty thousand deaths from yellow fever since 
 the war, the deaths from homicide, for the same period, have 
 been even greater." a The influence of the old slave regime, 
 and its still existing influences, in checking foreign immigra- 
 tion into the South can be seen by the colored chart, No. VIII, 
 showing the relative density of foreign-born inhabitants in the 
 several parts of the United States. The deeper color shows 
 the greater foreign-born population. 
 
 The more perfect the security, the greater will be the 
 effective strength of the desire of accumulation. "Where 
 property is less safe, or the vicissitudes ruinous to fortunes 
 are more frequent and severe, fewer persons will save at all, 
 and, of those who do, many will require the inducement of a 
 higher rate of profit on capital to make them prefer a doubt- 
 ful future to the temptation of present enjoyment. 
 
 In the circumstances, for example, of a hunting tribe, 
 "man may be said to be necessarily improvident, and re- 
 gardless of futurity, because, in this state, the future pre- 
 sents nothing which can be with certainty either foreseen or 
 governed. . . . Besides a want of the motives exciting to 
 provide for the needs of futurity through means of the abili- 
 ties of the present, there is a want of the habits of perception 
 
 1 This and the subsequent quotations are taken by Mr. Mill from Rac's 
 " New Principles of Political Economy." 
 
 '"International Review," article "Colonization," 1881, p. 88. Sec II. V. 
 Redfield, "Homicide North and South," 1880. 
 
124: PRODUCTION. 
 
 and action, leading to a constant connection in the mind of 
 those distant points, and of the series of events serving to 
 unite them. Even, therefore, if motives be awakened capa- 
 ble of producing the exertion necessary to effect this connec- 
 tion, there remains the task of training the mind to think and 
 act so as to establish it." 
 
 § 3. For instance : " Upon the banks of the St. Law- 
 rence there are several little Indian villages. The cleared 
 land is rarely, I may almost say never, cultivated, nor are any 
 inroads made in the forest for such a purpose. The soil is, 
 nevertheless, fertile, and, were it not, manure lies in heaps 
 by their houses. Were every family to inclose half an acre 
 of ground, till it, and plant it in potatoes and maize, it would 
 yield a sufficiency to support them one half the year. They 
 suffer, too, every now and then, extreme want, insomuch 
 that, joined to occasional intemperance, it is rapidly reducing 
 their numbers. This, to us, so strange apathy proceeds not, 
 in any great degree, from repugnance to labor ; on the con- 
 trary, they apply very diligently to it when its reward is 
 immediate. It is evidently not the necessary labor that is 
 the obstacle to more extended culture, but the distant return 
 from that labor. I am assured, indeed, that among some of 
 the more remote tribes, the labor thus expended much ex- 
 ceeds that given by the whites. On the Indian, succeeding 
 years are too distant to make sufficient impression ; though, 
 to obtain what labor may bring about in the course of a few 
 months, he toils even more assiduously than the white man." 
 
 This view of things is confirmed by the experience of 
 the Jesuits, in their interesting efforts to civilize the Indians 
 of Paraguay. The real difficulty was the improvidence of 
 the people ; their inability to think for the future ; and the 
 necessity accordingly of the most unremitting and minute 
 superintendence on the part of their instructors. " Thus at 
 first, if these gave up to them the care of the oxen with 
 which they plowed, their indolent thoughtlessness would 
 probably leave them at evening still yoked to the implement. 
 "Worse than this, instances occurred where they cut them up 
 
THE LAW OF THE INCREASE OF CAPITAL. 125 
 
 for supper, thinking, when reprehended, that they sufficiently 
 excused themselves by saying they were hungry." 
 
 As an example intermediate, in the strength of the effect- 
 tive desire of accumulation, between the state of things thus 
 depicted and that of modern Europe, the case of the Chinese 
 deserves attention. " Durability is one of the chief quali- 
 ties, marking a high degree of the effective desire of accumu- 
 lation. The testimony of travelers ascribes to the instru- 
 ments formed by the Chinese a very inferior durability to 
 similar instruments constructed by Europeans. The houses, 
 we are told, unless of the higher ranks, are in general of 
 unburnt bricks, of clay, or of hurdles plastered with earth ; 
 the roofs, of reeds fastened to laths. A greater degree of 
 strength in the effective desire of accumulation would cause 
 them to be constructed of materials requiring a greater pres- 
 ent expenditure, but being far more durable. From the same 
 cause, much land, that in other countries would be cultivated, 
 lies waste. All travelers take notice of large tracts of lands, 
 chiefly swamps, which continue in a state of nature. To 
 bring a swamp into tillage is generally a process to com- 
 plete which requires several years. It must be previously 
 drained, the surface long exposed to the sun, and many 
 operations performed, before it can be made capable of bear- 
 ing a crop. Though yielding, probably, a very considerable 
 return for the labor bestowed on it, that return is not made 
 until a long time has elapsed. The cultivation of such land 
 implies a greater strength of the effective desire of. accumu- 
 lation than exists in the empire. The amount of self-denial 
 would seem to be small. It is their great deficiency in fore- 
 thought and frugality in this respect which is the cause of 
 the scarcities and famines that frequently occur." 
 
 That it is defect of providence, not defect of industry, 
 that limits production among the Chinese, is still more 
 obvious than in the case of the semi-agriculturized Indians. 
 " Where the returns are quick, where the instruments formed 
 require but little time to bring the events for which they 
 were formed to an issue," it is well known that " the great 
 
126 PRODUCTION. 
 
 progress which has been made in the knowledge of the arts 
 suited to the nature of the country and the wants of its in- 
 habitants " makes industry energetic and effective. " What 
 marks the readiness with which labor is forced to form the 
 most difficult materials into instruments, where these instru- 
 ments soon bring to an issue the events for which they are 
 formed, is the frequent occurrence, on many of their lakes 
 and rivers, of structures resembling the floating gardens of 
 the Peruvians, rafts covered with vegetable soil and culti- 
 vated. Labor in this way draws from the materials on which 
 it acts very speedy returns. Nothing can exceed the lux- 
 uriance of vegetation when the quickening powers of a 
 genial sun are ministered to by a rich soil and abundant 
 moisture. It is otherwise, as we have seen, in cases where 
 the return, though copious, is distant. European travelers are 
 surprised at meeting these little floating farms by the side of 
 swamps which only require draining to render them tillable." 
 
 "When a country has carried production as far as in the 
 existing state of knowledge it can be carried with an amount 
 of return corresponding to the average strength of the effect- 
 ive desire of accumulation in that country, it has reached 
 what is called the stationary state; the state in which no 
 further addition will be made to capital, unless there takes 
 place either some improvement in the arts of production, or 
 an increase in the strength of the desire to accumulate. In 
 the stationary state, though capital does not on the whole 
 increase, some persons grow richer and others poorer. Those 
 whose degree of providence is below the usual standard 
 become impoverished, their capital perishes, and makes room 
 for the savings of those whose effective desire of accumula- 
 tion exceeds the average. These become the natural pur- 
 chasers of the lands, manufactories, and other instruments of 
 production owned by their less provident countrymen. 
 
 In China, if that country has really attained, as it is sup- 
 posed to have done, the stationary state, accumulation has 
 stopped when the returns to capital are still as high as is in- 
 dicated by a rate of interest legally twelve per cent, and prac- 
 
THE LAW OF THE INCREASE OF CAPITAL. 127 
 
 tically varying (it is said) between eighteen and thirty-six. 
 It is to be presumed, therefore, that no greater amount of cap- 
 ital than the country already possesses can find employment 
 at this high rate of profit, and that any lower rate does not 
 hold out to a Chinese sufficient temptation to induce him to 
 abstain from present enjoyment. "What a contrast with 
 Holland, where, during the most flourishing period of its 
 history, the government was able habitually to borrow at two 
 per cent, and private individuals, on good security, at three ! 
 
 § 4. In [the United States and] the more prosperous 
 countries of Europe, there are to be found abundance of 
 prodigals : still, in a very numerous portion of the communi- 
 ty, the professional, manufacturing, and trading classes, being 
 those who, generally speaking, unite more of the means with 
 more of the motives for saving than any other class, the spirit 
 of accumulation is so strong that the signs of rapidly increas- 
 ing wealth meet every eye : and the great amount of capital 
 seeking investment excites astonishment, whenever peculiar 
 circumstances turning much of it into some one channel, such 
 as railway construction or foreign speculative adventure, bring 
 the largeness of the total amount into evidence. 
 
 There are many circumstances which, in England, give 
 a peculiar force to the accumulating propensity. The long 
 exemption of the country from the ravages of war and the 
 far earlier period than elsewhere at which property was 
 secure from military violence or arbitrary spoliation have 
 produced a long-standing and hereditary confidence in the 
 safety of funds when trusted out of the owner's hands, which 
 in most other countries is of much more recent origin, and 
 less firmly established. 
 
 The growth of deposit-banking in Great Britain, therefore, 
 advances with enormous strides, while in Continental countries 
 it makes very little headway. The disturbed condition of the 
 country in France, owing to wars, leads the thrifty to hoard 
 instead of depositing their savings. But in the United States 
 the same growth is seen as among the English. The net de- 
 posits of the national banks of the United States in 1871 were 
 $636,000,000, but in 1883 they had increased more than 83 
 
128 PRODUCTION. 
 
 per cent to $1,168,000,000. Deposit accounts are the rule even 
 with small tradesmen ; and the savings-banks of Massachusetts 
 alone show deposits in 1882-1883 of $241,311,362, and those 
 of New York of $412,147,213. The United States also escapes 
 from the heavy taxation which in Europe is imposed to main- 
 tain an extravagant army and navy chest. The effect of in- 
 stitutions, moreover, in stimulating the growth of material 
 prosperity is far more true of the United States than of Eng- 
 land, for the barriers raised against the movement from lower 
 to higher social classes in the latter country are non-existent 
 here, and consequently there is more stimulus toward acquiring 
 the means of bettering a man's social condition. 
 
 The geographical causes which have made industry rather 
 than war the natural source of power and importance to 
 Great Britain [and the United States] have turned an unu- 
 sual proportion of the most enterprising and energetic char- 
 acters into the direction of manufactures and commerce ; 
 into supplying their wants and gratifying their ambition by 
 producing and saving, rather than by appropriating what 
 has been produced and saved. Much also depended on the 
 better political institutions of this country, which, by the 
 scope they have allowed to individual freedom of action, 
 have encouraged personal activity and self-reliance, while, 
 by the liberty they confer of association and combination, 
 they facilitate industrial enterprise on a large scale. The 
 same institutions, in another of their aspects, give a most 
 direct and potent stimulus to the desire of acquiring wealth. 
 The earlier decline of feudalism [in England] having re- 
 moved or much weakened invidious distinctions between the 
 originally trading classes and those who had been accustomed 
 to despise them, and a polity having grown up which made 
 wealth the real source of political influence, its acquisition 
 was invested with a factitious value independent of its intrin- 
 sic utility. And, inasmuch as to be rich with out industry 
 has always hitherto constituted a step in the social scale 
 above those who are rich by means of industry, it becomes 
 the object of ambition to save not merely as much as will 
 afford a large income while in business, but enough to retire 
 from business and live in affluence on realized gains. 
 
THE LAW OF THE INCREASE OF CAPITAL. 129 
 
 In [the United States] England, and Holland, then, for a 
 long time past, and now in most other countries in Europe, 
 the second requisite of increased production, increase of capi- 
 tal, shows no tendency to become deficient. So far as that 
 element is concerned, production is susceptible of an increase 
 without any assignable bounds. The limitation to production, 
 not consisting in any necessary limit to the increase of the 
 other two elements, labor and capital, must turn upon the 
 properties of the only element which is inherently, and in 
 itself, limited in quantity. It must depend on the proper- 
 ties of land. 
 9 
 
CHAPTER IX. 
 
 OF THE LAW OF THE INCREASE OF PRODUCTION FROM LAND. 
 
 § 1. Land differs from the other elements of production, 
 labor, and capital, in not being susceptible of indefinite in- 
 crease. Its extent is limited, and the extent of the more 
 productive kinds of it more limited still. It is also evident 
 that the quantity of produce capable of being raised on any- 
 given piece of land is not indefinite. This limited quantity 
 of land and limited productiveness of it are the real limits 
 to the increase of production. 
 
 The limitation to production from the properties of the 
 soil is not like the obstacle opposed by a wall, which stands 
 immovable in one particular spot, and offers no hindrance to 
 motion short of stopping it entirely. We may rather com- 
 pare it to a highly elastic and extensible band, which is 
 hardly ever so violently stretched that it could not possibly 
 be stretched any more, yet the pressure of which is felt long 
 before the final limit is reached, and felt more severely the 
 nearer that limit is approached. 
 
 After a certain, and not very advanced, stage in the prog- 
 ress of agriculture — as soon, in fact, as mankind have ap- 
 plied themselves to cultivation with any energy, and have 
 brought to it any tolerable tools — from that time it is the 
 law of production from the land, that in any given state of 
 agricultural skill and knowledge, by increasing the labor, the 
 produce is not increased in an equal degree ; doubling the 
 labor does not double the produce ; or, to express the same 
 thing in other words, every increase of produce is obtained 
 
THE INCREASE OF PRODUCTION FROM LAND. 131 
 
 by a more than proportional increase in the application of 
 labor to the land. This general law of agricultural industry 
 is the most important proposition in political economy. "Were 
 the law different, nearly all the phenomena of the production 
 and distribution of wealth would be other than they are. 
 
 It is not generally considered that in the United States, 
 where in many sparsely settled parts of the country new land 
 is constantly being brought into cultivation, an additional pop- 
 ulation under existing conditions of agricultural skill can be 
 maintained with constantly increasing returns up to a certain 
 point before the law of diminishing returns begins to operate. 
 Where more laborers are necessary, and more capital wanted, 
 to co-operate in a new country before all the land can give its 
 maximum product, in such a stage of cultivation it can not be 
 said that the law of diminishing returns has yet practically set in. 
 
 When, for the purpose of raising an increase of produce, 
 recourse is had to inferior land, it is evident that, so far, the 
 produce does not increase in the same proportion with the 
 labor. The very meaning of inferior land is land which 
 with equal labor returns a smaller amount of produce. Land 
 may be inferior either in fertility or in situation. The one 
 requires a greater proportional amount of labor for growing 
 the produce, the other for carrying it to market. If the land 
 A yields a thousand quarters of wheat to a given outlay in 
 wages, manure, etc., and, in order to raise another thousand, 
 recourse must be had to the land B, which is either less 
 fertile or more distant from the market, the two thousand 
 quarters will cost more than twice as much labor as the 
 original thousand, and the produce of agriculture will be 
 increased in a less ratio than the labor employed in procur- 
 ing it. 
 
 Instead of cultivating the land B, it would be possible, 
 by higher cultivation, to make the land A produce more. 
 It might be plowed or harrowed twice instead of once, or 
 three times instead of twice; it might be dug instead of 
 being plowed ; after plowing, it might be gone over with 
 a hoe instead of a harrow, and the soil more completely pul- 
 verized ; it might be oftener or more thoroughly weeded ; 
 
132 PRODUCTION. 
 
 the implements used might be of higher finish, or more 
 elaborate construction ; a greater quantity or more expensive 
 kinds of manure might be applied, or, when applied, they 
 might be more carefully mixed and incorporated with the soil. 
 
 The example of market-gardens in the vicinity of great 
 cities and towns shows how the intensive culture permits an 
 increase of labor and capital with larger returns. These lands, 
 by their situation, are superior lands for this particular pur- 
 pose, although they might be inferior lands as regards absolute 
 productiveness when compared with the rich wheat-lands of 
 Dakota. New England and New Jersey farms, generally 
 speaking, no longer attempt the culture of grains, but (when 
 driven out of that culture by the great railway lines which 
 have opened up the West) they have arranged themselves in a 
 scale of adaptability for stock, grass, fruit, dairy, or vegetable 
 farming; and have thereby given greater profits to their owners 
 than the same land did under the old regime. Even on lands 
 where any grain can still be grown, corn, buckwheat, barley, 
 oats, and rye, cover the cultivated areas instead of wheat. 
 
 Inferior lands, or lands at a greater distance from the 
 market, of course yield an inferior return, and an increas- 
 ing demand can not be supplied from them unless at an 
 augmentation of cost, and therefore of price. If the addi- 
 tional demand could continue to be supplied from the supe- 
 rior lands, by applying additional labor and capital, at no 
 greater proportional cost than that at which they yield the 
 quantity first demanded of them, the owners or farmers of 
 those lands could undersell all others, and engross the whole 
 market. Lands of a lower degree of fertility or in a more 
 remote situation might indeed be cultivated by their pro- 
 prietors, for the sake of subsistence or independence ; but 
 it never could be the interest of any one to farm them for 
 profit. That a profit can be made from them, sufficient to 
 attract capital to such an investment, is a proof that cultiva- 
 tion on the more eligible lands has reached a point beyond 
 which any greater application of labor and capital would 
 yield, at the best, no greater return than can be obtained at 
 the same expense from less fertile or less favorably situated 
 lands. 
 
THE INCREASE OF PRODUCTION FROM LAND. 133 
 
 " It is long," says a late traveler in the United States, 1 
 " before an English eye becomes reconciled to the lightness 
 of the crops and the careless farming (as we should call it) 
 which is apparent. One forgets that, where land is so plenti- 
 ful and labor so dear as it is here, a totally different principle 
 must be pursued from that which prevails in populous coun- 
 tries, and that the consequence will of course be a want of 
 tidiness, as it were, and finish, about everything which re- 
 quires labor." Of the two causes mentioned, the plentiful- 
 ness of land seems to me the true explanation, rather than 
 the dearness of labor ; for, however dear labor may be, when 
 food is wanted, labor will always be applied to producing it 
 in preference to anything else. But this labor is more effect- 
 ive for its end by being applied to fresh soil than if it were 
 employed in bringing the soil already occupied into higher 
 cultivation. 
 
 The "Western movement of what might be called the " wheat- 
 center " is quite perceptible. Until recently Minnesota has 
 been a great wheat-producing State, and vast tracts of land 
 were there planted with that grain when the soil was first 
 broken. The profits on the first few crops have been enor- 
 mous, but it is now said to be more desirable for wheat-growers 
 to move onward to newer lands, and to sell the land to cultiva- 
 tors of a different class (of fruit and varied products), who 
 produce for a denser population. So that (in 1884) Dakota, 
 instead of Minnesota, has become the district of the greatest 
 wheat production. 2 
 
 Only when no soils remain to be broken up, but such as 
 either from distance or inferior quality require a consider- 
 able rise of price to render their cultivation profitable, can it 
 become advantageous to apply the high farming of Europe 
 to any American lands ; except, perhaps, in the immediate 
 vicinity of towns, where saving in cost of carriage may com- 
 pensate for great inferiority in the return from the soil itself. 
 
 1 " Letters from America," by John Robert Godley, vol. i. p. 42. See also 
 Lycll's "Travels in America," vol. ii, p. 83. — Mill. 
 
 1 Cf. "American Agriculture," "Princeton Review," May, 1882, by F. A. 
 Walker. 
 
134 PRODUCTION. 
 
 The principle which has now been stated must be re- 
 ceived, no doubt, with certain explanations and limitations. 
 Even after the land is so highly cultivated that the mere 
 application of additional labor, or of an additional amount of 
 ordinary dressing, would yield no return proportioned to the 
 expense, it may still happen that the application of a much 
 greater additional labor and capital to improving the soil 
 itself, by draining or permanent manures, would be as liber- 
 ally remunerated by the produce as any portion of the labor 
 and capital already employed. It would sometimes be much 
 more amply remunerated. This could not be, if capital al- 
 ways sought and found the most advantageous employment. 
 
 § 2. That the produce of land increases, cceteris paribus, 
 in a diminishing ratio to the increase in the labor employed, 
 is, as we have said (allowing for occasional and temporary 
 exceptions), the universal law of agricultural industry. This 
 principle, however, has been denied. So much so, indeed, 
 that (it is affirmed) the worst land now in cultivation pro- 
 duces as much food per acre, and even as much to a given 
 amount of labor, as our ancestors contrived to extract from 
 the richest soils in England. 
 
 The law of diminishing returns is the physical fact upon 
 which the economic doctrine of rent is based, and requires care- 
 ful attention. Carey asserts, instead, that there is a law of 
 increasing productiveness, since, as men grow in numbers and 
 intelligence, there arises an ability to get more from the soil. 1 
 Some objectors even deny that different grades of land are 
 cultivated, and that there is no need of taking inferior soils 
 into cultivation. If this were true, why would not one half an 
 acre of land be as good as a whole State ? Johnston 2 says : 
 "In a country and among poor settlers . . . poor land is a 
 relative term. Land is called poor which is not suitable to a 
 poor man, which on mere clearing and burning will not yield 
 good first crops. Thus that which is poor land for a poor man 
 may prove rich land to a rich man." 3 Moreover, as is con- 
 stantly the case in our country, it often happens that a railway 
 may bring new lands into competition with old lands in a given 
 
 1 " Social Science," vol. iii, p. 19. 
 
 3 "Notes on North America," 1851, vol. ii, pp. 116, 117. 
 
 3 See also Cairnes, " Logical Method," p. 35. 
 
THE INCREASE OF PRODUCTION FROM LAND. 135 
 
 market ; of which the most conspicuous example is the com- 
 petition of Western gram-fields with the Eastern farms. In 
 these older districts, before the competition came, there was a 
 given series of grades in the cultivated land ; after the railway 
 was built there was a disarrangement of the old series, some 
 going out of cultivation, some remaining, and some of the new 
 lands entering the list. The result is a new series of grades 
 better suited to satisfy the wants of men. 
 
 This, however, does not prove that the law of which we 
 have been speaking does not exist, but only that there is 
 some antagonizing principle at work, capable for a time of 
 making head against the law. Such an agency there is, in 
 habitual antagonism to the law of diminishing return from 
 land ; and to the consideration of this we shall now proceed. 
 It is no other than the progress of civilization. The most ob- 
 vious [part of it] is the progress of agricultural knowledge, skill, 
 and invention. Improved processes of agriculture are of two 
 kinds : (1) some enable the land to yield a greater absolute 
 produce, without an equivalent increase of labor ; (2) others 
 have not the power of increasing the produce, but have that of 
 diminishing the labor and expense by which it is obtained. 
 (1.) Among the first are to be reckoned the disuse of fallows, 
 by means of the rotation of crops ; and the introduction of new 
 articles of cultivation capable of entering advantageously into 
 the rotation. The change made in agriculture toward the 
 close of the last century, by the introduction of turnip-hus- 
 bandry, is spoken of as amounting to a revolution. Next in 
 order comes the introduction of new articles of food, contain- 
 ing a greater amount of sustenance, like the potato, or more 
 productive species or varieties of the same plant, such as the 
 Swedish turnip. In the same class of improvements must 
 be placed a better knowledge of the properties of manures, 
 and of the most effectual modes of applying them ; the intro- 
 duction of new and more powerful fertilizing agents, such as 
 guano, and the conversion to the same purpose of substances 
 previously wasted ; inventions like subsoil-plowing or tile- 
 draining, by which the produce of some kinds of lands is so 
 greatly multiplied ; improvements in the breed or feeding of 
 
136 PRODUCTION. 
 
 laboring cattle ; augmented stock of the animals which con- 
 sume and convert into human food what would otherwise be 
 wasted; and the like. (2.) The other sort of improvements, 
 those which diminish labor, but without increasing the capa- 
 city of the land to produce, are such as the improved con- 
 struction of tools ; the introduction of new instruments which 
 spare manual labor, as the winnowing and thrashing ma- 
 chines. These improvements do not add to the productive- 
 ness of the land, but they are equally calculated with the 
 former to counteract the tendency in the cost of production 
 of agricultural produce, to rise with the progress of popula- 
 tion and demand. 
 
 § 3. Analogous in effect to this second class of agricultu- 
 ral improvements are improved means of communication. 
 Good roads are equivalent to good tools. It is of no conse- 
 quence whether the economy of labor takes place in extract- 
 ing the produce from the soil, or in conveying it to the place 
 where it is to be consumed. 
 
 The functions performed by railways in the system of 
 production is highly important. They are among the most 
 influential causes affecting the cost of producing commodities, 
 particularly those which satisfy the primary wants of man, of 
 which food is the chief. The amount of tonnage carried is 
 enormous ; and the cost of this service to the producers and 
 consumers of the United States is a question of very great 
 magnitude. The serious reduction in the cost of transportation 
 on the railways will be a surprise to all who have not followed 
 the matter very closely ; the more so, that it has been brought 
 about by natural causes, and independent of legislation. Corn, 
 meat, and dairy products form, it is said, at least 50 per cent, 
 and coal and timber about 30 per cent, of the tonnage moved 
 on all the railways of the United States. If a lowered cost of 
 transportation has come about, it has then cost less to move the 
 main articles of immediate necessity. Had the charge in 1880 
 remained as high even as it was from 1866 to 1869, the number 
 of tons carried in 1880 would have cost the United States from 
 $500,000,000 to $800,000,000 more than the charge actually 
 made, owing to the reductions by the railways. It seems, how- 
 ever, that this process of reduction culminated about 1879. In 
 order to show the facts of this process, note the changes in 
 the following chart, No. V. The railways of the State of New 
 York are taken, but the same is also true of those of Ohio : 
 
THE INCREASE OF PRODUCTION FROM LAND. 
 
 137 
 
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138 PRODUCTION. 
 
 The explanation of this reduced cost is given by Mr. Edward 
 Atkinson 1 as (1) the competition of water-ways, (2) the compe- 
 tition of one railway with another, and (8) the competition of 
 other countries, which forces our railways to try to lay our 
 staple products down in foreign markets at a price which will 
 warrant continued shipment. Besides these reasons, much 
 ought also (4) to be assigned to the progress of inventions and 
 the reduced cost of steel and all appliances necessary to the 
 railways. 
 
 The large importance of the railways shows itself in an 
 influence on general business prosperity, and as a place for 
 large investments of a rapidly growing capital. The building 
 of railways, however, has been going on, at some times with 
 greater speed than at others. Instead of 33,908 miles of rail- 
 ways at the close of our war, we have now (1884) over 120,000 
 miles. How the additional mileage has been built year by 
 year, with two distinct eras of increased building — one from 
 1869 to 1873, and another from 1879 to 1884 — may be seen by 
 the shorter lines of the subjoined chart, No. VI. 
 
 That speculation has been excited at different times by the 
 opening up of our Western country, there can be no doubt. 
 And if a comparison be made with Chart No. XVII (Book IV, 
 Chap. Ill)', which gives the total grain-crops of the United 
 States, it will be seen that since 1879, although our population has 
 increased from 12^ per cent to 14 per cent, our grain-crops only 
 5 per cent, yet our railway mileage has increased 40 per cent. 
 
 The extent to which the United States has carried railway- 
 building, as compared with European countries, although we 
 have a very much greater area, is distinctly shown by Chart 
 No. VII. This application of one form of improvement to 
 oppose the law of diminishing returns in the United States 
 has produced extraordinary results, especially when we con- 
 sider that we are probably not yet using all our best lands, 
 or, in other words, that we have not yet felt the law of dimin- 
 ishing returns in some large districts. 
 
 Railways and canals are virtually a diminution of the cost 
 of production of all things sent to market by them ; and lit- 
 erally so of all those the appliances and aids for producing 
 which they serve to transmit. By their means land can be 
 
 , , — w 
 
 1 I am indebted to Mr. Atkinson for advanced proofs of the annexed charts. 
 See his paper in the "Journal of the American Agricultural Association," vol. 
 i, Nos. 3 and 4, p. 154, and a later discussion in the supplement of the Boston 
 "Manufacturers' Gazette," August 9, 1884, entitled "The Railway, the Farmer, 
 and the Public." His figures are drawn mainly from Poor's " Railway Manual." 
 
THE INCREASE OF PRODUCTION FROM LAND. 
 
 139 
 
 CHART VI. 
 
 Miles of Railroad in Operation on the 1st January in each Year, and the 
 Miles added in the Year Ensuing. 
 
 33,908 
 
 1,177 
 35,085 
 
 1,716 
 36,801 
 
 2,449 
 39,250 
 
 2,979 
 42,229 
 
 4,615 
 46,844 
 
 6,070 
 52,914 
 
 7,379 
 60,293 
 
 5,878 
 66,171 
 
 4,107 
 70,278 
 
 2,105 
 72,383 
 
 1,713 
 74,096 
 
 2,712 
 76,808 
 
 2,281 
 79,089 
 
 2,687 
 81,776 
 
 4,721 
 86,497 
 
 7,048 
 93,545 
 
 9,789 
 
 103,334 
 
 11,591 
 
 114,925 
 
 *6,618 
 
 121,543 
 
 * Estimated. 
 
140 PRODUCTION. 
 
 cultivated, which would not otherwise have remunerated the 
 cultivators without a rise of price. Improvements in navi- 
 gation have, with respect to food or materials brought from 
 beyond sea, a corresponding effect. 
 
 § 4. From similar considerations, it appears that many 
 purely mechanical improvements, which have, apparently, at 
 least, no peculiar connection with agriculture, nevertheless 
 enable a given amount of food to be obtained with a smaller 
 expenditure of labor. A great improvement in the process 
 of smelting iron would tend to cheapen agricultural imple- 
 ments, diminish the cost of railroads, of wagons and carts, 
 ships, and perhaps buildings, and many other things to which 
 iron is not at present applied, because it is too costly ; and 
 would thence diminish the cost of production of food. The 
 same effect would follow from an improvement in those pro- 
 cesses of what may be termed manufacture, to Which the 
 material of food is subjected after it is separated from the 
 ground. The first application of wind or water power to 
 grind corn tended to cheapen bread as much as a very im- 
 portant discovery in agriculture would have done ; and any 
 great improvement in the construction of corn-mills would 
 have, in proportion, a similar influence. 
 
 Those manufacturing improvements which can not be 
 made instrumental to facilitate, in any of its stages, the actual 
 production of food, and therefore do not help to counteract 
 or retard the diminution of the proportional return to labor 
 from the soil, have, however, another effect, which is prac- 
 tically equivalent. "What they do not prevent, they yet, in 
 some degree, compensate for. 1 
 
 The materials of manufactures being all drawn from the 
 land, and many of them from agriculture, which supplies in 
 particular the entire material of clothing, the general law 
 of production from the land, the law of diminishing return, 
 must in the last resort be applicable to manufacturing as 
 well as to agricultural history. As population increases, and 
 
 1 Cf. Book IV, Chap. I. 
 
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THE INCREASE OF PRODUCTION FROM LAND. 141 
 
 the power of the land to yield increased produce is strained 
 harder and harder, any additional supply of material, as well 
 as of food, must be obtained by a more than proportionally 
 increasing expenditure of labor. But the cost of the mate- 
 rial forming generally a very small portion of the entire cost 
 of the manufacture, the agricultural labor concerned in the 
 production of manufactured goods is but a small fraction of 
 the whole labor worked up in the commodity. 
 
 Mr. Babbage ' gives an interesting illustration of this prin- 
 ciple. Bar-iron of the value of £1 became worth, when manu- 
 factured into — 
 
 £ 
 10 
 
 Slit-iron, for nails 1 
 
 Natural steel 1 
 
 Horseshoes 2 
 
 Gun-barrels, ordinary 9 
 
 Wood-saws , 14 
 
 Scissors, best 446 
 
 Penknife-blades 657 
 
 Sword-handles, polished steel 972 
 
 It can not, however, be said of such manufactures as coarse 
 cotton cloth, wherein the increased cost of raw cotton causes 
 an immediate effect upon the price of the cloth, that the cost 
 of the materials forms but a small portion of the cost of the 
 manufacture. 2 
 
 All the labor [not engaged in preparing materials] tends 
 constantly and strongly toward diminution, as the amount of 
 production increases. Manufactures are vastly more suscep- 
 tible than agriculture of mechanical improvements and con- 
 trivances for saving labor. In manufactures, accordingly, 
 the causes tending to increase the productiveness of industry 
 preponderate greatly over the one cause which tends to dimin- 
 ish it ; and the increase of production, called forth by the 
 progress of society, takes place, not at an increasing, but at 
 a continually diminishing proportional cost. This fact has 
 manifested itself in the progressive fall of the prices and 
 values of almost every kind of manufactured goods during 
 two centuries past ; a fall accelerated by the mechanical in- 
 ventions of the last seventy or eighty years, and susceptible 
 
 1 " Economy of Manufactures," pp. 163, 1C4. s Cf. Book IV, Chap. I, § 4. 
 
142 PRODUCTION. 
 
 of being prolonged and extended beyond any limit which 
 it would be safe to specify. The benefit might even extend 
 to the poorest class. The increased cheapness of clothing 
 and lodging might make up to them for the augmented cost 
 of their food. 
 
 There is, thus, no possible improvement in the arts of 
 production which does not in one or another mode exercise 
 an antagonistic influence to the law of diminishing return to 
 agricultural labor. Nor is it only industrial improvements 
 which have this effect. Improvements in government, and 
 almost every kind of moral and social advancement, oper- 
 ate in the same manner. We may say the same of im- 
 provements in education. The intelligence of the workman 
 is a most important element in the productiveness of labor. 
 The carefulness, economy, and general trustworthiness of 
 laborers are as important as their intelligence. Friendly re- 
 lations and a community of interest and feeling between 
 laborers and employers are eminently so. In the rich and idle 
 classes, increased mental energy, more solid instruction, and 
 stronger feelings of conscience, public spirit, or philanthropy, 
 would qualify them to originate and promote the most valu- 
 able improvements, both in the economical resources of their 
 country and in its institutions and customs. 
 
 § 5. We must observe that what we have said of agri- 
 culture is true, with little variation, of the other occupations 
 which it represents ; of all the arts which extract materials 
 from the globe. Mining industry, for example, usually yields 
 an increase of produce at a more than proportional increase 
 of expense. 
 
 It does worse, for even its customary annual produce re- 
 quires to be extracted by a greater and greater expenditure 
 of labor and capital. As a mine does not reproduce the coal 
 or ore taken from it, not only are all mines at last exhausted, 
 but even when they as yet show no signs of exhaustion they 
 must be worked at a continually increasing cost ; shafts must 
 be sunk deeper, galleries driven farther, greater power ap- 
 plied to keep them clear of water; the produce must be 
 
THE INCREASE OF PRODUCTION FROM LAND. 143 
 
 lifted from a greater depth, or conveyed a greater distance. 
 The law of diminishing return applies therefore to mining 
 in a still more unqualified sense than to agriculture ; but the 
 antagonizing agency, that of improvements in production, 
 also applies in a still greater degree. Mining operations are 
 more susceptible of mechanical improvements than agricult- 
 ural : the first great application of the steam-engine was to 
 mining; and there are unlimited possibilities of improve- 
 ment in the chemical processes by which the metals are ex- 
 tracted. There is another contingency, of no unfrequent 
 occurrence, which avails to counterbalance the progress of 
 all existing mines toward exhaustion : this is, the discovery 
 of new ones, equal or superior in richness. 
 
 Professor Jevons has applied this economic law to the in- 
 dustrial situation of England. 1 While explaining that the 
 supply of cheap coal is the basis of English manufacturing 
 prosperity, yet he insists that, if the demand for coal is con- 
 stantly increasing, the point must inevitably be reached in the 
 future when the increased supply can be obtained only at a 
 higher cost. When coal costs England as much as it does any 
 other nation, then her exclusive industrial advantage will cease 
 to exist. In the United States the outlying iron deposits of 
 Lake Superior, Lake Champlain, and Pennsylvania, so geolo- 
 gists tell us, will find competition arising from the new grades 
 of greater productiveness in the richer deposits of States like 
 Alabama. In that case we shall be going from poorer to better 
 grades of iron-mines, but after the change is made a series of 
 different grades of productiveness will be established as before. 
 
 To resume : all natural agents which are limited in quan- 
 tity are not only limited in their ultimate productive power, 
 but, long before that power is stretched to the utmost, they 
 yield to any additional demands on progressively harder 
 terms. This law may, however, be suspended, or temporarily 
 controlled, by whatever adds to the general power of man- 
 kind over nature, and especially by any extension of their 
 knowledge, and their consequent command, of the properties 
 and powers of natural agents. 
 
 1 "The Coal Question" (1866). 
 
CHAPTEK X. 
 
 CONSEQUENCES OF THE FOKEGOING LAWS. 
 
 § 1. Fkom the preceding exposition it appears that the 
 limit to the increase of production is twofold : from deficiency 
 of capital, or of land. Production comes to a pause, either 
 because the effective desire of accumulation is not sufficient 
 to give rise to any further increase of capital, or because, 
 however disposed the possessors of surplus income may be 
 to save a portion of it, the limited land at the disposal of the 
 community does not permit additional capital to be em- 
 ployed with such a return as would be an equivalent to them 
 for their abstinence. 
 
 In countries where the principle of accumulation is as 
 weak as it is in the various nations of Asia, the desideratum 
 economically considered is an increase of industry, and of 
 the effective desire of accumulation. The means are, first, 
 a better government : more complete security of property ; 
 moderate taxes, and freedom from arbitrary exaction under 
 the name of taxes ; a more permanent and more advantageous 
 tenure of land, securing to the cultivator as far as possible 
 the undivided benefits of the industry, skill, and economy 
 he may exert. Secondly, improvement of the public intelli- 
 gence. Thirdly, the introduction of foreign arts, which raise 
 the returns derivable from additional capital to a rate corre- 
 sponding to the low strength of the desire of accumulation. 
 
 An excellent example of what might be done by this process 
 is to be seen under our very eyes in the present development 
 of Mexico, to which American capital and enterprise have been 
 
CONSEQUENCES OF THE FOREGOING LAWS. 145 
 
 so prominently drawn of late. All these proposed remedies, 
 if put into use in Mexico, would undoubtedly result in a strik- 
 ing increase of wealth. 
 
 § 2. But there are other countries, and England [and the 
 United States are] at the head of them, in which neither the 
 spirit of industry nor the effective desire of accumulation 
 need any encouragement. In these countries there would 
 never be any deficiency of capital, if its increase were never 
 checked or brought to a stand by too great a diminution of 
 its returns. It is the tendency of the returns to a progressive 
 diminution which causes the increase of production to be 
 often attended with a deterioration in the condition of the 
 producers ; and this tendency, which would in time put an 
 end to increase of production altogether, is a result of the 
 necessary and inherent conditions of production from the 
 land. 
 
 This, of course, is based on the supposition that no new 
 lands, such as those of the United States, can be opened for 
 cultivation. If there is no prohibition to the importation of 
 cheaper food, new and richer land in any part of the world, 
 within reach of the given country, is an influence which works 
 against the tendency. Yet the tendency, or economic law, is 
 there all the same, forever working. 
 
 In all countries which have passed beyond a very early 
 stage in the progress of agriculture, every increase in the 
 demand for food, occasioned by increased population, will 
 always, unless there is a simultaneous improvement in pro- 
 duction, diminish the share which on a fair division would 
 fall to each individual. An increased production, in default 
 of unoccupied tracts of fertile land, or of fresh improve- 
 ments tending to cheapen commodities, can never be ob- 
 tained but by increasing the labor in more than the same 
 proportion. The population must either work harder or eat 
 less, or obtain their usual food by sacrificing a part of their 
 other customary comforts. Whenever this necessity is post- 
 poned, it is because the improvements which facilitate pro- 
 duction continue progressive ; because the contrivances of 
 mankind for making their labor more effective keep up an 
 10 
 
146 PRODUCTION. 
 
 equal struggle with Nature, and extort fresh resources from 
 her reluctant powers as fast as human necessities occupy and 
 engross the old. 
 
 From this results the important corollary, that the ne- 
 cessity of restraining population is not, as many persons be- 
 lieve, peculiar to a condition of great inequality of property. 
 A greater number of people can not, in any given state of 
 civilization, be collectively so well provided for as a smaller. 
 The niggardliness of nature, 1 not the injustice of society, is 
 the cause of the penalty attached to over-population. An 
 unjust distribution of wealth does not even aggravate the 
 evil, but, at most, causes it to be somewhat earlier felt. It 
 is in vain to say that all mouths which the increase of man- 
 kind calls into existence bring with them hands. The new 
 mouths require as much food as the old ones, and the hands 
 do not produce as much. 
 
 After a degree of density has been attained, sufficient to 
 allow the principal benefits of combination of labor, all fur- 
 ther increase tends in itself to mischief, so far as regards the 
 average condition of the people ; but the progress of im- 
 provement has a counteracting operation, and allows of in- 
 creased numbers without any deterioration, and even con- 
 sistently with a higher average of comfort. Improvement 
 must here be understood in a wide sense, including not only 
 new industrial inventions, or an extended use of those already 
 known, but improvements in institutions, education, opin- 
 ions, and human affairs generally, provided they tend, as 
 almost all improvements do, to give new motives or new 
 facilities to production. 
 
 The increase in the population of the United States has 
 been enormous, as already seen, but the increase of production 
 has been still greater, owing to the fertility of our land, to im- 
 provements in the arts, and to our great genius for invention, 
 as may be seen by the following table (amounts in the second 
 
 1 Henry George, as well as the Socialists, thinks poverty arises from the 
 injustice of society, and here takes issue with the present teaching. But the 
 question can be better discussed under Distribution. 
 
COXSEQUEXCES OF THE FOREGOIXG LAWS. 
 
 147 
 
 column are given in millions). 1 The steady increase of the 
 valuation of our wealth goes on faster than the increase of 
 population, so that it manifests itself in a larger average wealth 
 to each inhabitant. 
 
 DECADES. 
 
 Valuation. 
 
 Per cent 
 
 of 
 increase. 
 
 Population. 
 
 Per cent 
 of 
 
 increase. 
 
 Per capita 
 valuation. 
 
 1800 
 
 $1,742 
 
 2,382 
 
 3,734 
 
 4,328 
 
 6,124 
 
 8,800 
 
 16,160 
 
 30,068 
 
 40,000 
 
 37 
 67 
 16 
 41 
 44 
 84 
 86 
 33 
 
 5,308,483 
 7,239,881 
 9,633,882 
 12,866,020 
 17,069,453 
 23,191,876 
 31,443,321 
 38,558,371 
 50,155,783 
 
 36 
 33 
 34 
 33 
 36 
 35 
 23 
 30 
 
 $328 
 329 
 
 1810 
 
 1820 
 
 386 
 
 1830 
 
 336 
 
 1840 
 
 359 
 
 1850 
 
 379 
 
 1860 
 
 514 
 
 1870 
 
 780 
 
 1880 
 
 798 
 
 
 
 If the productive powers of the country increase as rap- 
 idly as advancing numbers call for an augmentation of 
 produce, it is not necessary to obtain that augmentation by 
 the cultivation of soils more sterile than the worst already 
 under culture, or by applying additional labor to the old soils 
 at a diminished advantage ; or at all events this loss of power 
 is compensated by the increased efficiency with which, in the 
 progress of improvement, labor is employed in manufact- 
 ures. In one way or the other, the increased population is 
 provided for, and all are as well off as before. But if the 
 growth of human power over nature is suspended or slack- 
 ened, and population does not slacken its increase ; if, with 
 only the existing command over natural agencies, those 
 agencies are called upon for an increased produce ; this 
 greater produce will not be afforded to the increased popu- 
 lation, without either demanding on the average a greater 
 effort from each, or on the average reducing each to a smaller 
 ration out of the aggregate produce. 
 
 Ever since the great mechanical inventions of Watt, 
 Arkwright, and their contemporaries, the return to labor has 
 probably increased as fast as the population ; and would 
 
 1 Henry Gannet, " International Review," 1882, p. 503. 
 
148 PRODUCTION. 
 
 even have outstripped it, if that very augmentation of return 
 had not called forth an additional portion of the inherent 
 power of multiplication in the human species. During the 
 twenty or thirty years last elapsed, so rapid has been the ex- 
 tension of improved processes of agriculture [in England], 
 that even the land yields a greater produce in proportion to 
 the labor employed ; the average price of corn had become 
 decidedly lower, even before the repeal of the corn laws had 
 so materially lightened, for the time being, the pressure of 
 population upon production. But though improvement may 
 during a certain space of time keep up with, or even surpass, 
 the actual increase of population, it assuredly never comes 
 up to the rate of increase of which population is capable : 
 and nothing could have prevented a general deterioration 
 in the condition of the human race, were it not that popula- 
 tion has in fact been restrained. Had it been restrained 
 still more, and the same improvements taken place, there 
 would have been a larger dividend than there now is, for the 
 nation or the species at large. The new ground wrung 
 from nature by the improvements would not have been all 
 used up in the support of mere numbers. Though the 
 gross produce would not have been so great, there would 
 have been a greater produce per head of the population. 
 
 § 3. When the growth of numbers outstrips the progress 
 of improvement, and a country is driven to obtain the means 
 of subsistence on terms more and more unfavorable, by the 
 inability of its land to meet additional demands except on 
 more onerous conditions, there are two expedients, by which 
 it may hope to mitigate that disagreeable necessity, even 
 though no change should take place in the habits of the 
 people with respect to their rate of increase. One of these 
 expedients is the importation of food from abroad. The 
 other is emigration. 
 
 The admission of cheaper food from a foreign country is 
 equivalent to an agricultural invention by which food could 
 be raised at a similarly diminished cost at home. It equally 
 increases the productive power of labor. The return was 
 
CONSEQUENCES OF THE FOREGOING LAWS. 149 
 
 before, so much food for bo much labor employed in the 
 growth of food : the return is now, a greater quantity of 
 food for the same labor employed in producing cottons or 
 hardware, or some other commodity to be given in exchange 
 for food. The one improvement, like the other, throws 
 back the decline of the productive power of labor by a 
 certain distance : but in the one case, as in the other, it im- 
 mediately resumes its course ; the tide which has receded, 
 instantly begins to readvance. It might 6eem, indeed, that, 
 when a country draws its supply of food from so wide a sur- 
 face as the whole habitable globe, so little impression can be 
 produced on that great expanse by any increase of mouths 
 in one small corner of it that the inhabitants of the coun- 
 try may double and treble their numbers without feeling 
 the effect in any increased tension of the springs of produc- 
 tion, or any enhancement of the price of food throughout 
 the world. But in this calculation several things are over- 
 looked. 
 
 In the first place, the foreign regions from which corn 
 can be imported do not comprise the whole globe, but those 
 parts of it almost alone which are in the immediate neigh- 
 borhood of coasts or navigable rivers ; and of such there is 
 not, in the productive regions of the earth, so great a multi- 
 tude as to suffice during an indefinite time for a rapidly 
 growing demand, without an increasing strain on the pro- 
 ductive powers of the soil. 
 
 In the next place, even if the supply were drawn from 
 the whole instead of a small part of the surface of the ex- 
 porting countries, the quantity of food would still be lim- 
 ited, which could be obtained from them without an in- 
 crease of the proportional cost. The countries which export 
 food may be divided into two classes : those in which the 
 effective desire of accumulation is strong, and those in 
 which it is weak. In Australia and the United States of 
 America, the effective desire of accumulation is strong ; 
 capital increases fast, and the production of food might be 
 very rapidly extended. But in such countries population 
 
150 PRODUCTION. 
 
 • 
 
 also increases with extraordinary rapidity. Their agricult- 
 ure has to provide for their own expanding numbers, as 
 well as for those of the importing countries. They must, 
 therefore, from the nature of the case, be rapidly driven, if 
 not to less fertile, at least what is equivalent, to remoter 
 and less accessible lands, and to modes of cultivation like 
 those of old countries, less productive in proportion to the 
 labor and expense. 
 
 The extraordinary resources of the United States are scarce- 
 ly understood even by Americans. Chart No. XVIII (see 
 Book IV, Chap. Ill) may give some idea of the agricultural 
 possibilities of our land. It will be seen from this that the 
 quantity of fertile land in but one of our States — Texas — is 
 greater than that of Austria-Hungary. 
 
 But the countries which have at the same time cheap 
 food and great industrial prosperity are few, being only those 
 in which the arts of civilized life have been transferred full- 
 grown to a rich and uncultivated soil. Among old countries, 
 those which are able to export food, are able only because 
 their industry is in a very backward state, because capital, 
 and hence population, have never increased sufficiently to 
 make food rise to a higher price. Such countries are Russia, 
 Poland, and Hungary. 
 
 The law, therefore, of diminishing return to industry, 
 whenever population makes a more rapid progress than im- 
 provement, is not solely applicable to countries which are 
 fed from their own soil, but in substance applies quite as 
 much to those which are willing to draw their food from 
 any accessible quarter that can afford it cheapest. 
 
 § 4. Besides the importation of corn, there is another 
 resource which can be invoked by a nation whose increasing 
 numbers press hard, not against their capital, but against 
 the productive capacity of their land : I mean Emigration, 
 especially in the form of Colonization. Of this remedy the 
 efficacy as far as it goes is real, since it consist's in seeking 
 elsewhere those unoccupied tracts of fertile land which, if 
 they existed at home, would enable the demand of an in- 
 
CONSEQUENCES OF THE FOREGOING LAWS. 151 
 
 creasing population to be met without any falling off in the 
 productiveness of labor. Accordingly, when the region to 
 be colonized is near at hand, and the habits and tastes of 
 the people sufficiently migratory, this remedy is completely 
 effectual. The migration from the older parts of the Ameri- 
 can Confederation to the new Territories, which is to all in- 
 tents and purposes colonization, is what enables population 
 to go on unchecked throughout the Union without having 
 yet diminished the return to industry, or increased the diffi- 
 culty of earning a subsistence. 
 
 How strictly true this is may be seen by examining the map 
 given in the last census returns, 1 showing the residence of the 
 natives of the State of New York. The greater or less fre- 
 quency of natives of New York, residing in other States, is 
 shown by different degrees of shading on the map. A large 
 district westward as far as the Mississippi shows a density of 
 natives of New York of from two to six to a square mile, and 
 a lesser density from Minnesota to Indian Territory, on the 
 other side of the Mississippi. The same is shown of other older 
 States. The explanation of the movement can not be anything 
 else than the same as that for the larger movement from Europe 
 to America. 
 
 There is no probability that even under the most enlightened 
 arrangements (in older countries) a permanent stream of 
 emigration could be kept up, sufficient to take off, as in 
 America, all that portion of the annual increase (when pro- 
 ceeding at its greatest rapidity) which, being in excess of 
 the progress made during the same short period in the arts 
 of life, tends to render living more difficult for every aver- 
 agely situated individual in the community. And, unless this 
 can be done, emigration can not, even in an economical point 
 of view, dispense with the necessity of checks to population. 
 
 The influence of immigration to the United States from 
 European countries, in lessening the tension in the relation 
 between food and numbers, is one of the most marked events 
 in this century. The United States has received about one 
 fourth of its total population in 1880 from abroad since the 
 foundation of the republic, as will be seen by this table : 
 
 1 Volume on Population, p. 481. 
 
152 
 
 PRODUCTION. 
 
 TOTAL IMMIGKATION INTO THE 
 UNITED STATES. 
 
 PERIODS. 
 
 From 1789-1820. . 
 
 " 1820-1830. , 
 
 " 1831-1840. . 
 
 " 1841-1850. , 
 
 " 1851-1860. 
 
 " 1861-1870. 
 
 " 1871-1880. 
 
 « 1881-1883. 
 
 Total 
 
 Numbers. 
 
 250,00a 1 
 151,824 
 599,125 
 1,713,251 
 2,598,214 
 2,491,451 
 2,812,191 
 2,061,745 
 
 12,677,801 
 
 The causes operating on this 
 movement of men — a movement 
 unequaled in history — are un- 
 doubtedly economic. Like the 
 migration of the early Teutonic 
 races from the Baltic to Southern 
 Europe, it is due to the pressure 
 of numbers on subsistence. 
 
 A still more interesting study 
 is that of the causes which at- 
 tempt to explain the direction of 
 this stream after it has reached 
 our shores. It is a definite fact 
 that the old slave States have 
 hitherto received practically 
 none of this vast foreign immi- 
 gration. 3 The actual distribu- 
 tion of the foreign born in the 
 United States is to be seen in a 
 most interesting way by aid of 
 the colored map, Chart No.VIII, 
 giving the different densities of 
 foreign-born population in different parts of the Union. It seems 
 almost certain that the general belief hitherto in the insecurity 
 of life and property in the old slave States has worked against 
 the material prosperity of that section. 
 
 The different ages of the native- and foreign-born inhabit- 
 ants of the United States may be seen from the accompanying 
 diagrams s comparing the aggregate population of the United 
 States with the foreign-born. This may profitably be com- 
 pared with a similar diagram relating to the Chinese in the 
 United States (Book II, Chap. Ill, § 3). 
 
 1870 
 
 Of this number, 5,333,991 came 
 from the British Isles, of which 3,- 
 367,624 were Irish. 
 
 There came 3,860,624 Germans, 
 593,021 Scandinavians, and 334,064 
 French. (See United States " Statisti- 
 cal Abstract," 1878, 1880, 1883.) 
 
 t36 ^HaS 
 
 AGGREGATE. 
 
 The males are on the left of the line, females on the right. The figures give 
 the number of thousandths of each sex, and are represented by the distance right 
 and left on the horizontal lines. The horizontal lines, going upward, represent 
 the decades of life, e. g., there are 136 thousandths of males bel ow the age ot ten. 
 
 'Estimated. 2 See article "Colonization," " International Review," 1881, p. 88. 
 3 See F. A. Walker's " Statistical Atlas." 
 
CHART VIII 
 
BOOK II. 
 
 DISTRIBUTION. 
 
BOOK II. 
 DISTRIBUTION. 
 
 CHAPTER I. 
 
 OF PROPERTY. 
 
 § 1. The laws and conditions of the Production of 
 "Wealth partake of the character of physical truths. There 
 is nothing optional or arbitrary in them. It is not so with 
 the Distribution of Wealth. That is a matter of human insti- 
 tution solely. The things once there, mankind, individually 
 or collectively, can do with them as they like. They can 
 place them at the disposal of whomsoever they please, and 
 on whatever terms. The Distribution of "Wealth depends 
 on the laws and customs of society. The rules by which it 
 is determined are what the opinions and feelings of the rul- 
 ing portion of the community make them, and are very dif- 
 ferent in different ages and countries; and might be still 
 more different, if mankind so chose. "We have here to con- 
 sider, not the causes, but the consequences, of the rules ac- 
 cording to which wealth may be distributed. Those, at least, 
 are as little arbitrary, and have as much the character of 
 physical laws, as the laws of production. 
 
 "We proceed, then, to the consideration of the different 
 modes of distributing the produce of land and labor, which 
 have been adopted in practice, or may be conceived in the- 
 ory. Among these, our attention is first claimed by that 
 primary and fundamental institution, on which, unless in 
 
156 DISTRIBUTION. 
 
 some exceptional and very limited cases, the economical 
 arrangements of society have always rested, though in 
 its secondary features it has varied, and is liable to vary. 
 I mean, of course, the institution of individual prop- 
 erty. 
 
 Private property, as an institution, did not owe its origin 
 to any of those considerations of utility which plead for 
 the maintenance of it when established. Enough is known 
 of rude ages, both from history and from analogous states of 
 society in our own time, to show that tribunals (which al- 
 ways precede laws) were originally established, not to deter- 
 mine rights, but to repress violence and terminate quarrels. 
 With this object chiefly in view, they naturally enough gave 
 legal effect to first occupancy, by treating as the aggressor 
 the person who first commenced violence, by turning, or at- 
 tempting to turn, another out of possession. 
 
 In considering the institution of property as a question 
 in social philosophy, we must leave out of consideration its 
 actual origin in any of the. existing nations of Europe. We 
 may suppose a community unhampered by any previous pos- 
 session ; a body of colonists, occupying for the first time an 
 uninhabited country. (1.) If private property were adopted, 
 we must presume that it would be accompanied by none of 
 the initial inequalities and injustice which obstruct the bene- 
 ficial operation of the principle in old society. Every full- 
 grown man or woman, we must suppose, would be secured 
 in the unfettered use and disposal of his or her bodily and 
 mental faculties; and the instruments of production, the 
 land and tools, would be divided fairly among them, so that 
 all might start, in respect to outward appliances, on equal 
 terms. It is possible also to conceive that, in this original 
 apportionment, compensation might be made for the injuries 
 of nature, and the balance redressed by assigning to the less 
 robust members of the community advantages in the distri- 
 bution, sufficient to put them on a par with the rest. But 
 the division, once made, would not again be interfered with ; 
 individuals would be left to their own exertions and to the 
 
PROPERTY. 157 
 
 ordinary chances for making an advantageous use of what 
 was assigned to them. (2.) If individual property, on the 
 contrary, were excluded, the plan which must be adopted 
 would be to hold the land and all instruments of production 
 as the joint property of the community, and to carry on the 
 operations of industry on the common account. The direc- 
 tion of the labor of the community would devolve upon a 
 magistrate or magistrates, whom we may suppose elected by 
 the suffrages of the community, and whom we must assume 
 to be voluntarily obeyed by them. The division of the 
 produce would in like manner be a public act. The prin- 
 ciple might either be that of complete equality, or of appor- 
 tionment to the necessities or deserts of individuals, in what- 
 ever manner might be conformable to the ideas of justice or 
 policy prevailing in the community. 
 
 The assailants of the principle of individual property 
 may be divided into two classes : (1) those whose scheme 
 implies absolute equality in the distribution of the physical 
 means of life and enjoyment, and (2) those who admit ine- 
 quality, but grounded on some principle, or supposed prin- 
 ciple, of justice or general expediency, and not, like so many 
 of the existing social inequalities, dependent on accident 
 alone. The characteristic name for this [first] economical 
 system is Communism, a word of Continental origin, only 
 of late introduced into this country. The word Socialism, 
 which originated among the English Communists, and was 
 assumed by them as a name to designate their own doctrine, 
 is now, on the Continent, employed in a larger sense ; not 
 necessarily implying Communism, or the entire abolition of 
 private property, but applied to any system which requires 
 that the land and the instruments of production should be 
 the property, not of individuals, but of communities, or as- 
 sociations, or of the government. 
 
 It should be said, moreover, that Socialism is to-day used in 
 the distinct sense of a system which abolishes private property, 
 and places the control of the capital, labor, and combined in- 
 dustries of the country in the hands of the state. The essence 
 
158 DISTRIBUTION. 
 
 of modern socialism is the appeal to state-help and the weak- 
 ening of individual self-help. Collectivism is also a term now- 
 used by German and French writers to describe an organization 
 of the industries of a country under a collective instead of an 
 individual management. Collectivism is but the French ex- 
 pression for the system of state socialism. 
 
 § 2. The objection ordinarily made to a system of com- 
 munity of property and equal distribution of the produce, 
 that each person would be incessantly occupied in evading 
 his fair share of the work, points, undoubtedly, to a real 
 difficulty. But those who urge this objection forget to how 
 great an extent the same difficulty exists under the system 
 on which nine tenths of the business of society is now con- 
 ducted. And though the " master's eye," when the master 
 is vigilant and intelligent, is of proverbial value, it must be 
 remembered that, in a Socialist farm or manufactory, each 
 laborer would be under the eye, not of one master, but of 
 the whole community. If Communistic labor might be less 
 vigorous than that of a peasant proprietor, or a workman 
 laboring on his own account, it would probably be more en- 
 ergetic than that of a laborer for hire, who has no personal 
 interest in the matter at all. 
 
 Another of the objections to Communism is that if every 
 member of the community were assured of subsistence for 
 himself and any number of children, on the sole condition of 
 willingness to work, prudential restraint on the multiplica- 
 tion of mankind would be at an end, and population would 
 start forward at a rate which would reduce the community 
 through successive stages of increasing discomfort to actual 
 starvation. But Communism is precisely the state of things 
 in which opinion might be expected to declare itself with 
 greatest intensity against this kind of selfish intemperance. 
 An augmentation of numbers which diminished the comfort 
 or increased the toil of the mass would then cause (which now 
 it does not) immediate and unmistakable inconvenience to 
 every individual in the association; inconvenience which 
 could not then be imputed to the avarice of employers, or 
 the unjust privileges of the rich. 
 
PROPERTY. 159 
 
 A more real difficulty is that of fairly apportioning the 
 labor of the community among its members. There are 
 many kinds of work, and by what standard are they to be 
 measured one against another ? "Who is to judge how much 
 cotton-spinning, or distributing goods from the stores, or 
 brick-laying, or chimney-sweeping, is equivalent to so much 
 plowing ? Besides, even in the same kind of work, nomi- 
 nal equality of labor would be so great a real inequality that 
 the feeling of justice would revolt against its being enforced. 
 All persons are not equally fit for all labor ; and the same 
 quantity of labor is an unequal burden on the weak and the 
 strong, the hardy and the delicate, the quick and the slow, 
 the dull and the intelligent. 1 
 
 If, therefore, the choice were to be made between Com- 
 munism with all its chances and the present state of society 
 with all its sufferings and injustices, all the difficulties, great 
 or small, of Communism, would be but as dust in the balance. 
 But, to make the comparison applicable, we must compare 
 Communism at its best with the regime of individual prop- 
 perty, not as it is, bat as it might be made. The laws of 
 property have never yet conformed to the principles on 
 which the justification of private property rests. They have 
 made property of things which never ought to be property, 
 and absolute property where only a qualified property ought 
 to exist. Private property, in every defense made of it, is 
 supposed to mean the guarantee to individuals of the fruits 
 of their own labor and abstinence. The guarantee to them 
 of the fruits of the labor and abstinence of others, transmit- 
 ted to them without any merit or exertion of their own, is 
 not of the essence of the institution, but a mere incidental 
 consequence, which, when it reaches a certain height, does 
 not promote, but conflicts with the ends which render pri- 
 vate property legitimate. To judge of the final destination 
 of the institution of property, we must suppose everything 
 
 1 For a further discussion of the difference between the motive powers under 
 private property and under Communism, see Mr. Mill's posthumous " Chapters 
 on Socialism," " Fortnightly Review," 1879 (vol. xxxi). 
 
160 DISTRIBUTION. 
 
 rectified which causes the institution to work in a manner 
 opposed to that equitable principle, of proportion between 
 remuneration and exertion, on which, in every vindication of 
 it that will bear the light, it is assumed to be grounded. We 
 must also suppose two conditions realized, without which 
 neither Communism nor any other laws or institutions could 
 make the condition of the mass of mankind other than de- 
 graded and miserable. One of these conditions is, universal 
 education ; the other, a due limitation of the numbers of the 
 community. With these, there could be no poverty, even 
 under the present social institutions : and, these being sup- 
 posed, the question of socialism is not, as generally stated by 
 Socialists, a question of flying to the sole refuge against the 
 evils which now bear down humanity, but a mere question 
 of comparative advantages, which futurity must determine. 
 We are too ignorant either of what individual agency in its 
 best form, or socialism in its best form, can accomplish, to be 
 qualified to decide which of the two will be the ultimate 
 form of human society. 
 
 If a conjecture may be hazarded, the decision will prob- 
 ably depend mainly on one consideration, viz., which of the 
 two systems is consistent with the greatest amount of human 
 liberty and spontaneity. It is yet to be ascertained whether 
 the communistic scheme would be consistent with that multi- 
 form development of human nature, those manifold unlike- 
 nesses, that diversity of tastes and talents, and variety of 
 intellectual points of view, which not only form a great part 
 of the interest of human life, but, by bringing intellects into 
 stimulating collision and by presenting to each innumerable 
 notions that he would not have conceived of himself, are the 
 mainspring of mental and moral progression. 
 
 § 3. For general purposes, a clearer understanding of the 
 various schemes may be gained by observing that (1) one class 
 of socialists intend to include the state itself within their plan, 
 and (2) another class aim to form separate communities inside 
 the state, and under its protection. 
 
 Of this first system there are no present examples ; but 
 the object of most of the socialistic organizations in the United 
 
PROPERTY. IQl 
 
 States and Europe is to strive for the assumption by the 
 state of the production and distribution of wealth. 1 At pres- 
 ent the most active Socialists are to be found in Germany. 
 The origin of this influence, however, is to be traced to France. 2 
 Louis Blanc,' in his " Organisation du Travail," considers prop- 
 erty the great scourge of society. The Government, he asserts, 
 should regulate production ; raise money to be appropriated 
 without interest for creating state workshops, in which the 
 workmen should elect their own overseers, and all receive the 
 same wages ; and the sums needed should be raised from the 
 abolition of collateral inheritance. The important practical 
 part of his scheme was that the great state workshops, aided 
 by the Government, would make private competition in those 
 industries impossible, and thus bring about the change from 
 the private to the socialistic system. 
 
 The founder of modern German socialism was Karl Marx, 4 
 and almost the only Socialist who pretended to economic 
 knowledge. He aimed his attack on the present social sys- 
 tem against the question of value, by asserting that the amount 
 of labor necessary for the production of an article is the sole 
 measure of its exchange value. It follows from this that the 
 
 1 For an exposition of the varying forms of modern state socialism, and that 
 form of it which advocates the nationalization of land (in H. George's " Prog- 
 ress and Poverty," and Alfred Russel Wallace's "Land Nationalization, its 
 Necessity and its Aims") see a chapter in Henry Fawcett's last (sixth) edition 
 of his " Manual " (1884). For a general and valuable treatise on Socialism, but 
 one which does not describe schemes much later than Owen's, see Louis Rey- 
 baud's " Etudes sur les reformateurs, ou socialistes modernes " (seventh edition, 
 1864). An excellent bibliography is given, vol. ii, pp. 453-470. 
 
 ' Pierre Joseph Proudhon (born 1809) made a well-known attack on private 
 property in his " Qu'est-ce que la Propriete," " What is Property ? " (1840). His 
 answer was, " It is robbery." See also Ely, " French and German Socialism " 
 (1883), p. 140. 
 
 3 Louis Blanc (born 1813, died 1882). His chief book, the " Organization of 
 Labor," appeared in 1840, in the columns of the "Revue du Progres." 
 
 4 Karl Marx (born 1818, died 1883) published "The Criticism of Political 
 Economy" (1859); and an extension of the same book under the new title of 
 " Capital" (1867), of which only the first volume has appeared, on " The Pro- 
 cess of the Production of Capital." This was again enlarged in 1872 to 822 
 pages. A large part of the work is filled with extracts from parliamentary re- 
 ports on the condition of English workmen. Before the Revolution of 1848 he 
 edited a communistic journal, and was obliged to leave the country afterward, 
 by which he was led to London. He was an able writer on history and politics. 
 Marx was assisted by Friedrich Engels, who wrote " The Condition of the Work- 
 ing Classes in England " (1845). See Ely, ibid., chap. x. 
 
 11 
 
162 DISTRIBUTION. 
 
 right of property in the article vests wholly in the laborer, 
 while the capitalist, if he claims a share of the product, is noth- 
 ing less than a robber. No just system, he avers, can properly 
 exist so long as the rate of wages is fixed by free contract be- 
 tween the employer and laborer ; therefore the only remedy is 
 the nationalization of all the elements of production, land, tools, 
 materials, and all existing appliances, which involves, of course, 
 the destruction of the institution of private property. An ob- 
 vious weakness in this scheme is the provision that the Govern- 
 ment should determine what goods are to be produced, and 
 that every one is bound to perform that work which is assigned 
 by the state. In this there is no choice of work, and the 
 tyranny of one master would be supplanted by the tyranny 
 of a greater multiplex master in the officers of Government. 
 Moreover, it can not be admitted that exchange value is de- 
 termined by the quantity of labor alone. Every one knows 
 that the result of ten days' labor of a skilled watch-maker does 
 not exchange for the result of ten days' labor of an unskilled 
 hodman. Of two men making shoes, one may produce a good 
 the other a: poor article, although both may work the same 
 length of time ; so that their exchange value ought not to be 
 determined by the mere quantity of labor expended. Above 
 all, Marx would extend the equality of wages for the same 
 time to the manager and superintendent also. In other words, 
 he proposes to take away all the incentives to the acquirement 
 or exercise of superior and signal ability in every work of life, 
 the result of which would inevitably lead to a deadening exten- 
 sion of mediocrity. 
 
 This system gained an undue attention because it was 
 made the instrument of a socialist propaganda under the lead- 
 ership of Ferdinand Lassalle. 1 This active leader, in 1863, 
 founded the German " Workingmen's Union," a year earlier 
 than the "International 3 Association." In 1869 Liebknecht 
 and his friends established the " Social Democratic Working- 
 men's Party," which after some difficulties absorbed the fol- 
 lowers of Lassalle in a congress at Gotha in 1875, and form the 
 
 1 Born 1825, the son of a rich Jewish merchant. In philosophy and juris- 
 prudence he won the praise of Humboldt and Boeckh. But vanity and wild 
 ambition checked the success due to great abilities and energy of character. 
 He was finally shot in a duel in 1864. He appears as the antagonist of Schultze 
 (of Delitzsch), advocating state-help against the self-help of the originator of 
 the People's Banks. 
 
 1 For an account of this society see Theodore D. Woolsey's " Communism 
 and Socialism" (1880); "Nineteenth Century," July, 1878 ; and Ely, ibid., 
 chap. xi. 
 
PROPERTY. 163 
 
 present Socialist party in Germany. Their programme, 1 as 
 announced at Gotha, is as follows : 
 
 I. Labor is the source of all riches and of all culture. As 
 general profitable labor can only be done by the human society, 
 the whole product of labor belongs to society — i. e., to all its 
 members — who have the same duties and the same right to 
 work, each according to his reasonable wants. 
 
 In the present society the means of work are the monopoly 
 of the class of capitalists. The class of workingmen thus be- 
 come dependent on them, and consequently are given over to 
 all degrees of misery and servitude. 
 
 In order to emancipate labor it is requisite that the means 
 of work be transformed into the common property of society, 
 that all production be regulated by associations, and that the 
 entire product of labor be turned over to society and justly 
 distributed for the benefit of all. 
 
 None but the working-class itself can emancipate labor, as 
 in relation to it all other classes are only a reactionary mass. 
 
 II. Led by these principles, the German Social Working- 
 men's party, by all legal means, strives for a free state and soci- 
 ety, the breaking down of the iron laws of wages by abolishing 
 the system of hired workingmen, by abolishing exploitation in 
 every shape, and doing away with all social and political ine- 
 quality. 
 
 The German Social Workingmen's party, although first 
 working within its national confines, is fully conscious of the 
 international character of the general workingmen's movement, 
 and is resolved to fulfill all duties which it imposes on each 
 workingraan in order to realize the fraternity of all men. 
 
 The German Social Workingmen's party, for the purpose 
 of preparing the way, and for the solution of the social prob- 
 lem, demands the creation of social productive associations, to 
 be supported by the state government, and under the control 
 of the working-people. The productive associations are to be 
 founded in such numbers that the social organization of the 
 whole production can be effected by them. 
 
 The German Social Workingmen's party requires as the 
 basis of state government : 
 
 1. Universal, equal, direct, and secret suffrage, which, be- 
 ginning with the twentieth year, obliges all citizens to vote in 
 all State, county, and town elections. Election-day must be a 
 Sunday or a holiday. 
 
 2. Direct legislation by the people ; decision as to war and 
 peace by the people. 
 
 1 See New York " Nation," Nos. 684, 686. 
 
164 DISTRIBUTION. 
 
 3. General capability of bearing arms ; popular defense in 
 place of standing armies. 
 
 4. Abolition of all exceptional laws, especially those relating 
 to the press, public meetings, and associations — in short, of all 
 laws which hinder the free expression of ideas and thought. 
 
 5. Gratuitous administration of justice by the people. 
 
 6. General and equal, popular and gratuitous education by 
 the Government in all classes and institutes of learning ; general 
 duty to attend school ; religion to be declared a private affair. 
 
 The German Social Workingmen's party insists on realizing 
 in the present state of society : 
 
 1. The largest possible extension of political rights and 
 freedom in conformity to the above six demands. 
 
 2. A single progressive income-tax for State, counties, and 
 towns, instead of those which are imposed at present, and in 
 place of indirect taxes, which unequally burden the people. 
 
 3. Unlimited right of combination. 
 
 4. A normal working-day corresponding with the wants of 
 society ; prohibition of Sunday labor. 
 
 5. Prohibition of children's work and of women's work, so 
 far as it injures their health and morality. 
 
 6. Protective laws for the life and health of workingmen ; 
 sanitary control of their dwellings ; superintendence of mines, 
 factories, industry, and home work by officers chosen by the 
 workingmen ; an effectual law guaranteeing the responsibility 
 of employers. 
 
 7. Regulation of prison-work. 
 
 8. Unrestricted self-government of all banks established for 
 the mutual assistance of workingmen. 
 
 The above scheme also represents very well the character of 
 the Socialist agitators in the United States, who are themselves 
 chiefly foreigners, and have foreign conceptions of socialism. 
 On this form of socialism it is interesting to have Mr. Mill's 
 later opinions ' in his own words. 
 
 " Among those who call themselves Socialists, two kinds 
 of persons may be distinguished. There are, in the first 
 place, (1) those whose plans for a new order of society, in 
 which private property and individual competition are to be 
 superseded and other motives to action substituted, are on 
 the scale of a village community or township, and would be 
 applied to an entire country by the multiplication of such 
 
 1 From his posthumous " Chapters on Socialism," " Fortnightly Review," 
 1879, p. 513 (vol. xxxi), and written in 1869. 
 
PROPERTY. 165 
 
 self-acting units ; of this character are the systems of Owen, 
 of Fourier, and the more thoughtful and philosophic Social- 
 ists generally. The other class (2) who are more a product 
 of the Continent than of Great Britain, and may be called 
 the revolutionary Socialists, propose to themselves a much 
 bolder stroke. Their scheme is the management of the 
 whole productive resources of the country by one central 
 authority, the general Government. And with this view 
 some of them avow as their purpose that the working- 
 classes, or somebody in their behalf, should take possession 
 of all the property of the country, and administer it for the 
 general benefit. The aim of that is to substitute the new 
 rule for the old at a single stroke, and to exchange the 
 amount of good realized under the present system, and its 
 large possibilities of improvement, for a plunge without any 
 preparation into the most extreme form of the problem of 
 carrying on the whole round of the operations of social life 
 without the motive power which has always hitherto worked 
 the social machinery. It must be acknowledged that those 
 who would play this game on the strength of their own 
 private opinion, unconfirmed as yet by any experimental 
 verification, must have a serene confidence in their own 
 wisdom on the one hand, and a recklessness of people's suf- 
 ferings on the other, which Robespierre and St. Just, hither- 
 to the typical instances of those united attributes, scarcely 
 came up to." 
 
 § 4. [Of the schemes to be tried within a state], the 
 two elaborate forms of non-communistic Socialism known 
 as Saint-Simonism and Fourierism are totally free from the 
 objections usually urged against Communism. The Saint- 
 Simonian ' scheme does not contemplate an equal, but an 
 
 1 The Count de Saint-Simon served in our Revolutionary War in the French 
 army, while very young, and ended a life of misfortune and poverty in 1825, a 
 month after the publication of his " Nouveau Christianismc " (Woolsey's " Com- 
 munism and Socialism," p. 107). For a fuller account, see R. T. Ely's "French 
 and German Socialism," p. 53 ; A. J. Booth's " Saint-Simon and Saint-Simon- 
 ism" (London, 1871); and Reybaud, ibid. 
 
1QQ DISTRIBUTION. 
 
 unequal division of the produce; it does not propose that 
 all should be occupied alike, but differently, according to 
 their vocation or capacity ; the function of each being as- 
 signed, like grades in a regiment, by the choice of the direct- 
 ing authority, and the remuneration being by salary, pro- 
 portioned to the importance, in the eyes of that authority, 
 of the function itself, and the merits of the person who ful- 
 fills it. But to suppose that one or a few human beings, 
 howsoever selected, could, by whatever machinery of sub- 
 ordinate agency, be qualified to adapt each person's work 
 to his capacity, and proportion each person's remuneration 
 to his merits, is a supposition almost too chimerical to be 
 reasoned against. 1 
 
 The most skillfully combined, and with the greatest fore- 
 sight of objections, of all the forms of Socialism is that com- 
 monly known as Fourierism.' This system does not con- 
 template the abolition of private property, nor even of in- 
 heritance: on the contrary, it avowedly takes into consid- 
 eration, as an element in the distribution of the produce, 
 capital as well as labor. It proposes that the operations of 
 industry should be carried on by associations of about two 
 thousand members, combining their labor on a district of 
 about a square league in extent, under the guidance of 
 chiefs selected by themselves (the " phalanstery "). In the 
 distribution a certain minimum is first assigned for the 
 subsistence of every member of the community, whether 
 capable or not of labor. The remainder of the produce 
 is shared in certain proportions, to be determined before- 
 hand, among the three elements, Labor, Capital, and Talent. 
 
 1 This experiment when put on trial in France first brought up the question 
 of the legal justice of giving an absolute right to inherited property, and num- 
 bered among its disciples the economists, Michel Chevalier and Adolphe Blan- 
 qui, and the philosopher, Auguste Comte. 
 
 2 Fourier was born at Besancon in 1112. He wrote the " Theory of the 
 Four Movements" (1808) ; "A Treatise on Domestic and Agricultural Associa- 
 tion " (1822) ; " The Theory of Universal Unity " (1841). Died 1837. See Ely, 
 ibid., p. 81 ; Victor Considerant's " La Destinee Sociale " (fourth edition, 1851) ; 
 and Reybaud, ibid. 
 
PROPERTY. 1(37 
 
 The capital of the community may be owned in unequal 
 shares by different members, who would in that case re- 
 ceive, as in any other joint-stock company, proportional divi- 
 dends. The claim of each person on the share of the prod- 
 uce apportioned to talent is estimated by the grade or rank 
 which the individual occupies in the several groups of labor- 
 ers to which he or she belongs, these grades being in all 
 cases conferred by the choice of his or her companions. 
 The remuneration, when received, would not of necessity be 
 expended or enjoyed in common ; there would be separate 
 menages for all who prefered them, and no other commu- 
 nity of living is contemplated than that all the members of 
 the association should reside in the same pile of buildings ; 
 for saving of labor and expense, not only in building, but 
 in every branch of domestic economy ; and in order that, 
 the whole buying and selling operations of the community 
 being performed by a single agent, the enormous portion of 
 the produce of industry now carried off by the profits of 
 mere distributors might be reduced to the smallest amount 
 possible. 
 
 Fourierism was tried in "West Virginia by American dis- 
 ciples, and it was advocated by Horace Greeley. A modified 
 form appeared in the famous community at Brook Farm (near 
 Dedham, Massachusetts), which drew there George Ripley, 
 Margaret Fuller, and even George William Curtis and Nathan- 
 iel Hawthorne. 
 
 There have been many smaller communities established in 
 the United States, but it can not be said that they have been 
 successful from the point of view either of numbers or mate- 
 rial prosperity. The followers of Rapp, or the Harmonists, in 
 Pennsylvania and Indiana ; the Owenites, 1 in Indiana ; the 
 community of Zoar, in Ohio ; the Inspirationists, in New York 
 
 1 Robert Owen (father of Robert Dale Owen), born 1771, in 1799 was en- 
 gaged in the famous New Lanark Mills, of which Jeremy Bentham was one of 
 the partners. In 1825 he purchased Harmony, in Indiana, from Mr. Rapp. He 
 believed in a full community of property ; that the Government should employ 
 the surplus of labor for which there was no demand ; and that, until the mem- 
 bers became fully trained, affairs should be managed by one head (as in Saint- 
 Simonism). 
 
1(58 DISTRIBUTION. 
 
 and Iowa ; the Perfectionists, at Oneida and Wallingford — are 
 all evidently suffering from the difficulties due to the absence of 
 family life, from the increasing spirit of personal independence 
 which carries away the younger members of the organizations, 1 
 and the want of that executive ability which distinguishes the 
 successful manager in private enterprises. 
 
 § 5. " The attacks* on the present social order are vigor- 
 ous and earnest, but open to the charge of exaggeration. 
 
 " In the first place, it is unhappily true that the wages of 
 ordinary labor, in all the countries of Europe, are wretchedly 
 insufficient to supply the physical and moral necessities of 
 the population in any tolerable measure. But when it is 
 further alleged that even this insufficient remuneration has a 
 tendency to diminish ; that there is, in the words of M. Louis 
 Blanc, une baisse continue des salaires / the assertion is in 
 opposition to all accurate information, and to many notorious 
 facts. It has yet to be proved that there is any country 
 in the civilized world where the ordinary wages of labor, es- 
 timated either in money or in articles of consumption, are 
 declining ; while in many they are, on the whole, on the in- 
 crease ; and an increase which is becoming, not slower, but 
 more rapid. There are, occasionally, branches of industry 
 which are being gradually superseded by something else, 
 and in those, until production accommodates itself to demand, 
 wages are depressed. 
 
 " M. Louis Blanc appears to have fallen into the same error 
 which was at first committed by Malthus and his followers, 
 that of supposing because population has a greater power of 
 
 1 For Brook Farm, see Noyes's " History of American Socialism," chapter 
 xi, and the life of "George Ripley," by 0. B. Frothingham (1882). In general, 
 also, for American experiments see Charles Nordhoff's " The Communistic Soci- 
 eties of the United States"; W. A. Hinds's "American Communists" (1878); 
 Woolsey's "Communism and Socialism" (1880); and Noyes's "American So- 
 cialism" (1870). 
 
 s The extracts in large type in this section are taken from Mr. Mill's " Chap- 
 ters on Socialism" ("Fortnightly Review," 1879), being only the beginning of 
 a larger work begun in 1869, and given to the public since his death. They 
 are of interest because they give his conclusions twenty years after his " Politi- 
 cal Economy " was written. 
 
PROPERTY. 109 
 
 increase than subsistence, its pressure upon subsistence must 
 be always growing more severe. It is a great point gained 
 for truth when it comes to be seen that the tendency to over- 
 population is a fact which Communism, as well as the exist- 
 ing order of society, would have to deal with. However 
 this may be, experience shows that in the existing state of 
 society the pressure of population on subsistence, which is 
 the principal cause of low wages, though a great, is not an 
 increasing evil ; on the contrary, the progress of all that is 
 called civilization has a tendency to diminish it, partly by 
 the more rapid increase of the means of employing and main- 
 taining labor, partly by the increased facilities opened to 
 labor for transporting itself to new countries and unoccupied 
 fields of employment, and partly by a general improvement 
 in the intelligence and prudence of the population. It is, 
 of course, open to discussion what form of society has the 
 greatest power of dealing successfully with the pressure of 
 population on subsistence, and on this question there is 
 much to be said for Socialism ; but it has no just claim 
 to be considered as the sole means of preventing the 
 general and growing degradation of the mass of mankind 
 through the peculiar tendency of poverty to produce over- 
 population. 
 
 " Next, it must be observed that Socialists generally, and 
 even the most enlightened of them, have a very imperfect 
 and one-sided notion of the operation of competition. They 
 see half its effects, and overlook the other half. They forget 
 that competition is a cause of high prices and values as well 
 as of low ; that the buyers of labor and of commodities com- 
 pete with one another as well as the sellers ; and that, if it is 
 competition which keeps the prices of labor and commodities 
 as low as they are, it is competition which keeps them from 
 falling still lower. To meet this consideration, Socialists are 
 reduced to affirm that, when the richest competitor has got 
 rid of all his rivals, he commands the market and can de- 
 mand any price he pleases. But in the ordinary branches of 
 industry no one rich competitor has it in his power to drive 
 
170 DISTRIBUTION. 
 
 out all the smaller ones. Some businesses show a tendency 
 to pass out of the hands of small producers or dealers into a 
 smaller number of larger ones ; but the cases in which this 
 happens are those in which the possession of a larger capital 
 permits the adoption of more powerful machinery, more 
 efficient by more expensive processes, or a better organized 
 and more economical mode of carrying on business, and this 
 enables the large dealer legitimately and permanently to 
 supply the commodity cheaper than can be done on the small 
 scale ; to the great advantage of the consumers, and there- 
 fore of the laboring-classes, and diminishing, pro tanto, that 
 waste of the resources of the community so much complained 
 of by Socialists, the unnecessary multiplication of mere dis- 
 tributors, and of the various other classes whom Fourier calls 
 the parasites of industry. 
 
 " Another point on which there is much misapprehension 
 on the part of Socialists, as well as of trades-unionists and 
 other partisans of labor against capital, relates to the propor- 
 tion in which the produce of the country is really shared and 
 the amount of what is actually diverted from those who pro- 
 duce it, to enrich other persons. When, for instance, a capi- 
 talist invests £20,000 in his business, and draws from it an in- 
 come of (suppose) £2,000 a year, the common impression is 
 as if he were the beneficial owner both of the £20,000 and 
 of the £2,000, while the laborers own nothing but their wages. 
 The truth, however, is that he only obtains the £2,000 on 
 condition of applying no part of the £20,000 to his own 
 use. He has the legal control over it, and might squan- 
 der it if he chose, but if he did he would not have the 
 £2,000 a year also. For all personal purposes they have 
 the capital and he has but the profits, which it only yields 
 to him on condition that the capital itself is employed in 
 satisfying not his own wants, but those of laborers. Even 
 of his own share a small part only belongs to him as the 
 owner of capital. The portion of the produce which falls 
 to capital merely as capital is measured by the interest of 
 money, since that is all that the owner of capital obtains 
 
PROPERTY. 271 
 
 when he contributes to production nothing except the capi- 
 tal itself. 
 
 " The result of our review of the various difficulties of So- 
 cialism has led us to the conclusion that the various schemes 
 for managing the productive resources of the country bv 
 public instead of private agency have a case for a trial, and 
 some of them may eventually establish their claims to prefer- 
 ence over the existing order of things, but that they are at 
 present workable only by the elite of mankind, and have yet 
 to prove their power of training mankind at large to the state 
 of improvement which they presuppose." 
 
 § 6. It is next to be considered what is included in the 
 idea of private property and by what considerations the ap- 
 plication of the principle should be bounded. 
 
 The institution of property, when limited to its essential 
 elements, consists in the recognition, in each person, of a 
 right to the exclusive disposal of what he or she have pro- 
 duced by their own exertions, or received either by gift or 
 by fair agreement, without force or fraud, from those who 
 produced it. The foundation of the whole is, the right of 
 producers to what they themselves have produced. Nothing 
 is implied in property but the right of each to his (or her) 
 own faculties, to what he can produce by them, and to what- 
 ever he can get for them in a fair market : together with his 
 right to give this to any other person if he chooses, and the 
 right of that other to receive and enjoy it. 
 
 It follows, therefore, that although the right of bequest, 
 or gift after death, forms part of the idea of private property, 
 the right of inheritance, as distinguished from bequest, does 
 not. That the property of persons who have made no dispo- 
 sition of it during their lifetime should pass first to their 
 children, and, failing them, to the nearest relations, may be 
 a proper arrangement or not, but is no consequence of the 
 principle of private property. I see no reason why collateral 
 inheritance should exist at all. Mr. Bentham long ago pro- 
 posed, and other high authorities have agreed in the opinion, 
 that, if there are no heirs either in the descending or in the 
 
172 DISTRIBUTION. 
 
 ascending line, the property, in case of intestacy, should es- 
 cheat to the state. The parent owes to society to endeavor 
 to make the child a good and valuable member of it, and 
 owes to the children to provide, so far as depends on him, 
 such education, and such appliances and means, as will en- 
 able them to start with a fair chance of achieving by their 
 own exertions a successful life. To this every child has a 
 claim ; and I can not admit that as a child he has a claim to 
 more. 
 
 The essential principle of property being to assure to all 
 persons what they have produced by their labor and accumu- 
 lated by their abstinence, this principle can not apply to what 
 is not the produce of labor, the raw material of the earth. If 
 the land derived its productive power wholly from nature, 
 and not at all from industry, or if there were any means of 
 discriminating what is derived from each source, it not only 
 would not be necessary, but it would be the height of injus- 
 tice, to let the gift of nature be engrossed by individuals^ 
 [But] the use of the land in agriculture must indeed, for the 
 time being, be of necessity exclusive ; the same person who 
 has plowed and sown must be permitted to reap. 
 
 But though land is not the produce of industry, most of 
 its valuable qualities are so. Labor is not only requisite for 
 using, but almost equally so for fashioning, the instrument. 
 Considerable labor is often required at the commencement, 
 to clear the land for cultivation. In many cases, even when 
 cleared, its productiveness is wholly the effect of labor and 
 art. One of the barren est soils in the world, composed of 
 the material of the Goodwin Sands, the Pays de Waes in 
 Flanders, has been so fertilized by industry as to have be- 
 come one of the most productive in Europe. Cultivation 
 also requires buildings and fences, which are wholly the prod- 
 uce of labor. The fruits of this industry can not be reaped 
 in a short period. The labor and outlay are immediate, the 
 benefit is spread over many years, perhaps over all future 
 time. A holder will not incur this labor and outlay when 
 strangers and not himself will be benefited by it. If he 
 
PROPERTY. 173 
 
 undertakes such improvements, he must have a sufficient 
 period before him in which to profit by them ; and he is in 
 no way so sure of having always a sufficient period as when 
 his tenure is perpetual. 
 
 These are the reasons which form the justification, in an 
 economical point of view, of property in land. It is seen 
 that they are only valid in so far as the proprietor of land is 
 its improver. Whenever, in any country, the proprietor, 
 generally speaking, ceases to be the improver, political econ- 
 omy has nothing to say in defense of landed property, as there 
 established. 
 
 "When the " sacredness of property " is talked of, it 
 should always be remembered that any such sacredness 
 does not belong in the same degree to landed property. ]STo 
 man made the land. It is the original inheritance of the 
 whole species. Its appropriation is wholly a question of 
 general expediency. When private property in land is not 
 expedient, it is unjust. The reverse is the case with prop- 
 erty in movables, and in all things the product of labor: 
 over these, the owner's power both of use and of exclusion 
 should be absolute, except where positive evil to others 
 would result from it ; but, in the case of land, no exclusive 
 right should be permitted in any individual which can not 
 be shown to be productive of positive good. To be allowed 
 any exclusive right at all, over a portion of the common in- 
 heritance, while there are others who have no portion, is 
 already a privilege. No quantity of movable goods which 
 a person can acquire by his labor prevents others from ac- 
 quiring the like by the same means; but, from the very 
 nature of the case, whoever owns land keeps others out 
 of the enjoyment of it. When land is not intended to be 
 cultivated, no good reason can in general be given for its 
 being private property at all. Even in the case of cultivated 
 land, a man whom, though only one among millions, the law 
 permits to hold thousands of acres as his single share, is not 
 entitled to think that all this is given to him to use and 
 abuse, and deal with as if it concerned nobody but himself. 
 
174 DISTRIBUTION. 
 
 The rents or profits which he can obtain from it are at 
 his sole disposal ; but with regard to the land, in everything 
 which he does with it, and in everything which he abstains 
 from doing, he is morally bound, and should, whenever the 
 case admits, be legally compelled to make his interest and 
 pleasure consistent with the public good. 
 
CHAPTER II. 
 
 OF WAGES. 
 
 § 1. Political economists generally, and English politi- 
 cal economists above others, have been accustomed to lay 
 almost exclusive stress upon the first of [two] agencies 
 [competition and custom] ; to exaggerate the effect of com- 
 petition, and to take into little account the other and con- 
 flicting principle. They are apt to express themselves as 
 if they thought that competition actually does, in all cases, 
 whatever it can be shown to be the tendency of competition 
 to do. This is partly intelligible, if we consider that onlji 
 through the principle of competition has political economy 
 any pretension to the character of a science. So far as rents, 
 profits, wages, prices, are determined by competition, laws 
 may be assigned for them. Assume competition to be theirj 
 exclusive regulator, and principles of broad generality and! 
 scientific precision may be laid down, according to which 
 they will be regulated. The political economist justly deems 
 this his proper business : and, as an abstract or hypothetical 
 science, political economy can not be required to do, and in- 
 deed can not do, anything more. But it would be a great 
 misconception of the actual course of human affairs to sup- 
 pose that competition exercises in fact this unlimited sway. 
 I am not speaking of monopolies, either natural or artificial, 
 or of any interferences of authority with the liberty of pro- ^ 
 duction or exchange. Such disturbing causes have always^ 
 been allowed for by political economists. I speak of cases 
 in which there is nothing to restrain competition ; no hin- 
 
176 DISTRIBUTION. 
 
 drance to it either in the nature of the case or in artificial 
 obstacles ; yet in which the result is not determined by 
 competition, but by custom or usage ; competition either 
 not taking place at all, or producing its effect in quite a dif- 
 ferent manner from that which is ordinarily assumed to be 
 natural to it. 
 
 As stated by Mr. Cairnes, 1 political economy is a science 
 just as is any recognized physical science — astronomy, chemis- 
 try, physiology. The economic " facts we find existing are the 
 the results of causes, between which and them the connection 
 is constant and invariable. It is, then, the constant relations 
 exhibited in economic phenomena that we have in view when 
 we speak of the laws of the phenomena of wealth ; and in the 
 exposition of these laws consists the science of political econ- 
 omy." It is to be remembered that economic laws are tenden- 
 cies, not actual descriptions of any given conditions in this or 
 that place. 
 
 Competition, in fact, has only become in any considerable 
 degree the governing principle of contracts, at a compara- 
 tively modern period. The further we look 'back into his- 
 tory, the more we see all transactions and engagements under 
 the influence of fixed customs. The relations, more espe- 
 cially between the land-owner and the cultivator, and the 
 payments made by the latter to the former, are, in all states 
 of society but the most modern, determined by the usage of 
 the country. The custom of the country is the universal 
 rule ; nobody thinks of raising or lowering rents, or of let- 
 ting land, on other than the customary conditions. Compe- 
 tition, as a regulator of rent, has no existence. 
 
 Prices, whenever there was no monopoly, came earlier 
 under the influence of competition, and are much more uni- 
 versally subject to it, than rents. The wholesale trade, in 
 the great articles of commerce, is really under the dominion 
 of competition. But retail price, the price paid by the 
 actual consumer, seems to feel very slowly and imperfectly 
 the effect of competition ; and, when competition does exist, 
 
 1 " Logical Method," pp. 34, 36. 
 
c^ 
 
 
 
 ^r 
 
 WAGES. 177 
 
 it often, instead of lowering prices, merely divides the gains 
 of the high price among a greater number of dealers. The 
 influence of competition is making itself felt more and more 
 through the principal branches of retail trade in the large 
 towns. 
 
 All professional remuneration is regulated by custom. 
 The fees of physicians, surgeons, and barristers, the charges 
 of attorneys, are nearly invariable. Not certainly for want 
 of abundant competition in those professions, but because 
 the competition operates by diminishing each competitor's 
 chance of fees, not by lowering the fees themselves. 
 
 These observations must be received as a general cor- 
 rection to be applied whenever relevant, whether expressly 
 mentioned or not, to the conclusions contained in the sub- 
 sequent portions of this treatise. Our reasonings must, in 
 general, proceed as if the known and natural effects of com- 
 petition were actually produced by it, in all cases in which 
 it is not restrained by some positive obstacle. "Where com- 
 petition, though free to exist, does not exist, or where it 
 exists, but has its natural consequences overruled by any 
 other agency, the conclusions will fail more or less of being 
 applicable. To escape error, we ought, in applying the con- 
 clusions of political economy to the actual affairs of life, to 
 consider not only what will happen supposing the maximum 
 of competition, but how far the result will be affected if 
 competition falls short of the maximum. 
 
 § 2. Under the head of "Wages are to be considered, first, 
 the causes which determine or influence the wages of labor 
 generally, and secondly, the differences that exist between 
 the wages of different employments. It is convenient to 
 keep these two classes of considerations separate ; and in 
 discussing the law of wages, to proceed in the first instance 
 as if there were no other kind of labor than common un- 
 skilled labor, of the average degree of hardness and disagree- 
 ableness. 
 
 Competition, however, must be regarded, in the present 
 6tate of society, as the principal regulator of wages, and cus- 
 12 
 
178 DISTRIBUTION. 
 
 torn or individual character only as a modifying circumstance, 
 and that in a comparatively slight degree. 
 s~ Wages, then, depend mainly upon the demand and sup- 
 (ply of labor ; or, as it is often expressed, on the propor- 
 tion between population and capital. By population is here 
 meant the number only of the laboring-class, or rather of 
 those who work for hire ; and by capital, only circulating 
 capital, and not even the whole of that, but the part which 
 is expended in the direct purchase of labor. To this, how- 
 ever, must be added all funds which, without forming a part 
 of capital, are paid in exchange for labor, such as the wages 
 of soldiers, domestic servants, and all other unproductive 
 laborers. There is unfortunately no mode of expressing, by 
 one familiar term, the aggregate of what may be called the 
 wages-fund of a country : and, as the wages of productive 
 labor form nearly the whole of that fund, it is usual to over- 
 look the smaller and less important part, and to say that 
 wages depend on population and capital. It will be con- 
 venient to employ this expression, remembering, however, 
 to consider it as elliptical, and not as a literal statement of 
 the entire truth. 
 
 With these limitations of the terms, wages not only de- 
 pend upon the relative amount of capital and population, 
 but can not, under the rule of competition, be affected by 
 anything else. Wages (meaning, of course, the general rate) 
 can not rise, but by an increase of the aggregate funds 
 employed in hiring laborers, or a diminution in the number 
 of the competitors for hire ; nor fall, except either by a 
 diminution of the funds devoted to paying labor, or by an 
 increase in the number of laborers to be paid. ' 
 
 This is the simple statement of the well-known Wages-Fund 
 Theory, which has given rise to no little animated discussion. 
 Few economists now assent to this doctrine when stated as 
 above, and without changes. The first attack on this explana- 
 tion of the rate of wages came from what is now a very scarce 
 pamphlet, written by F. D. Longe, entitled " A Refutation of 
 the Wage-Fund Theory of Modern Political Economy" (1866). 
 Because laborers do not really compete with each other, he 
 
WAGES. 
 
 179 
 
 regarded the idea of average wages as absurd as the idea of an 
 average price of ships and cloth ; he declared that there was no 
 predetermined wages-fund necessarily expended on labor ; and 
 that " demand for commodities " determined the amount of 
 wealth devoted to paying wages (p. 46). While the so-called 
 wages-fund limits the total amount which the laborers can re- 
 ceive, the employer would try to get his workmen at as much less 
 than that amount as possible, so that the aggregate fund would 
 have no bearing on the actual amount paid in wages. The 
 quantity of work to be done, he asserts, determines the quan- 
 tity of labor to be employed. About the same time (but un- 
 known to Mr. Longe), W. T. Thornton was studying the same 
 subject, and attracted considerable attention by his publication, 
 11 On Labor" (1868), which in Book II, Chap. I, contained an 
 extended argument to show that demand and supply (i. e., the 
 proportion between wages-fund and laborers) did. not regulate 
 wages, and denied the existence of a predetermined wages-fund 
 fixed in amount. His attack, however, assumes a very different 
 conception of an economic law from that which we think right to 
 insist upon. The character of mankind being what it is, it will 
 be for their interest to invest so 
 much and no more in labor, and 
 we must believe that in this sense 
 there is a predetermination of 
 wealth to be paid in wages. In 
 order to make good investments, 
 a certain amount must, if capi- 
 talists follow their best interests, 
 go to the payment of labor. 1 Mr. 
 Thornton's argument attracted 
 the more attention because Mr. 
 Mill a admitted that Mr. Thornton 
 had induced him to abandon his 
 Wages-Fund Theory. The sub- 
 ject was, however, taken up, re- 
 examined by Mr. Cairnes, 3 and stated in a truer form. (1.) The 
 total wealth of a country (circle A in the diagram) is the outside 
 limit of its capital. How much capital will be saved out of this 
 depends upon the effective desire of accumulation in the com- 
 munity (as set forth in Book I, Chap. VIII). The size of circle 
 B within circle A, therefore, depends on the character of the 
 people. The wages-fund, then, depends ultimately on the ex- 
 tent of A, and proximately on the extent of B. It can never 
 
 1 Cf. Cairnes, "Leading Principles," pp. 180-188. 
 9 In the " Fortnightly Review," May 1, 1869. 
 3 " Leading Principles," pp. 149-189. 
 
180 DISTRIBUTION. 
 
 be larger than B. So far, at least, its amount is " predeter- 
 mined" in the economic sense by general laws regarding the 
 accumulation of capital and the expectation of profit. Circle 
 B contracts and expands under influences which have nothing 
 to do with the immediate bargains between capitalists and la- 
 borers. (2.) Another influence now conies in to affect the amount 
 of capital actually paid as wages, one also governed by general 
 causes outside the reach of laborer or capitalist, that is, the 
 state of the arts of production. In production, the particular 
 conditions of each industry will determine how much capital 
 is to be set apart for raw material, how much for machinery, 
 buildings, and all forms of fixed capital, and how many laborers 
 will be assigned to a given machine for a given amount of 
 material. With some kinds of hand-made goods the largest 
 share of capital goes to wages, a less amount for materials, 
 and a very small proportion for machinery and tools. In 
 many branches of agriculture and small farming this holds true. 
 The converse, however, is true in many manufactures, where 
 machinery is largely used. No two industries will maintain 
 the same proportion between the three elements. The nature 
 of the industry, therefore, will determine whether a greater or 
 a less share of capital will be spent in wages. It is needless to 
 say that this condition of things is not one to be changed at 
 the demand of either of the two parties to production, Labor 
 and Capital ; it responds only to the advance of mechanical sci- 
 ence or general intelligence. It is impossible, then, to escape 
 the conclusion that genei-al causes restrict the amount which 
 will, under any normal investment, go to the payment of 
 wages. Only within the limits set by these forces can any 
 further expansion or contraction take place. (3.) Within these 
 limits, of course, minor changes may take place, so that the 
 fund can not be said to be "fixed" or "absolutely predeter- 
 mined"; but these changes must take place within such nar- 
 row limits that they do not much affect the practical side of 
 the question. How these changes act, may be seen in a part of 
 the following illustration of the above principles : 
 
 Suppose a cotton-mill established in one of the valleys of 
 Vermont, for the management of which the owner has $140,000 
 of capital. Of this, $100,000 is given for buildings, machinery, 
 and plant. If he turns over his remaining capital ($40,000) 
 each month, we will suppose that $28,000 spent in raw mate- 
 rials will keep five hundred men occupied at a monthly ex- 
 penditure of $12,000. The present state of cotton-manufacture 
 itself settles the relation between a given quantity of raw cot- 
 ton and a certain amount of machinery. A fixed amount of 
 cotton, no more, no less, can be spun by each spindle and 
 woven by each loom ; and the nature of the process determines 
 
WAGES. 181 
 
 the number of laborers to each machine. This proportion is 
 something which an owner must obey, if he expects to compete 
 with other manufacturers : the relationship is fixed for, not by, 
 him. Now, each of the five hundred laborers being supposed 
 to receive on an average $1.00 a day, imagine an influx of a 
 body of French Canadians who offer to work, on an average, 
 for eighty cents a day. 1 The five hundred men will now receive 
 but $9,600 monthly instead of $12,000, as before, as a wages- 
 fund ; the monthly payment for wages now is nearly seven per 
 cent, while formerly it was nearly nine per cent of the total 
 capital invested ($140,000). Thus it will be seen that the 
 wages-fund can change with a change in the supply of labor : 
 but the point to be noticed is that it is a change in the subdi- 
 vision, $12,000, of the total $140,000. That is^ this alteration 
 can take place only within the limits set by the nature of the 
 industry. Now, if this $2,400 (i. e., $12,000 less $9,600) saved 
 out of the wages-fund were to be reinvested, it must necessa- 
 rily be divided between raw materials, fixed capital, and wages 
 in the existing relations, that is, only seven per cent of the new 
 $2,400 would be added to the wages-fund. It is worth while 
 calling attention to this, if for no other reason than to show 
 that in this way a change can be readily made in the wages- 
 fund by natural movements; and that no one can be so absurd 
 as to say that it is absolutely fixed in amount. But it certain- 
 ly is " predetermined " in the economic sense, in that any rein- 
 vestments, as well as former funds, must necessarily be distrib- 
 uted according to the above general principles, independent of 
 the "higgling" in the labor market. The following is Mr. 
 Cairnes's statement of the amount and " predetermination " of 
 the wages-fund : 
 
 " I believe that, in the existing state of the national wealth, 
 the character of Englishmen being what it is, a certain pros- 
 pect of profit will " determine " a certain proportion of this 
 wealth to productive investment; that the amount thus 'deter- 
 mined ' will increase as the field for investment is extended, 
 and that it will not increase beyond what this field can find 
 employment for at that rate of profit which satisfies English 
 commercial expectation. Further, I believe that, investment 
 thus taking place, the form which it shall assume will be 'de- 
 termined' by the nature of the national industries — 'deter- 
 mined,' not under acts of Parliament, or in virtue of any physi- 
 cal law, but through the influence of the investor's interests ; 
 while this, the form of the investment, will again 'determine' 
 the proportion of the whole capital which shall be paid as 
 
 1 Counting six days to a week and four weeks to a month. 
 
182 DISTRIBUTION. 
 
 wages to laborers." ' In this excellent and masterly concep- 
 tion, the doctrine of a wages-fund is not open to the objections 
 usually urged against it. Indeed, with the exception of Pro- 
 fessor Fawcett, scarcely any economist believes in an absolute- 
 ly fixed wages-fund. In this sense, then, and in view of the 
 above explanation, it will be understood what is meant by say- 
 ing that wages depend upon the proportion of the wages-fund 
 to the number of the wage-receivers.' 
 
 In applying these principles to the question of strikes, it is 
 evident enough that if they result in an actual expansion of the 
 whole circle B, by forcing saving from unproductive expendi- 
 ture, a real addition, of some extent, may be made to the 
 wages-fund ; but only by increasing the total capital. If, how- 
 ever, they attempt to increase one of the elements of capital, the 
 wages-fund, without also adding to the other elements, fixed 
 capital and materials, in the proportion fixed by the nature of 
 the industry, they will destroy all possibility of continuing that 
 production in the normal way, and the capitalist must withdraw 
 from the enterprise. 
 
 Francis A. Walker s has also offered a solution of this prob- 
 lem in his " Wages Question " (1876), in which he holds that 
 " wages are, in a philosophical view of the subject, paid out of 
 the product of present industry, and hence that production 
 furnishes the true measure of wages" (p. 128). ''It is the 
 prospect of a profit in production which determines the em- 
 ployer to hire laborers ; it is the anticipated value of the prod- 
 uct which determines how much he can pay him" (p. 144). 
 No doubt wages can be (and often are) paid out of the current 
 product ; but what amount ? What is the principle of distribu- 
 tion ? Wherever the incoming product is a moral certainty 
 (and, unless this is true, in no case could wages be paid out of 
 the future product), saving is as effective upon it as upon the 
 actual accumulations of the past ; and the amount of the coming 
 product which will be saved and used as capital is determined 
 by the same principles which govern the saving of past prod- 
 ucts. An increase of circle A by a larger production makes 
 possible an increase of circle B, but whether it will be enlarged 
 
 1 " Leading Principles," p. 185. 
 
 8 Mr. Thornton replied to Mr. Cairnes (" Nineteenth Century," August, 1879). 
 A succinct statement of the condition of the wages-fund controversy has been 
 made by Henry Sidgwick, "Fortnightly Review," September 1, 18*79. See also 
 W. G. Sumner, "Princeton Review," " Wages," November, 1882. 
 
 3 He advanced the same view in the "North American Review," vol. cxx, 
 January, 1875. In his "Political Economy " (1883) he advances a more exten- 
 sive theory of distribution. See "Atlantic Monthly," July, 1883, p. 129. 
 
WAGES. 133 
 
 or not depends on the principle of accumulation. The larger 
 the total production of wealth, the greater the possible wages, 
 all must admit; but it does not seem clear that General Walker 
 has given us a solution of the real question at issue. The 
 larger the house you build, the larger the rooms may be ; but 
 it does not follow that the rooms will be necessarily large — as 
 any inmate of a summer hotel will testify. 
 
 § 3. There are, however, some facts in apparent con- 
 tradiction to this [the Wages-Fund] doctrine, which it is in- 
 cumbent on us to consider and explain. 
 
 1. For instance, it is a common saying that wages are high 
 when trade is good. The demand for labor in any par- 
 ticular employment is more pressing, and higher wages are 
 paid, when there is a brisk demand for the commodity pro- 
 duced ; and the contrary when there is what is called a 
 stagnation : then work-people are dismissed, and those who 
 are retained must submit to a reduction of wages ; though 
 in these cases there is neither more nor less capital than be- 
 fore. This is true ; and is one of those complications in the 
 concrete phenomena which obscure and disguise the opera- 
 tion of general causes ; but it is not really inconsistent with 
 the principles laid down. Capital which the owner does 
 not employ in purchasing labor, but keeps idle in his hands, 
 is the same thing to the laborers, for the time being, as 
 if it did not exist. All capital is, from the variations of 
 trade, occasionally in this state. A manufacturer, finding 
 a slack demand for his commodity, forbears to employ la- 
 borers in increasing a stock which he finds it difficult to 
 dispose of ; or if he goes on until all his capital is locked up 
 in unsold goods, then at least he must of necessity pause 
 until he can get paid for some of them. But no one expects 
 either of these states to be permanent ; if he did, he would 
 at the first opportunity remove his capital to some other 
 occupation, in which it would still continue to employ la- 
 bor. The capital remains unemployed for a time, during 
 which the labor market is overstocked, and wages fall. 
 Afterward the demand revives, and perhaps becomes un- 
 usually brisk, enabling the manufacturer to sell his com- 
 
184 DISTRIBUTION. 
 
 modify even faster than he can produce it ; his whole capi- 
 tal is then brought into complete efficiency, and, if he is able, 
 he borrows capital in addition, which would otherwise have 
 gone into some other employment. These, however, are 
 but temporary fluctuations : the capital now lying idle will 
 next year be in active employment, that which is this year 
 unable to keep up with the demand will in its turn be locked 
 up in crowded warehouses ; and wages in these several de- 
 partments will ebb and flow accordingly : but nothing can 
 permanently alter general wages, except an increase or a 
 diminution of capital itself (always meaning by the term, 
 the funds of all sorts, destined for the payment of labor) com- 
 pared with the quantity of labor offering itself to be hired. 
 
 2. Again, it is another common notion that high prices 
 make high wages ; because the producers and dealers, being 
 better off, can afford to pay more to their laborers. I have 
 already said that a brisk demand, which causes temporary 
 high prices, causes also temporary high wages. But high 
 prices, in themselves, can only raise wages if the dealers, 
 receiving more, are induced to save more, and make an 
 addition to their capital, or at least to their purchases of 
 labor. Wages will probably be temporarily higher in the 
 employment in which prices have risen, and somewhat lower 
 in other employments : in which case, while the first half of 
 the phenomenon excites notice, the other is generally over- 
 looked, or, if observed, is not ascribed to the cause which 
 really produced it. Nor will the partial rise of wages last 
 long : for, though the dealers in that one employment gain 
 more, it does not follow that there is room to employ a 
 greater amount of savings in their own business : their in- 
 creasing capital will probably flow over into other employ- 
 ments, and there counterbalance the diminution previously 
 made in the demand for labor by the diminished savings of 
 other classes. 
 
 A clear distinction must be made between real wages and 
 money wages ; the former is of importance to the laborer, the 
 latter to the employer. The quantity of commodities satisfy- 
 
WAGES. 135 
 
 ing his desires which the laborer receives for his exertion con- 
 stitutes his real wages. The mere amount of money he receives 
 for his exertions, irrespective of what the money will exchange 
 for, forms his money wages. Since the functions of money 
 have not yet been explained, it is difficult to discuss the rela- 
 tion between prices and money wages here. But, as the total 
 value of the products in a certain industry is the sum out of 
 which both money wages and profits are paid, this total will 
 rise or fall (efficiency of labor remaining the same) with the 
 price of the particular article. If the price rises, profits will 
 be greater than elsewhere, and more capital will be invested in 
 that one business ; that is, the capital will be a demand for 
 more labor, and, until equalization is accomplished in all trades 
 between wages and profits, money wages will be higher in 
 some trades than in others. 1 
 
 When reference is had to the connection between real 
 wages and prices, the question is a different one. General 
 high prices would not change general real wages. But if high 
 prices cause higher money wages in particular branches of trade, 
 then, because the movement is not general, there will accrue, to 
 those receiving more money, the means to buy more of real 
 wages. And, as in practice, changes in prices which arise from 
 an increased demand are partial, and not general, it often hap- 
 pens that high prices produce high real wages (not general high 
 wages) in some, not in all employments. (For a further study 
 of this relation between pi'ices and wages the reader is advised 
 to recall this discussion in connection with that in a later part 
 of the volume, Book III, Chaps. XX and XXI. ) 
 
 3. Another opinion often maintained is, that wages (mean- 
 ing of course money wages) vary with the price of food ; 
 rising when it rises, and falling when it falls. This opinion 
 is, I conceive, only partially true ; and, in so far as true, in 
 no way affects the dependence of wages on the proportion 
 between capital and labor: since the price of food, when 
 it affects wages at all, affects them through, that law. Dear 
 or cheap food caused by variety of seasons does not affect 
 wages (unless they are artificially adjusted to it by law or 
 charity) : or rather, it has some tendency to affect them in 
 the contrary way to that supposed ; since in times of scarcity 
 people generally compete more violently for employment, 
 and lower the labor market against themselves. But dear- 
 
 1 See Cairnes, " Leading Principles," p. 209. 
 
186 DISTRIBUTION. 
 
 ness or cheapness of food, when of a permanent character, 
 and capable of being calculated on beforehand, may affect 
 wages. (1.) In the first place, if the laborers have, as is often 
 the case, no more than enough to keep them in working 
 condition and enable them barely to support the ordinary 
 number of children, it follows that, if food grows perma- 
 nently dearer without a rise of wages, a greater number of 
 the children will prematurely die ; and thus wages will 
 ultimately be higher, but only because the number of peo- 
 ple will be smaller, than if food had remained cheap. (2.) 
 But, secondly, even though wages were high enough to admit 
 of food's becoming more costly without depriving the la- 
 borers and their families of necessaries ; though they could 
 bear, physically speaking, to be worse off, perhaps they 
 would not consent to be so. They might have habits of 
 comfort which were to them as necessaries, and sooner than 
 forego which, they would put an additional restraint on 
 their power of multiplication; so that wages would rise, 
 not by increase of deaths but by diminution of births. In 
 these cases, then, wages do adapt themselves to the price 
 of food, though after an interval of almost a generation. 1 
 If wages were previously so high that they could bear reduc- 
 tion, to which the obstacle was a high standard of comfort 
 habitual among the laborers, a rise of the price of food, or 
 any other disadvantageous change in their circumstances, 
 may operate in two ways : (a) it may correct itself by a rise 
 of wages, brought about through a gradual effect on the pru- 
 dential check to population ; or (h) it may permanently lower 
 the standard of living of the class, in case their previous 
 habits in respect of population prove stronger than their 
 previous habits in respect of comfort. In that case the in- 
 jury done to them will be permanent, and their deteriorated 
 condition will become a new minimum, tending to perpetu- 
 
 1 This proposition needs to be kept in mind for the future discussion of the 
 cost of production of food and its relation to cost of labor. Book II, Chap. V, 
 
 §8. 
 
WAGES. 
 
 187 
 
 ate itself as the more ample minimum did before. It is to 
 be feared that, of the two modes in which the cause may 
 operate, the last (b) is the most frequent, or at all events suffi- 
 ciently so to render all propositions, ascribing a self-repair- 
 ing quality to the calamities which befall the laboring-classes, 
 practically of no validity. 
 
 The converse case occurs when, by improvements in agri- 
 culture, the repeal of corn laws, or other such causes, the 
 necessaries of the laborers are cheapened, and they are enabled 
 with the same [money] wages to command greater comforts 
 than before. Wages will not fall immediately : it is even 
 possible that they may rise ; but they will fall at last, so as 
 to leave the laborers no better off than before, unless during 
 this interval of prosperity the standard of comfort regarded 
 as indispensable by the class is permanently raised. Unfor- 
 tunately this salutary effect is by no means to be counted 
 upon : it is a much more difficult thing to raise, than to 
 lower, the scale of living which the laborers will consider as 
 more indispensable than marrying and having a family. 
 According to all experience, a great increase invariably takes 
 place in the number of marriages in seasons of cheap food 
 and full employment. 
 
 This is to be seen by some brief statistics of marriages in 
 Vermont and Massachusetts. 
 
 
 1860. 
 
 1861. 
 
 1863. 
 
 1863. 
 
 1864. 1865. 
 
 1866. 
 
 1867. 
 
 Massachusetts . . . 
 
 2,179 
 12,404 
 
 2,1S8 
 10,972 
 
 1,962 
 
 11,014 
 
 2,007 
 10,873 
 
 1,804 1 2,569 
 12,513 |l3,052 
 
 3,001 
 14,428 
 
 2,857 
 14,451 
 
 In Vermont, while the average number of marriages was 
 reached in 1860 and 1861, it fell off on the breaking out of the 
 war ; rose in 1863, under the fair progress of the Northern 
 
 arms ; again fell off in 1864, during 
 the period of discouragement ; and 
 since 1865 has kept a regularly 
 higher average. In manufacturing 
 Massachusetts the number fell ear- 
 lier than in agricultural Vermont, 
 at the beginning of the difficulties. 
 The effects of the financial panic of 1857, in Massachusetts, 
 
 1856 
 
 July to Jan.. . 
 
 . 6,418 
 
 1857 
 
 Jan. to July. . 
 
 . .5,808 
 
 (i 
 
 
 . .5,936 
 
 1858 
 
 Jan. to July. . 
 
 ..4,917 
 
 
 
 5,610 
 
188 DISTRIBUTION. 
 
 show a similar movement in the number of marriages. The 
 crisis came in October, 1857. In the three months following 
 that date there were 400 less marriages. 
 
 To produce permanent advantage, the temporary cause 
 operating upon them must be sufficient to make a great change 
 in their condition — a change such as will be felt for many- 
 years, notwithstanding any stimulus which it may give dur- 
 ing one generation to the increase of people. When, indeed, 
 the improvement is of this signal character, and a generation 
 grows up which has always been used to an improved scale 
 of comfort, the habits of this new generation in respect to 
 population become formed upon a higher minimum, and the 
 improvement in their condition becomes permanent. 
 , § 4. Wages depend, then, on the proportion between the 
 number of the laboring population and the capital or other 
 funds devoted to the purchase of labor; we will say, for 
 shortness, the capital. If wages are higher at one time or 
 place than at another, if the subsistence and comfort of the 
 class of hired laborers are more ample, it is for no other 
 reason than because capital bears a greater proportion to 
 population. It is not the absolute amount of accumulation 
 or of production that is of importance to the laboring-class ; 
 it is not the amount even of the funds destined for distribu- 
 tion among the laborers ; it is the proportion between those 
 funds and the numbers among whom they are shared. The 
 condition of the class can be bettered in no other way than 
 by altering that proportion to their advantage : and every 
 scheme for their benefit which does not proceed on this as its 
 foundation is, for all permanent purposes, a delusion. 
 
 In countries like North America and the Australian colo- 
 nies, where the knowledge and arts of civilized life and a 
 high effective desire of accumulation coexist with a bound- 
 less extent of unoccupied land, the growth of capital easily 
 keeps pace with the utmost possible increase of population, 
 and is chiefly retarded by the impracticability of obtaining 
 laborers enough. All, therefore, who can possibly be born 
 can find employment without overstocking the market : every 
 
WAGES. 189 
 
 laboring family enjoys in abundance the necessaries, many 
 of the comforts, and some of the luxuries of life ; and, un- 
 less in case of individual misconduct, or actual inability to 
 work, poverty does not, and dependence need not, exist. 
 [In England] so gigantic has been the progress of the cotton 
 manufacture since the inventions of Watt and Arkwright, 
 that the capital engaged in it has probably quadrupled in the 
 time which population requires for doubling. "While, there- 
 fore, it has attracted from other employments nearly all the 
 hands which geographical circumstances and the habits or 
 inclinations of the people rendered available ; and while the 
 demand it created for infant labor has enlisted the immediate 
 pecuniary interest of the operatives in favor of promoting, 
 instead of restraining, the increase of population ; neverthe- 
 less wages in the great seats of the manufacture are still so 
 high that the collective earnings of a family amount, on an 
 average of years, to a very satisfactory sum ; and there is as 
 yet no sign of decrease, while the effect has also been felt 
 in raising the general standard of agricultural wages in the 
 counties adjoining. 
 
 But those circumstances of a country, or of an occupa- 
 tion, in which population can with impunity increase at its 
 utmost rate, are rare and transitory. Yery few are the coun- 
 tries presenting the needful union of conditions. Either the 
 industrial arts are backward and stationary, and capital there- 
 fore increases slowly, or, the effective desire of accumulation 
 being low, the increase soon reaches its limit ; or, even though 
 both these elements are at their highest known degree, the 
 increase of capital is checked, because there is not fresh land 
 to be resorted to of as good quality as that already occupied. 
 Though capital should for a time double itself simultaneous- 
 ly with population, if all this capital and population are to 
 find employment on the same land, they can not, without 
 an unexampled succession of agricultural inventions, continue 
 doubling the produce ; therefore, if wages do not fall, profits 
 must ; and, when profits fall, increase of capital is slackened. 
 
 Except, therefore, in the very peculiar cases which I have 
 
190 DISTRIBUTION. 
 
 just noticed, of which the only one of any practical impor- 
 tance is that of a new colony, or a country in circumstances 
 equivalent to it, it is impossible that population should in- 
 crease at its utmost rate without lowering wages. In no old 
 country does population increase at anything like its utmost 
 rate ; in most, at a very moderate rate : in some countries, 
 not at all. These facts are only to be accounted for in two 
 ways. Either the whole number of births which nature 
 admits of, and which happen in some circumstances, do not 
 take place ; or, if they do, a large proportion of those who 
 are born, die. The retardation of increase results either from 
 mortality or prudence ; from Mr. Malthus's positive, or from 
 his preventive check : and one or the other of these must 
 and does exist, and very powerfully too, in all old societies. 
 Wherever population is not kept down by the prudence 
 either of individuals or of the state, it is kept down by star- 
 vation or disease. 
 
 § 5. Where a laboring-class who have no property but 
 their daily wages, and no hope of acquiring it, refrain from 
 over-rapid multiplication, the cause, I believe, has always 
 hitherto been, either actual legal restraint, or a custom of 
 some sort which, without intention on their part, insensibly 
 molds their conduct, or affords immediate inducements not 
 to marry. It is not generally known in how many countries 
 of Europe direct legal obstacles are opposed to improvident 
 marriages. 
 
 Where there is no general law restrictive of marriage, 
 there are often customs equivalent to it. When the guilds 
 or trade corporations of the middle ages were in vigor, their 
 by-laws or regulations were conceived with a very vigilant 
 eye to the advantage which the trade derived from limiting 
 competition ; and they made it very effectually the interest 
 of artisans not to marry until after passing through the two 
 stages of apprentice and journeyman, and attaining the rank 
 of master. 
 
 Unhappily, sentimentality rather than common sense 
 usually presides over the discussions of these subjects. Dis- 
 
WAGES. 191 
 
 (Missions on the condition of the laborers, lamentations over 
 its wretchedness, denunciations of all who are supposed to 
 be indifferent to it, projects of one kind or another for im- 
 proving it, were in no country and in no time of the world 
 so rife as in the present generation; but there is a tacit 
 agreement to ignore totally the law of wages, or to dismiss 
 it in a parenthesis, with such terms as " hard-hearted Mal- 
 thusianism " ; as if it were not a thousand times more hard- 
 hearted to tell human beings that they may, than that they 
 may not, call into existence swarms of creatures who are 
 sure to be miserable, and most likely to be depraved ! 
 
 I ask, then, is it true or not, that if their numbers were 
 fewer they would obtain higher wages ? This is the ques- 
 tion, and no other : and it is idle to divert attention from it, 
 by attacking any incidental position of Malthus or some 
 » other writer, and pretending that to refute that is to dis- 
 prove the principle of population. Some, for instance, have 
 achieved an easy victory over a passing remark of Mr. Mal- 
 thus, hazarded chiefly by way of illustration, that the increase 
 of food may perhaps be assumed to take place in an arith- 
 metical ratio, while population increases in a geometrical : 
 when every candid reader knows that Mr. Malthus laid no 
 stress on this unlucky attempt to give numerical precision to 
 things which do not admit of it, and every person capable 
 of reasoning must see that it is wholly superfluous to his 
 argument. Others have attached immense importance to 
 a correction which more recent political economists have 
 made in the mere language of the earlier followers of Mr. 
 Malthus. Several writers had said that it is the tendency 
 of population to increase faster than the means of subsist- 
 ence. The assertion was true in the sense in which they 
 meant it, namely, that population would in most circum- 
 stances increase faster than the means of subsistence, if it 
 were not checked either by mortality or by prudence. But 
 inasmuch as these checks act with unequal force at different 
 times and places, it was possible to interpret the language of 
 these writers as if they had meant that population is usually 
 
192 DISTRIBUTION. 
 
 gaining ground upon subsistence, and the poverty of the 
 people becoming greater. Under this interpretation of their 
 meaning, it was urged that the reverse is the truth : that as 
 civilization advances, the prudential check tends to become 
 stronger, and population to slacken its rate of increase, rela- 
 tively to subsistence ; and that it is an error to maintain 
 that population, in any improving community, tends to in- 
 crease faster than, or even so fast as, subsistence. 1 The word 
 tendency 2 is here used in a totally different sense from that 
 of the writers who affirmed the proposition ; but waiving the 
 verbal question, is it not allowed, on both sides, that in old 
 countries population presses too closely upon the means of 
 subsistence ? 
 
 1 Mr. Carey takes this ground. 
 
 a See the explanation of an economic law, Book II, Chap. II, § 1. 
 
CHAPTER III. 
 
 OF REMEDIES FOE LOW WAGES. 
 
 § 1. The simplest expedient which can be imagined for 
 keeping the wages of labor up to the desirable point would 
 be to fix them by law ; and this is virtually the object aimed 
 at in a variety of plans which have at different times been, 
 or still are, current, for remodeling the relation between 
 laborers and employers. No one, probably, ever suggested 
 that wages should be absolutely fixed, since the interests of 
 all concerned often require that they should be variable ; but 
 some have proposed to fix a minimum of wages, leaving the 
 variations above that point to be adjusted by competition. 
 Another plan, which has found many advocates among the 
 leaders of the operatives, is that councils should be formed, 
 which in England have been called local boards of trade, in 
 France " conseils de prud'hommes," and other names ; con- 
 sisting of delegates from the work-people and from the em- 
 ployers, who, meeting in conference, should agree upon a 
 rate of wages, and promulgate it from authority, to be bind- 
 ing generally on employers and workmen ; the ground of 
 decision being, not the state of the labor market, but natural 
 equity ; to provide that the workmen shall have reasonable 
 wages, and the capitalist reasonable profits. 
 
 The one expedient most suggested by politicians and labor- 
 reformers in the United States is anfeight-hour law, mandatory 
 upon all employers. It is to be remembered, however, that in 
 very many industries piece-work exists, and if a diminution of 
 hours is enforced, that will mean a serious reduction in the 
 amount of wages which can be possibly earned in a day. 
 
 13 
 
194 DISTRIBUTION. 
 
 Even if all industries were alike in the matter of arranging 
 their work, this plan means higher wages for the same work, 
 or the same wages for less work, and so an increased cost of 
 labor. This would, then, take its effect on profits at once ; and 
 the effects would be probably seen in a withdrawal of capital 
 from many industries, where, as now, the profits are very low. 
 It must be recalled, however, that in the United States there 
 has been, under the influence of natural causes, unaided by 
 legislation, a very marked reduction in the hours of labor, ac- 
 companied by an increase of wages. For example, in 1840, 
 Rhode Island operatives in the carding-room of the cotton-mills 
 worked fourteen hours a day for $3.28 a week, while in 1884 
 they work eleven hours and receive $5.40 a week. This result 
 is most probably due to the gain arising from the invention of 
 labor-saving machinery. 
 
 Others again (but these are rather philanthropists inter- 
 esting themselves for the laboring- classes, than the laboring 
 people themselves) are shy of admitting the interference of 
 authority in contracts for labor : they fear that if law inter- 
 vened, it would intervene rashly and ignorantly ; they are 
 convinced that two parties, with opposite interests, attempt- 
 ing to adjust those interests by negotiation through their 
 representatives on principles of equity, when no rule could 
 be laid down to determine what was equitable, would merely 
 exasperate their differences instead of healing them ; but 
 what it is useless to attempt by the legal sanction, these per- 
 sons desire to compass by the moral. Every employer, they 
 think, ought to give sufficient wages ; and if he does it not 
 willingly, should be compelled to it by general opinion ; the 
 test of sufficient wages being their own feelings, or what they 
 suppose to be those of the public. This is, I think, a fair 
 representation of a considerable body of existing opinion on 
 the subject. 
 
 I desire to confine my remarks to the principle involved 
 in all these suggestions, without taking into account practical 
 difficulties, serious as these must at once be seen to be. I 
 shall suppose that by one or other of these contrivances 
 wages could be kept above the point to which they would 
 be brought by competition. This is as much as to say, above 
 the highest rate which can be afforded by the existing capi- 
 
REMEDIES FOR LOW WAGES. 195 
 
 tal consistently with employing all the laborers. For it is a 
 mistake to suppose that competition merely keeps down 
 wages. It is equally the means by which they are kept up. 
 When there are any laborers unemployed, these, unless main- 
 tained by charity, become competitors for hire, and wages 
 fall ; but when all who were out of work have found em- 
 ployment, wages will not, under the freest system of compe- 
 tition, fall lower. There are strange notions afloat concern- 
 ing the nature of competition. Some people seem to imagine 
 that its effect is something indefinite ; that the competition 
 of sellers may lower prices, and the competition of laborers 
 may lower wages, down to zero, or some unassignable mini- 
 mum. Nothing can be more unfounded. Goods can only 
 be lowered in price by competition to the point which calls 
 forth buyers sufficient to take them off ; and wages can only 
 be lowered by competition until room is made to admit all 
 the laborers to a share in the distribution of the wages-fund. 
 If they fell below this point, a portion of capital would re- 
 main unemployed for waut of laborers ; a counter-competi- 
 tion would commence on the side of capitalists, and wages 
 would rise. 
 
 The assumption in the last chapter in regard to competition 
 and custom should be kept in mind in all this reasoning. As 
 a matter of fact, there is not that mobility of labor which in- 
 sures so free an operation of competition that equality of pay- 
 ment always exists. In reality there is no competition at all 
 between the lower grades of laborers and the higher classes of 
 skilled labor. Of course, the tendency is as explained by Mr. 
 Mill, and as time goes on there is a distinctly greater mobility 
 of labor visible. Vast numbers pass from Scandinavia and 
 other countries of Europe to the United States, or from Eng- 
 land to Australia, urged by the desire to go from a community 
 of low to one of higher wages. 
 
 Since, therefore, the rate of wages which results from 
 competition distributes the whole wages-fund among the 
 whole laboring population, if law or opinion succeeds in 
 fixing wages above this rate, some laborers are kept out of 
 employment ; and as it is not the intention of the philan- 
 thropists that these should starve, they must be provided for 
 
196 DISTRIBUTION. 
 
 by a forced increase of the wages-fund — by a compulsory 
 saving. It is nothing to fix a minimum of wages unless 
 there be a provision that work, or wages at least, be found 
 for all who apply for it. This, accordingly, is always part 
 of the scheme, and is consistent with the ideas of more peo- 
 ple than would approve of either a legal or a moral minimum 
 of wages. Popular sentiment looks upon it as the duty of 
 the rich, or of the state, to find employment for all the poor. 
 If the moral influence of opinion does not induce the rich to 
 spare from their consumption enough to set all the poor at 
 work at " reasonable wages," it is supposed to be incumbent 
 on the state to lay on taxes for the purpose, either by local 
 rates or votes of public money. The proportion between 
 labor and the wages-fund would thus be modified to the ad- 
 vantage of the laborers, not by restriction of population, but 
 by an increase of capital. 
 
 § 2. If this claim on society could be limited to the exist- 
 ing generation ; if nothing more were necessary than a com- 
 pulsory accumulation, sufficient to provide permanent em- 
 ployment at ample wages for the existing numbers of the 
 people ; such a proposition would have no more strenuous 
 supporter than myself. Society mainly consists of those who 
 live by bodily labor ; and if society, that is, if the laborers, 
 lend their physical force to protect individuals in the enjoy- 
 ment of superfluities, they are entitled to do so, and have 
 always done so, with the reservation of a power to tax those 
 superfluities for purposes of public utility ; among which 
 purposes the subsistence of the people is the foremost. 
 Since no one is responsible for having been born, no pecun- 
 iary sacrifice is too great to be made by those who have 
 more than enough, for the purpose of securing enough to all 
 persons already in existence. 
 
 But it is another thing altogether when those who have 
 produced and accumulated are called upon to abstain from 
 consuming until they have given food and clothing, not only 
 to all who now exist, but to all whom these or their descend- 
 ants may think fit to call into existence. Such an obliga- 
 
REMEDIES FOR LOW WAGES. 197 
 
 tion acknowledged and acted upon, would suspend all checks, 
 both positive and preventive ; there would be nothing to 
 hinder population from starting forward at its rapidest rate ; 
 and as the natural increase of capital would, at the best, not 
 be more rapid than before, taxation, to make up the growing 
 deficiency, must advance with the same gigantic strides. 
 But let them work ever so efficiently, the increasing popula- 
 tion could not, as we have so often shown, increase the prod- 
 uce proportionally ; the surplus, after all were fed, would 
 bear a less and less proportion to the whole produce and to 
 the population : and the increase of people going on in a con- 
 stant ratio, while the increase of produce went on in a dimin- 
 ishing ratio, the surplus would in time be wholly absorbed ; 
 taxation for the support of the poor would engross the whole 
 income of the country ; the payers and the receivers would 
 be melted down into one mass. 
 
 It would be possible for the state to guarantee employ- 
 ment at ample wages to all who are born. But if it does 
 this, it is bound in self-protection, and for the sake of every 
 purpose for which government exists, to provide that no per- 
 son shall be born without its consent. To give profusely to 
 the people, whether under the name of charity or of employ- 
 ment, without placing them under such influences that pru- 
 dential motives shall act powerfully upon them, is to lavish 
 the means of benefiting mankind without attaining the ob- 
 ject. But remove the regulation of their wages from their 
 own control ; guarantee to them a certain payment, either by 
 law or by the feeding of the community ; and no amount of 
 comfort that you can give them will make either them or 
 their descendants look to their own self-restraint as the prop- 
 er means for preserving them in that state. 
 
 The famous poor-laws of Elizabeth, enacted in 1601, were 
 at first intended to relieve the destitute poor, sick, aged, and 
 impotent, but in their administration a share was given to all 
 who begged it. Employers, of course, found it cheaper to hire 
 labor partly paid for by the parish, and the independent farm- 
 laborer who would not go on the parish found his own wages 
 lowered by this kind of competition. This continued a crying 
 
198 DISTRIBUTION. 
 
 evil until it reached the proportions described by May : " As 
 the cost of pauperism, thus encouraged, was increasing, the 
 poorer rate-payers were themselves reduced to poverty. The 
 soil was ill-cultivated by pauper labor, and its rental consumed 
 by parish rates. In a period of fifty years, the poor-rates were 
 quadrupled, and had reached, in 1833, the enormous amount 
 of £8,600,000. In many parishes they were approaching the 
 annual value of the land itself." ' The old poor-laws were re- 
 pealed, and there went into effect in 1834 the workhouse sys- 
 tem, which, while not denying subsistence to all those born, 
 required that the giving of aid should be made as disagreeable 
 as possible, in order to stimulate among the poor a feeling of 
 repugnance to all aid from the community. This is also the 
 general idea of poor-relief in the United States. 
 
 The cultivation of the principle of self-help in each laborer 
 is certainly the right object at which to aim. In the United 
 States voluntary charitable organizations have associated to- 
 gether, in some cities, in order to scrutinize all cases of pov- 
 erty through a number of visitors in each district, who advise 
 and counsel the unfortunate, but never give money. This sys- 
 tem has been very successful, and, by basing its operations on 
 the principle of self-help, has given the best proof of its right 
 to an increasing influence. 
 
 § 3. Next to the attempts to regulate wages, and provide 
 artificially that all who are willing to work shall receive an 
 adequate price for their labor, we have to consider another 
 class of popular remedies, which do not profess to interfere 
 with freedom of contract ; which leave wages to be fixed by 
 the competition of the market, but, when they are considered 
 insufficient, endeavor by some subsidiary resource to make 
 up to the laborers for the insufficiency. Of this nature was 
 the allowance system. The principle of this scheme being 
 avowedly that of adapting the means of every family to its 
 necessities, it was a natural consequence that more should be 
 given to the married than to the single, and to those who had 
 large families than to those who had not: in fact, an allow- 
 ance was usually granted for every child. It is obvious that 
 this is merely another mode of fixing a minimum of wages. 
 
 There is a rate of wages, either the lowest on which the 
 
 1 " Constitutional History of England," vol. ii, p. 563. See also Nicholls's 
 " History of the Poor Laws," vol. ii, p. 303. 
 
REMEDIES FOR LOW WAGES. 
 
 199 
 
 people can, or the lowest on which they will consent, to live. 
 We will suppose this to be seven shillings a week. Shocked 
 at the wretchedness of this pittance, the parish authorities 
 humanely make it up to ten. But the laborers are accus- 
 tomed to seven, and though they would gladly have more, 
 will live on that (as the fact proves) rather than restrain the 
 instinct of multiplication. Their habits will not be altered 
 for the better by giving them parish pay. Receiving three 
 shillings from the parish, they will be as well off as before, 
 though they should increase sufficiently to bring down wages 
 to four shillings. They will accordingly people down to that 
 point ; or, perhaps, without waiting for an increase of num- 
 bers, there are unemployed laborers enough in the workhouse 
 to produce the effect at once. It is well known that the al- 
 lowance system did practically operate in the mode described, 
 and that under its influence wages sank to a lower rate than 
 had been known in England before. 
 
 The operation of a low standard upon the wages of those in 
 the community who have a higher one, has been seen in the 
 United States to a certain extent by the landing on our shores 
 of Chinese laborers, who maintain a decidedly lower standard 
 of living than either their American or Irish competitors. If 
 they come in such numbers as to retain their lower standard 
 by forming a group by themselves, and are thereby not assimi- 
 lated into the body 
 
 of laborers who have 1870. 
 
 a higher standard of 
 comfort, they can, to 
 the extent of their 
 ability to do work, 
 drive other laborers 
 out of employment. 
 This, moreover, is 
 exactly what was 
 done by the Irish,who 
 drove Americans out 
 of the mills of New England, and who are now being driven 
 out, probably, by the French Canadians, with a standard lower 
 than the Irish. The Chinese come here now without their 
 families, as may be seen by the accompanying diagram, in 
 which the shaded side represents the males on the left, and the 
 unshaded the females on the right, of the perpendicular line. 
 
200 DISTRIBUTION. 
 
 The horizontal lines show the ages, the largest number being 
 about thirty years of age. It will be noted how many come in 
 the prime of life, and how few children and females there are. 
 It need hardly be said that the economic side of a ques- 
 tion is here discussed, which requires for its solution many ethi- 
 cal and political considerations besides. 
 
 § 4. By what means, then, is poverty to be contended 
 against \ How is the evil of low wages to be remedied ? 
 If the expedients usually recommended for the purpose are 
 not adapted to it, can no others be thought of? Is the 
 problem incapable of solution ? Can political economy do 
 nothing, but only object to everything, and demonstrate that 
 nothing can be done % Those who think it hopeless that the 
 laboring - classes should be induced to practice a sufficient 
 degree of prudence in regard to the increase of their fami- 
 lies, because they have hitherto stopped short of that point, 
 show an inability to estimate the ordinary principles of 
 human action. Nothing more would probably be necessary 
 to secure that result, than an opinion generally diffused that 
 it was desirable. 
 
 But let us try to imagine what would happen if the idea 
 became general among the laboring-class that the compe- 
 tition of too great numbers was the principal cause of their 
 poverty. "We are often told that the most thorough percep- 
 tion of the dependence of wages on population will not influ- 
 ence the conduct of a laboring-man, because it is not the 
 children he himself can have that will produce any effect in 
 generally depressing the labor market. True, and it is also 
 true that one soldiers running away will not lose the battle ; 
 accordingly, it is not that consideration which keeps each 
 soldier in his rank : it is the disgrace which naturally and 
 inevitably attends on conduct by any one individual which, 
 if pursued by a majority, everybody can see would be fatal. 
 Men are seldom found to brave the general opinion of their 
 class, unless supported either by some principle higher than 
 regard for opinion, or by some strong body of opinion else- 
 where. 
 
 If the opinion were once generally established among the 
 
REMEDIES FOR LOW WAGES. 201 
 
 laboring - class that their welfare required a due regulation 
 of the numbers of families, the respectable and well-con- 
 ducted of the body would conform to the prescription, and 
 only those would exempt themselves from it who were in 
 the habit of making light of social obligations generally ; 
 and there would be then an evident justification for convert- 
 ing the moral obligation against bringing children into the 
 world, who are a burden to the community, into a legal 
 one ; just as in many other cases of the progress of opinion, 
 the law ends by enforcing against recalcitrant minorities 
 obligations which, to be useful, must be general, and which, 
 from a sense of their utility, a large majority have volunta- 
 rily consented to take upon themselves. 
 
 The dependence of wages on the number of the competi- 
 tors for employment is so far from hard of comprehension, 
 or unintelligible to the laboring-classes, that by great bodies 
 of them it is already recognized and habitually acted on. It 
 is familiar to all trades-unions : every successful combina- 
 tion to keep up wages owes its success to contrivances for 
 restricting the number of competitors ; all skilled trades are 
 anxious to keep down their own numbers, and many impose, 
 or endeavor to impose, as a condition upon employers, that 
 they shall not take more than a prescribed number of appren- 
 tices. There is, of course, a great difference between limit- 
 ing their numbers by excluding other people, and doing the 
 same thing by a restraint imposed on themselves ; but the 
 one as much as the other shows a clear perception of the re- 
 lation between their numbers and their remuneration. The 
 principle is understood in its application to any one employ- 
 ment, but not to the general mass of employment. For this 
 there are several reasons : first, the operation of causes is 
 more easily and distinctly seen in the more circumscribed 
 field ; secondly, skilled artisans are a more intelligent class 
 than ordinary manual laborers ; and the habit of con- 
 cert, and of passing in review their general condition as 
 a trade, keeps up a better understanding of their col- 
 lective interests; thirdly and lastly, they are the most 
 
202 DISTRIBUTION". 
 
 provident, because they are the best off, and have the most 
 to preserve. 
 
 § 5. For the purpose, therefore, of altering the habits of 
 the laboring people, there is need of a twofold action, direct- 
 ed simultaneously upon their intelligence and their poverty. 
 An effective national education of the children of the labor- 
 ing-class is the first thing needful ; and, coincidently with 
 this, a system of measures which shall (as the devolution 
 did in France) extinguish extreme poverty for one whole 
 generation. Without entering into disputable points, it may 
 be asserted without scruple that the aim of all intellectual 
 training for the mass of the people should be to cultivate 
 common sense ; to qualify them for forming a sound practi- 
 cal judgment of the circumstances by which they are sur- 
 rounded. [But] education is not compatible with extreme 
 poverty. It is impossible effectually to teach an indigent 
 population. Toward effecting this object there are two re- 
 sources available, without wrong to any one, without any of 
 the liabilities of mischief attendant on voluntary or legal 
 charity, and not only without weakening, but on the con- 
 trary strengthening, every incentive to industry, and every 
 motive to forethought. 
 
 The first is a great national measure of colonization. I 
 mean, a grant of public money, sufficient to remove at once, 
 and establish in the colonies, a considerable fraction of the 
 youthful agricultural population. It has been shown by 
 others that colonization on an adequate scale might be so 
 conducted as to cost the country nothing, or nothing that 
 would not be certainly repaid ; and that the funds required, 
 even by way of advance, would not be drawn from the capi- 
 tal employed in maintaining labor, bat from that surplus 
 which can not find employment at such profit as constitutes 
 an adequate remuneration for the abstinence of the possessor, 
 and which is therefore sent abroad for investment, or wasted 
 at home in reckless speculations. 
 
 The second resource would be to devote all common 
 land, hereafter brought into cultivation, to raising a class of 
 
REMEDIES FOR LOW WAGES. 203 
 
 small proprietors. What I would propose is, that common 
 land should be divided into sections of five acres or there- 
 about, to be conferred in absolute property on individuals 
 of the laboring-class who would reclaim and bring them into 
 cultivation by their own labor. 
 
 This suggestion works to the same purpose as the proposal 
 that our Government should retain its public lands and aid in 
 the formation of a great number of small farmers, rather than, 
 by huge grants, to foster large holdings in the Western States 
 and Territories. ' 
 
 The preference should be given to such laborers, and 
 there are many of them, as had saved enough to maintain 
 them until their first crop was got in, or whose character 
 was such as to induce some responsible person to advance 
 to them the requisite amount on their personal security. 
 The tools, the manure, and in some cases the subsistence 
 also, might be supplied by the parish, or by the state ; inter- 
 est for the advance, at the rate yielded by the public funds, 
 being laid on as a perpetual quitrent, with power to the 
 peasant to redeem it at any time for a moderate number of 
 years' purchase. These little landed estates might, if it were 
 thought necessary, be indivisible by law ; though, if the plan 
 worked in the manner designed, I should not apprehend any 
 objectionable degree of subdivision. In case of intestacy, 
 and in default of amicable arrangement among the heirs, 
 they might be bought by government at their value, and re- 
 granted to some other laborer who could give security for the 
 price. The desire to possess one of these small properties 
 would probably become, as on the Continent, an inducement 
 to prudence and economy pervading the whole laboring popu- 
 lation ; and that great desideratum among a people of hired 
 laborers would be provided, an intermediate class between 
 them and their employers ; affording them the double ad- 
 vantage of an object for their hopes, and, as there would be 
 good reason to anticipate, an example for their imitation. 
 
 1 For further discussion of the advantages of small holdings, see Book IV, 
 Chap. V, § 2. 
 
204 DISTRIBUTION. 
 
 It would, however, be of little avail that either or both 
 of these measures of relief should be adopted, unless on such 
 a scale as would enable the whole body of hired laborers 
 remaining on the soil to obtain not merely employment, but 
 a large addition to the present wages — such an addition as 
 would enable them to live and bring up their children in a 
 degree of comfort and independence to which they have 
 hitherto been strangers. 
 
CHAPTER IV. 
 
 OF THE DIFFERENCES OF WAGES IN DIFFERENT EMPLOYMENTS. 
 
 § 1. In treating of wages, we have hitherto confined our- 
 selves to the causes which operate on them generally, and 
 en masse ; the laws which govern the remuneration of ordi- 
 nary or average labor, without reference to the existence of 
 different kinds of work which are habitually paid at differ- 
 ent rates, depending in some degree on different laws. "We 
 will now take into consideration these differences, and exam- 
 ine in what manner they affect or are affected by the conclu- 
 sions already established. 
 
 The differences, says [Adam Smith], arise partly "from 
 certain circumstances in the employments themselves, which 
 either really, or at least in the imaginations of men, make 
 up for a small pecuniary gain in some, and counterbalance 
 a great one in others." These circumstances he considers to 
 be : " First, the agreeableness or disagreeableness of the em- 
 ployments themselves ; secondly, the easiness and cheapness, 
 or the difficulty and expense of learning them ; thirdly, the 
 constancy or inconstancy of employment in them ; fourthly, 
 the small or great trust which must be reposed in those who 
 exercise them ; and, fifthly, the probability or improbability 
 of success in them." 
 
 (1.) " The wages of labor vary with the ease or hardship, 
 the cleanliness or dirtiness, the honorableness or dishonor- 
 ableness of the employment. A journeyman blacksmith, 
 though an artificer, seldoms earns so much in twelve hours 
 as a collier, who is only a laborer, does in eight. His work 
 
206 DISTRIBUTION. 
 
 is not quite so dirty, is less dangerous, and is carried on in 
 daylight and above ground. Honor makes a great part of 
 the reward of all honorable professions. In point of pecun- 
 iary gain, all things considered," their recompense is, in his 
 opinion, below the average. " Disgrace has the contrary 
 effect. The trade of a butcher is a brutal and an odious 
 business ; but it is in most places more profitable than the 
 greater part of common trades. The most detestable of all 
 employments, that of the public executioner, is, in propor- 
 tion to the quantity of work done, better paid than any com- 
 mon trade whatever." 
 
 (2.) " Employment is much more constant," continues 
 Adam Smith, " in some trades than in others. In the great- 
 er part of manufactures, a journeyman may be pretty sure 
 of employment almost every day in the year that he is able 
 to work. A mason or brick-layer, on the contrary, can work 
 neither in hard frost nor in foul weather, and his employ- 
 ment at all other times depends upon the occasional calls of 
 his customers. He is liable, in consequence, to be frequent- 
 ly without any. What he earns, therefore, while he is em- 
 ployed, must not only maintain him while he is idle, but 
 make him some compensation for those anxious and despond- 
 ing moments which the thought of so precarious a situation 
 must sometimes occasion." 
 
 " When (1) the inconstancy of the employment is com- 
 bined with (2) the hardship, disagreeableness, and dirtiness 
 of the work, it sometimes raises the wages of the most com- 
 mon labor above those of the most skillful artificers. A 
 collier working by the piece is supposed, at Newcastle, to 
 earn commonly about double, and in many parts of Scotland 
 about three times, the wages of common labor. His high 
 wages arise altogether from the hardship, disagreeableness, 
 and dirtiness of his work. His employment may, upon most 
 occasions, be as constant as he pleases. The coal-heavers in 
 London exercise a trade which in hardship, dirtiness, and 
 disagreeableness almost equals that of colliers; and from 
 the unavoidable irregularity in the arrivals of coal-ships, the 
 
DIFFERENCES OF WAGES IN DIFFERENT EMPLOYMENTS. 207 
 
 employment of the greater part of them is necessarily very 
 inconstant. If colliers, therefore, commonly earn double and 
 triple the wages of common labor, it ought not to seem un- 
 reasonable that coal-heavers should sometimes earn four or 
 five times those wages. In the inquiry made into their con- 
 dition a few years ago, it was found that, at the rate at which 
 they were then paid, they could earn about four times the 
 wages of common labor in London." 
 
 These inequalities of remuneration, which are supposed 
 to compensate for the disagreeable circumstances of particu- 
 lar employments, would, under certain conditions, be natural 
 consequences of perfectly free competition : and as between 
 employments of about the same grade, and filled by nearly 
 the same description of people, they are, no doubt, for the 
 most part, realized in practice. 
 
 But it is altogether a false view of the state of facts to 
 present this as the relation which generally exists between 
 agreeable and disagreeable employments. The really ex- 
 hausting and the really repulsive labors, instead of being 
 better paid than others, are almost invariably paid the worst 
 of all, because performed by those who have no choice. If 
 the laborers in the aggregate, instead of exceeding, fell short 
 of the amount of employment, work which was generally 
 disliked would not be undertaken, except for more than 
 ordinary wages. But when the supply of labor so far ex- 
 ceeds the demand that to find employment at all is an uncer- 
 tainty, and to be offered it on any terms a favor, the case is 
 totally the reverse. Partly from this cause, and partly from 
 the natural and artificial monopolies, which will be spoken of 
 presently, the inequalities of wages are generally in an oppo- 
 site direction to the equitable principle of compensation, 
 erroneously represented by Adam Smith as the general law 
 of the remuneration of labor. 
 
 (3.) One of the points best illustrated by Adam Smith is 
 the influence exercised on the remuneration of an employ- 
 ment by the uncertainty of success in it. If the chances are 
 great of total failure, the reward in case of success must be 
 
208 DISTRIBUTION. 
 
 sufficient to make up, in the general estimation, for those 
 adverse chances. Put your son apprentice to a shoemaker, 
 there is little doubt of his learning to make a pair of shoes ; 
 but send him to study the law, it is at least twenty to one if 
 ever he makes such proficiency as will enable him to live by 
 the business. In a perfectly fair lottery, those who draw the 
 prizes ought to gain all that is lost by those who draw the 
 blanks. In a profession where twenty fail for one that suc- 
 ceeds, that one ought to gain all that should have been gained 
 by the unsuccessful twenty. How extravagant soever the 
 fees of counselors-at-law may sometimes appear, their real 
 retribution is never equal to this. 
 
 § 2. The preceding are cases in which inequality of 
 remuneration is necessary to produce equality of attractive- 
 ness, and are examples of the equalizing effect of free com- 
 petition. The following are cases of real inequality, and 
 arise from a different principle. 
 
 (4.) " The wages of labor vary according to the small or 
 great trust which must be reposed in the workmen. The 
 wages of goldsmiths and jewelers are everywhere superior 
 to those of many other workmen, not only of equal but of 
 much superior ingenuity, on account of the precious mate- 
 rials with which they are intrusted." The superiority of 
 reward is not here the consequence of competition, but of its 
 absence : not a compensation for disadvantages inherent in 
 the employment, but an extra advantage ; a kind of monopo- 
 ly price, the effect not of a legal, but of what has been termed 
 a natural monopoly. If all laborers were trustworthy, it 
 would not be necessary to give extra pay to working gold- 
 smiths on account of the trust. The degree of integrity re- 
 quired being supposed to be uncommon, those who can make 
 it appear that they possess it are able to take advantage of 
 the peculiarity, and obtain higher pay in proportion to its 
 rarity. 
 
 This same explanation of a natural monopoly applies exact- 
 ly to the causes which give able executive managers, who 
 watch over productive operations, the usually high rewards for 
 
DIFFERENCES OF WAGES IX DIFFERENT EMPLOYMENTS. 209 
 
 labor under the name of "wages of superintendence." If suc- 
 cessful managers of cotton or woolen mills were as plentiful, in 
 proportion to the demand for them, as ordinary artisans, in 
 proportion to the demand for them, then the former would get 
 no higher rewards than the latter. Able executive and busi- 
 ness managers secure high wages solely on the ground — as ex- 
 plained above — of monopoly ; that is, because their numbers, 
 owing to natural causes, are few relatively to the demand for 
 them in every industry in the land. 
 
 (5.) Some employments require a much longer time to 
 learn, and a much more expensive course of instruction, than 
 others ; and to this extent there is, as explained by Adam 
 Smith, an inherent reason for their being more highly remu- 
 nerated. Wages, consequently, must yield, over and above 
 the ordinary amount, an annuity sufficient to repay these 
 sums, with the common rate of profit, within the number of 
 years [the laborer] can expect to live and be in working con- 
 dition. 
 
 But, independently of these or any other artificial mo- 
 nopolies, there is a natural monopoly in favor of skilled 
 laborers against the unskilled, which makes the difference of 
 reward exceed, sometimes in a manifold proportion, what is 
 sufficient merely to equalize their advantages. But the fact 
 that a course of instruction is required, of even a low degree 
 of costliness, or that the laborer must be maintained for a 
 considerable time from other sources, suffices everywhere to 
 exclude the great body of the laboring people from the pos- 
 sibility of any such competition. Until lately, all employ- 
 ments which required even the humble education of reading 
 and writing could be recruited only from a select class, the 
 majority having had no opportunity of acquiring those attain- 
 ments. 
 
 Here is found the germ of the idea, which has been elab- 
 orately worked out by Mr. Cairnes 1 in his theory of non-com- 
 peting groups of laborers : " What we find, in effect, is, not a 
 whole population competing indiscriminately for all occupa- 
 tions, but a series of industrial layers superposed on one an- 
 other, within each of which the various candidates for employ- 
 
 1 " Leading Principles," pp. 64-69. 
 14 
 
210 DISTRIBUTION. 
 
 ment possess a real and effective power of selection, while 
 those occupying the several strata are, for all purposes of 
 effective competition, practically isolated from each other." 
 (Mr. Mill certainly understood this fully, and stated it clearly 
 again in Book III, Chap. II, § 2.) 
 
 The changes, however, now so rapidly taking place in 
 usages and ideas, are undermining all these distinctions ; the 
 habits or disabilities which chained people to their hereditary 
 condition are fast wearing away, and every class is exposed 
 to increased and increasing competition from at least the 
 class immediately below it. The general relaxation of con- 
 ventional barriers, and the increased facilities of education 
 which already are, and will be in a much greater degree, 
 brought within the reach of all, tend to produce, among 
 many excellent effects, one which is the reverse : they tend 
 to bring down the wages of skilled labor. 
 
 § 3. A modifying circumstance still remains to be no- 
 ticed, which interferes to some extent with the operation of 
 the principles thus far brought to view. While it is true, as 
 a general rule, that the earnings of skilled labor, and espe- 
 cially of any labor which requires school education, are at a 
 monopoly rate, from the impossibility, to the mass of the 
 people, of obtaining that education, it is also true that the 
 policy of nations, or the bounty of individuals, formerly did 
 much to counteract the effect of this limitation of competi- 
 tion, by offering eleemosynary instruction to a much larger 
 class of persons than could have obtained the same advan- 
 tages by paying their price. 
 
 [Adam Smith has pointed out that] " whenever the law 
 has attempted to regulate the wages of workmen, it has al- 
 ways been rather to lower them than to raise them. But the 
 law has upon many occasions attempted to raise the wages of 
 curates, and, for the dignity of the Church, to oblige the 
 rectors of parishes to give them more than the wretched 
 maintenance which they themselves might be willing to ac- 
 cept of. And in both cases the law seems to have been 
 equally ineffectual, and has never been either able to raise 
 
DIFFERENCES OF WAGES IN DIFFERENT EMPLOYMENTS. 211 
 
 the wages of curates or to sink those of laborers to the degree 
 that was intended, because it has never been able to hinder 
 either the one from being willing to accept of less than the 
 legal allowance, on account of the indigence of their situa- 
 tion and the multitude of their competitors, or the other 
 from receiving more, on account of the contrary competition 
 of those who expected to derive either profit or pleasure from 
 employing them." 
 
 Although the highest pecuniary prizes of successful au- 
 thorship are incomparably greater than at any former period, 
 yet on any rational calculation of the chances, in the existing 
 competition, scarcely any writer can hope to gain a living by 
 books, and to do so by magazines and reviews becomes daily 
 more difficult. It is only the more troublesome and disagree- 
 able kinds of literary labor, and those which confer no per- 
 sonal celebrity, such as most of those connected with news- 
 papers, or with the smaller periodicals, on which an educated 
 person can now rely for subsistence. Of these, the remuner- 
 ation is, on the whole, decidedly high ; because, though ex- 
 posed to the competition of what used to be called " poor 
 scholars" (persons who have received a learned education 
 from some public or private charity), they are exempt from 
 that of amateurs, those who have other means of support 
 being seldom candidates for such employments. 
 
 AVhen an occupation is carried on chiefly by persons who 
 derive the main portion of their subsistence from other 
 sources, its remuneration may be lower almost to any extent 
 than the wages of equally severe labor in other employ- 
 ments. The principal example of the kind is domestic 
 manufactures. When spinning and knitting were carried on 
 in every cottage, by families deriving their principal support 
 from agriculture, the price at which their produce was sold 
 (which constituted the remuneration of their labor) was often 
 so low that there would have been required great perfection 
 of machinery to undersell it. The amount of the remunera- 
 tion in such a case depends chiefly upon whether the quan- 
 tity of the commodity produced by this description of labor 
 
212 DISTRIBUTION. 
 
 suffices to supply the whole of the demand. If it does not, 
 and there is consequently a necessity for some laborers who 
 devote themselves entirely to the employment, the price of 
 the article must be sufficient to pay those laborers at the ordi- 
 nary rate, and to reward, therefore, very handsomely the do- 
 mestic producers. But if the demand is so limited that the 
 domestic manufacture can do more than satisfy it, the price 
 is naturally kept down to the lowest rate at which peas- 
 ant families think it worth while to continue the production. 
 Thus far, as to the remuneration of the subsidiary employ- 
 ment ; but the effect to the laborers of having this additional 
 resource is almost certain to be (unless peculiar counteract- 
 ing causes intervene) a proportional diminution of the wages 
 of their main occupation. 
 
 For the same reason it is found that, cceteris paribus, 
 those trades are generally the worst paid in which the wife 
 and children of the artisan aid in the work. The income 
 which the habits of the class demand, and down to which 
 they are almost sure to multiply, is made up in those trades 
 by the earnings of the whole family, while in others the 
 same income must be obtained by the labor of the man alone. 
 It is even probable that their collective earnings will amount 
 to a smaller sum than those of the man alone in other trades, 
 because the prudential restraint on marriage is unusually weak 
 when the only consequence immediately felt is an improve- 
 ment of circumstances, the joint earnings of the two going 
 further in their domestic economy after marriage than before. 
 
 This statement seems to be borne out by the statistics of 
 wages 1 both in England and the United States. In our cotton- 
 mills, where women do certain kinds of work equally well with 
 men, the wages of the men are lower than in outside employ- 
 ments into which women can not enter. 
 
 Blacksmiths, per week $16 74 
 
 r. ;] ( Drawers-in, cotton-mill — man, per week $5 50 
 
 of four} " " " woman " 5 50 
 
 oiioui. ' Tenders, two boys 4 50 
 
 Total $15 50 
 
 1 See Young, " Labor in Europe." 
 
DIFFERENCES OF WAGES IN DIFFERENT EMPLOYMENTS. 213 
 
 In this case the family of four all together receive only 
 about the same as the wages of the single blacksmith alone. 
 
 § 4. "Where men and women work at the same employ- 
 ment, if it be one for which they are equally fitted in point 
 of physical power, they are not always unequally paid. 
 Women in factories sometimes earn as much as men ; and 
 so they do in hand-loom weaving, which, being paid by the 
 piece, brings their efficiency to a sure test. When the effi- 
 ciency is equal, but the pay unequal, the only explanation that 
 can be given is custom. But the principal question relates 
 to the peculiar employments of women. The remuneration 
 of these is always, I believe, greatly below that of employ- 
 ments of equal skill and equal disagreeableness carried on 
 by men. In some of these cases the explanation is evidently 
 that already given : as in the case of domestic servants, whose 
 wages, speaking generally, are not determined by competi- 
 tion, but are greatly in excess of the market value of the 
 labor, and in this excess, as in almost all things which are 
 regulated by custom, the male sex obtains by far the largest 
 share. In the occupations in which employers take full ad- 
 vantage of competition, the low wages of women, as com- 
 pared with the ordinary earnings of men, are a proof that 
 the employments are overstocked : that although so much 
 smaller a number of women than of men support them- 
 selves by wages, the occupations which law and usage make 
 accessible to them are comparatively so few that the field of 
 their employment is still more overcrowded. 
 
 Yet within the employments open to women, such as mil- 
 linery and dress-making, certain women are able to charge 
 excessively high prices for work, because, having obtained a 
 reputation for especial skill and taste, they can exact in the 
 hig h prices of their articles what is really their high wages. 
 Within these employments women are unable to earn a living 
 not so much by the lack of work, as by not bringing to their 
 occupation that amount of skill and those business qualities 
 (owing, of course, to their being brought up unaccustomed to 
 business methods) which are requisite for the success of any 
 one, either man or woman. 
 
214 DISTRIBUTION. 
 
 It must be observed that, as matters now stand, a suffi- 
 cient degree of overcrowding may depress the wages of 
 women to a much lower minimum than those of men. The 
 wages, at least of single women, must be equal to their sup- 
 port, but need not be more than equal to it ; the minimum, 
 in their case, is the pittance absolutely requisite for the 
 sustenance of one human being. Now the lowest point 
 to which the most superabundant competition can perma- 
 nently depress the wages of a man is always somewhat more 
 than this. "Where the wife of a laboring-man does not by 
 general custom contribute to his earnings, the man's wages 
 must be at least sufficient to support himself, a wife, and 
 a number of children adequate to keep up the popula- 
 tion, since, if it were less, the population would not be 
 kept up. 
 
 § 5. Thus far we have, throughout this discussion, pro- 
 ceeded on the supposition that competition is free, so far as 
 regards human interference ; being limited only by natural 
 causes, or by the unintended effect of general social circum- 
 stances. But law or custom may interfere to limit competi- 
 tion. If apprentice laws, or the regulations of corporate 
 bodies, make the access to a particular employment slow, 
 costly, or difficult, the wages of that employment may be 
 kept much above their natural proportion to the wages of 
 common labor. In some trades, however, and to some ex- 
 tent, the combinations of workmen produce a similar effect. 
 Those combinations always fail to uphold wages at an arti- 
 ficial rate unless they also limit the number of competitors. 
 Putting aside the atrocities sometimes committed by work- 
 men in the way of personal outrage or intimidation, which 
 can not be too rigidly repressed, if the present state of the 
 general habits of the people were to remain forever unim- 
 proved, these partial combinations, in so far as they do suc- 
 ceed in keeping up the wages of any trade by limiting its 
 numbers, might be looked upon as simply intrenching round 
 a particular spot against the inroads of over-population, and 
 making the wages of the class depend upon their own rate of 
 
DIFFERENCES OF WAGES IN DIFFERENT EMPLOYMENTS. 215 
 
 increase, instead of depending on that of a more reckless and 
 improvident class than themselves. 
 
 To conclude this subject, I must repeat an observation 
 already made, that there are kinds of labor of which the 
 wages are fixed by custom, and not by competition. Such 
 are the fees or charges of professional persons — of physicians, 
 surgeons, barristers, and even attorneys. 
 
CHAPTEK Y. 
 
 OF PROFITS. 
 
 § 1. Having treated of the laborer's share of the produce, 
 we next proceed to the share of the capitalist ; the profits of 
 capital or stock ; the gains of the person who advances the 
 expenses of production — who, from funds in his possession, 
 pays the wages of the laborers, or supports them during the 
 work ; who supplies the requisite buildings, materials, and 
 tools or machinery ; and to whom, by the usual terms of the 
 contract, the produce belongs, to be disposed of at his pleas- 
 ure. After indemnifying him for his outlay, there com- 
 monly remains a surplus, which is his profit ; the net income 
 from his capital [and skill] ; the amount which he can afford 
 to expend in necessaries or pleasures, or from which by fur- 
 ther saving he can add to his wealth. 
 
 As the wages of the laborer are the remuneration of la- 
 bor, so [a part of] the profits of the capitalist are properly, 
 according to Mr. Senior's well-chosen expression, the remu- 
 neration of abstinence. They are what he gains by forbear- 
 ing to consume his capital for his own uses, and allowing it 
 to be consumed by productive laborers for their uses. For 
 this forbearance he requires a recompense. 
 
 Of the gains, however, which the possession of a capital 
 enables a person to make, (1) a part only is properly an 
 equivalent for the use of the capital itself ; namely, as much 
 as a solvent person would be willing to pay for the loan of it. 
 This, which as everybody knows is called interest, is all that 
 a person is enabled to get by merely abstaining from the 
 
PROFITS. 217 
 
 immediate consumption of his capital, and allowing it to be 
 used for productive purposes by others. The remuneration 
 which is obtained in any country for mere abstinence is 
 measured by the current rate of interest on the best security ; 
 such security as precludes any appreciable chance of losing 
 the principal. What a person expects to gain, who superin- 
 tends the employment of his own capital, is always more, and 
 generally much more, than this. The rate of profit greatly 
 exceeds the rate of interest. (2.) The surplus is partly com- 
 pensation for risk. By lending his capital on unexception- 
 able security he runs little or no risk. But if he embarks in 
 business on his own account, he always exposes his capital to 
 some, and in many cases to very great, danger of partial or 
 total loss. For this danger he must be compensated, other- 
 wise he will not incur it. (3.) He must likewise be remuner- 
 ated for the devotion of his time and labor. The control of 
 the operations of industry usually belongs to the person who 
 supplies the whole or the greatest part of the funds by which 
 they are carried on, and who, according to the ordinary ar- 
 rangement, is either alone interested, or is the person most 
 interested (at least directly), in the result. To exercise this 
 control with efficiency, if the concern is large and compli- 
 cated, requires great assiduity, and often no ordinary skill. 
 This assiduity and skill must be remunerated. 
 
 The gross profits from capital, the gains returned to those 
 who supply the funds for production, must suffice for these 
 three purposes ; and the three parts into which profit may 
 be considered as resolving itself may be described respect- 
 ively as interest, insurance, and wages of superintendence. 
 
 Inasmuch as risk is the cause affecting the rate of interest, 
 it would be much simpler to consider the whole reward for ab- 
 stinence as interest, the rate of which is affected by the risk ; 
 and to carefully exclude from the profits of capital the payment 
 for " assiduity and skill," which is distinctly wages of labor. 
 The " wages of superintendence," as every one on a moment's 
 reflection must admit, have no necessary connection whatever 
 with the possession of capital. The thing with which the la- 
 borer is occupied does not give the reason for associating his 
 
218 DISTRIBUTION. 
 
 wages with the name of that thing ; because a highly-qualified 
 manager supervises the operations of capital, it does not follow 
 that he has capital, or should be regarded as being paid for the 
 possession of capital. The man who shovels ashes is not paid 
 wages of ashes, any more than a man who superintends other 
 people's capital is paid the reward of capital. The payment 
 for services, in the one case as in the other, depends upon the 
 skill of the manager, just as it does with an ordinary mechanic, 
 rising or falling with his fitness for the peculiar work. Skill 
 as a manager is the cause ; the amount of the remuneration is 
 the consequence. If so, then the wages of superintendence 
 have no logical connection, in the economic sense, with capi- 
 tal as the thing which determines the amount of its reward, 
 any more than it affects the wages of any and all labor. The 
 payment for the use of capital, simply as capital, may be seen 
 by the amount which a widow who is not engaged in active 
 business receives from her property invested as trust funds. 
 Moreover, it is less and less true that the manager of the opera- 
 tions of industry is necessarily the capitalist. To see this, 
 mark the executive managers (called " treasurers " by custom) 
 of cotton and woolen mills, who receive a remuneration entire- 
 ly distinct from any capital they may have invested in the 
 shares of the corporation ; and the officials of the great mutual 
 insurance companies, who receive the wages of managers, but 
 for managing the capital of others. A large — by far the largest 
 — part of what is usually called profit, therefore, should be 
 treated as wages, and the forces which govern its amount are 
 the same as those affecting the amounts of all other kinds of 
 wages, such as are discussed in the preceding chapter. The 
 acknowledgment of this distinction is of extreme importance, 
 and affects, in a profound way, the whole question of distribu- 
 tion. To include "wages of superintendence" in profits of 
 capital is to unnecessarily complicate one of the most serious 
 economic questions — namely, the relations of capital and labor. 
 
 § 2. The lowest rate of profit that can permanently exist 
 is that which is barely adequate, at the given place and time, 
 to afford an equivalent for the abstinence, risk, and exertion 
 implied in the employment of capital. From the gross profit 
 has first to be deducted as much as will form a fund suffi- 
 cient on the average to cover all losses incident to the em- 
 ployment. Next, it must afford such an equivalent to the own- 
 er of the capital for forbearing to consume it as is then and 
 there a sufficient motive to him to persist in his abstinence. 
 How much will be required to form this equivalent depends 
 
PROFITS. 219 
 
 on the comparative value placed, in the given society, upon 
 the present and the future (in the words formerly used) : on 
 the strength of the effective desire of accumulation. Fur- 
 ther, after covering all losses, and remunerating the owner 
 for forbearing to consume, there must be something left to 
 recompense the labor and skill of the person who devotes 
 his time to the business. 
 
 Such, then, is the minimum of profits : but that mini- 
 mum is exceedingly variable, and at some times and places 
 extremely low, on account of the great variableness of two 
 out of its three elements. That the rate of necessary remu- 
 neration for abstinence, or in other words the effective desire 
 of accumulation, differs widely in different states of society 
 and civilization, has been seen in a former chapter. There 
 is a still wider difference in the element which consists in 
 compensation for risk. 
 
 The remuneration of capital in different employments, 
 much more than the remuneration of labor, varies according 
 to the circumstances which render one employment more at- 
 tractive or more repulsive than another. The profits, for ex- 
 ample, of retail trade, in proportion to the capital employed, 
 exceed those of wholesale dealers or manufacturers, for this 
 reason among others, that there is less consideration attached 
 to the employment. The greatest, however, of these differ- 
 ences, is that caused by difference of risk. The profits of a 
 gunpowder-manufacturer must be considerably greater than 
 the average, to make up for the peculiar risks to which he 
 and his property are constantly exposed. When, however, 
 as in the case of marine adventure, the peculiar risks are 
 capable of being, and commonly are, commuted for a fixed 
 payment, the premium of insurance takes its regular place 
 among the charges of production, and the compensation 
 which the owner of the ship or cargo receives for that pay- 
 ment does not appear in the estimate of his profits, but is 
 included in the replacement of his capital. 
 
 The minimum of profits can not properly include wages of 
 superintendence, nor is it so included, practically, in Mr. Mill's 
 
220 DISTRIBUTION. 
 
 discussions on the minimum of profits in a later part of this 
 volume. The operation of the various elements in changing the 
 amount of profits might be expressed as follows : As between 
 different countries and communities, who have a different ef- 
 fective desire of accumulation, profits may vary with the ele- 
 ment of interest and risk ; within the same district, where in- 
 terest is generally the same on the same security, profits may 
 vary with the risk attached to different industries; and, within 
 the same occupations, interest and risk being given, the wages 
 of superintendence may make a greater variation than either 
 of the other two causes — since a skillful manager may make a 
 large return, a poor one none at all. Or between two employ- 
 ments, interest and risk remaining the same, wages of superin- 
 tendence sometimes produce a wide difference. 
 
 The portion, too, of the gross profit, which forms the 
 remuneration for the labor and skill of the dealer or pro- 
 ducer, is very different in different employments. This is 
 the explanation always given of the extraordinary rate of 
 apothecaries' profit. There are cases, again, in which a con- 
 siderable amount of labor and skill is required to conduct a 
 business necessarily of limited extent. In such cases a higher 
 than common rate of profit is necessary to yield only the 
 common rate of remuneration. 
 
 All the natural monopolies (meaning thereby those which 
 are created by circumstances, and not by law) which produce 
 or aggravate the disparities in the remuneration of different 
 kinds of labor, operate similarly between different employ- 
 ments of capital. 
 
 In this passage Mr. Mill points out distinctly that the move- 
 ment up and down in the wages of a manager are governed by 
 the same laws as those which regulate differences in the differ- 
 ent rewards of labor, but yet he connects it improperly with 
 capital. It will be seen that Mr. Mill uses the term "gross 
 profit" on the next page in order to avoid the difficulty, which 
 rises unconsciously in his mind, of the anomalous presence of 
 the wages of the manager in the question of profit. 
 
 § 3. After due allowance is made for these various causes 
 of inequality, namely ^ difference in the risk or agreeable- 
 ness of different employments, and natural or artificial mo- 
 nopolies [which give greater or less wages of superintend- 
 
PROFITS. 221 
 
 ence], the rate of profit on capital in all employments tends 
 to an equality. That portion of profit which is properly 
 interest, and which forms the real remuneration for absti- 
 nence, is strictly the same at the same time and place, what- 
 ever be the employment. The rate of interest, on equally 
 good security, does not vary according to the destination of 
 the principal, though it does vary from time to time very 
 much, according to the circumstances of the market. 
 
 It is far otherwise with gross profit, which, though (as 
 will presently be seen) it does not vary much from employ- 
 ment to employment, varies very greatly from individual to 
 individual, and can scarcely be in any two cases the same. 
 It depends on the knowledge, talents, economy, and energy 
 of the capitalist himself, or of the agents whom he employs ; 
 on the accidents of personal connection ; and even on chance. 
 Hardly any two dealers in the same trade, even if their com- 
 modities are equally good and equally cheap, carry on their 
 business at the same expense, or turn over their capital in 
 the same time. That equal capitals give equal profits, as a 
 general maxim of trade, would be as false as that equal age 
 or size gives equal bodily strength, or that equal reading or 
 experience gives equal knowledge. The effect depends as 
 much upon twenty other things as upon the single cause 
 specified. On an average (whatever may be the occasional 
 fluctuations) the various employments of capital are on such 
 a footing as to hold out, not equal profits, but equal expec- 
 tations of profit, to persons of average abilities and advan- 
 tages. By equal, I mean after making compensation for any 
 inferiority in the agreeableness or safety of an employment. 
 If the case were not so; if there were, evidently, and to 
 common experience, more favorable chances of pecuniary 
 success in one business than in others, more persons would 
 engage their capital in the business. If, on the contrary, a 
 business is not considered thriving ; if the chances of profit 
 in it are thought to be inferior to those in other employ- 
 ments ; capital gradually leaves it, or at least new capital is 
 not attracted to it ; and by this change in the distribution of 
 
222 DISTRIBUTION. 
 
 capital between the less profitable and the more profitable 
 employments, a sort of balance is restored. 
 
 A This may be easily shown by a diagram in 
 
 which the capital in one employment is repre- 
 sented by A B, and which exceeds C D, that in 
 another employment, by the amount of A JB. It 
 q is not necessary that the whole of the excess, 
 A F, should be transferred to C D to make the 
 two capitals equal, but only A JE> which, added 
 to CD, brings CD to an equality with MB. 
 
 This equalizing process, commonly described 
 D as the transfer of capital from one employment 
 to another, is not necessarily the onerous, slow, 
 and almost impracticable operation which it is very often 
 represented to be. In the first place, it does not always 
 imply the actual removal of capital already embarked in an 
 employment. In a rapidly progressive state of capital, the 
 adjustment often takes place by means of the new accumu- 
 lations of each year, which direct themselves in preference 
 toward the more thriving trades. Even when a real trans- 
 fer of capital is necessary, it is by no means implied that any 
 of those who are engaged in the unprofitable employment 
 relinquish business and break up their establishments. The 
 numerous and multifarious channels of credit through which, 
 in commercial nations, unemployed capital diffuses itself over 
 the field of employment, flowing over in greater abundance 
 to the lower levels, are the means by which the equalization 
 is accomplished. The process consists in a limitation by one 
 class of dealers or producers and an extension by the other 
 of that portion of their business which is carried on with bor- 
 rowed capital. 
 
 " Political economists say that capital sets toward the most 
 profitable trades, and that it rapidly leaves the less profitable 
 and non-paying trades. But in ordinary countries this is a slow 
 process, and some persons, who want to have ocular demon- 
 strations of abstract truths, have been inclined to doubt it be- 
 cause they could not see it. The process would be visible 
 enough if you could only see the books of the bill-brokers and 
 the bankers. If the iron- trade ceases to be as profitable as 
 
PROFITS. 223 
 
 usual, less iron is sold ; the fewer the sales the fewer the hills ; 
 and in consequence the number of iron bills [at the banks] is 
 diminished. On the other hand, if, in consequence of a bad 
 harvest, the corn trade becomes on a sudden profitable, imme- 
 diately 'corn bills' are created in large numbers, and, if good, 
 are discounted [at the banks]. Thus capital runs as surely 
 and instantly where it is most wanted, and where there is most 
 to be made of it, as water runs to find its level." * 
 
 In the case of an altogether declining trade, in which it 
 is necessary that the production should be, not occasionally 
 varied, but greatly and permanently diminished, or perhaps 
 stopped altogether, the process of extricating the capital is, 
 no doubt, tardy and difficult, and almost always attended with 
 considerable loss ; much of the capital fixed in machinery, 
 buildings, permanent works, etc., being either not applicable 
 to any other purpose, or only applicable after expensive alter- 
 ations ; and time being seldom given for effecting the change 
 in the mode in which it would be effected with least loss, 
 namely, by not replacing the fixed capital as it wears out. 
 There is besides, in totally changing the destination of a capi- 
 tal, so great a sacrifice of established connection, and of ac- 
 quired skill and experience, that people are always very slow 
 in resolving upon it, and hardly ever do so until long after 
 a change of fortune has become hopeless. 
 
 In general, then, although profits are very different to 
 different individuals, and to the same individual in different 
 years, there can not be much diversity at the same time and 
 place in the average profits of different employments (other 
 than the standing differences necessary to compensate for dif- 
 ference of attractiveness), except for short periods, or when 
 6ome great permanent revulsion has overtaken a particular 
 trade. It is true that, to persons with the same amount of 
 original means, there is more chance of making a large for- 
 tune in some employments than in others. But it would be 
 found that in those same employments bankruptcies also are 
 more frequent, and that the chance of greater success is bal- 
 anced by a greater probability of complete failure. 
 
 1 Walter Bagebot, " Lombard Street," p. 13. 
 
224 DISTRIBUTION. 
 
 § 4. The preceding remarks have, I hope, sufficiently 
 elucidated what is meant by the common phrase, " the ordi- 
 nary rate of profit," and the sense in which, and the limita- 
 tions under which, this ordinary rate has a real existence. It 
 now remains to consider what causes determine its amount. 
 
 The cause of profit is, that labor produces more than is re- 
 quired for its support ; the reason why capital yields a profit 
 is, because food, clothing, materials, and tools last longer than 
 the time which is required to produce them ; so that if a capi- 
 talist supplies a party of laborers with these things, on con- 
 dition of receiving all they produce, they will, in addition to 
 reproducing their own necessaries and instruments, have a 
 portion of their time remaining, to work for the capitalist. 
 "We thus see that profit arises, not from the incident of ex- 
 change, but from the productive power of labor; and the 
 general profit of the country is always what the productive 
 power of labor makes it, whether any exchange takes place 
 or not. I proceed, in expansion of the considerations thus 
 briefly indicated, to exhibit more minutely the mode in which 
 the rate of profit is determined. 
 
 I assume, throughout, the state of things which, where 
 the laborers and capitalists are separate classes, prevails, with 
 few exceptions, universally ; namely, that the capitalist ad- 
 vances the whole expenses, including the entire remunera- 
 tion of the laborer. That he should do so is not a matter of 
 inherent necessity ; the laborer might wait until the produc- 
 tion is complete for all that part of his wages which exceeds 
 mere necessaries, and even for the whole, if he has funds in 
 hand sufficient for his temporary support. But in the latter 
 case the laborer is to that extent really a capitalist, investing 
 capital in the concern, by supplying a portion of the funds 
 necessary for carrying it on ; and even in the former case 
 he may be looked upon in the same light, since, contributing 
 his labor at less than the market price, he may be regarded 
 as lending the difference to his employer, and receiving it 
 back with interest (on whatever principle computed) from 
 the proceeds of the enterprise. 
 
PROFITS. 225 
 
 The capitalist, then, may be assumed to make all the 
 advances and receive all the produce. His profit consists of 
 the excess of the produce above the advances ; his rate of 
 profit is the ratio which that excess bears to the amount 
 advanced. 
 
 For example, if A advances 8,000 bushels of corn to labor- 
 ers in return for 10,000 yards of cloth (and if one bushel of 
 corn sells for the same sum as one yard of cloth), his profit 
 consists of 2,000 yards of cloth. The ratio of the excess, 2,000, 
 to 8,000, the outlay, or 25 per cent, is the rate of profit. It is 
 not the ratio of 2,000 to 10,000. 
 
 But what do the advances consist of ? It is, for the pres- 
 ent, necessary to suppose that the capitalist does not pay 
 any rent ; has not to purchase the use of any appropriated 
 natural agent. The nature of rent, however, we have not 
 yet taken into consideration; and it will hereafter appear 
 that no practical error, on the question we are now examin- 
 ing, is produced by disregarding it. 
 
 If, then, leaving rent out of the question, we inquire in 
 what it is that the advances of the capitalist, for purposes of 
 production, consist, we shall find that they consist of wages 
 of labor. 
 
 A large portion of the expenditure of every capitalist 
 consists in the direct payment of wages. What does not con- 
 sist of this is composed of materials and implements, includ- 
 ing buildings. But materials and implements are produced 
 by labor ; and as our supposed capitalist is not meant to repre- 
 sent a single employment, but to be a type of the productive 
 industry of the whole country, we may suppose that he 
 makes his own tools and raises his own materials. He does 
 this by means of previous advances, which, again, consist 
 wholly of wages. If we suppose him to buy the materials 
 and tools instead of producing them, the case is not altered : 
 he then repays to a previous producer the wages which that 
 previous producer has paid. It is true he repays it to him 
 with a profit ; and, if he had produced the things himself, he 
 himself must have had that profit on this part of his outlay 
 15 
 
226 DISTRIBUTION. 
 
 as well as on every other part. The fact, however, remains, 
 that in the whole process of production, beginning with the 
 materials and tools and ending with the finished product, all 
 the advances have consisted of nothing but wages, except 
 that certain of the capitalists concerned have, for the sake of 
 general convenience, had their share of profit paid to them 
 before the operation was completed. 
 
 This idea may be more clear, perhaps, if we imagine a large 
 corporation, not only making woolen cloth, but owning sheep- 
 ranches, where the raw materials are produced ; the shops 
 where all machinery is made ; and who even produce on their 
 own property all the food, clothing, shelter, and consumption 
 of the laborers employed by them. A line of division may be 
 passed through the returns in all these branches of the indus- 
 try, separating what is wages from what is profit. Then it can 
 be easily imagined that all the returns on one side, represent- 
 ing profits, go to capitalists, no matter whether they are thou- 
 sands in number, or only one capitalist typifying the rest, or a 
 single corporation acting for many small capitalists. 
 
 § 5. It thus appears that the two elements on which, and 
 which alone, the gains of the capitalists depend, are, first, the 
 magnitude of the produce, in other words, the productive 
 power of labor ; and secondly, the proportion of that produce 
 obtained by the laborers themselves ; the ratio which the remu- 
 neration of the laborers bears to the amount they produce. 
 
 We thus arrive at the conclusion of Kicardo and others, 
 that the rate of profits depends upon wages ; rising as wages 
 fall, and falling as wages rise. In adopting, however, this 
 doctrine, I must insist upon making a most necessary altera- 
 tion in its wording. Instead of saying that profits depend 
 on wages, let us say (what Ricardo really meant) that they 
 depend on the cost of labor. 
 
 This is an entirely different question from that concerning 
 the rate of wages before discussed (Book II, Chap. II). That 
 had to do with the amount of the capital which each laborer, 
 on an average, received as real wages, and this average rate 
 was affected by the number of competitors for labor, as com- 
 pared with the existing capital, taking into account the nature 
 of the industries in a country. An increase of population, 
 bringing more laborers to compete for employment, will lower 
 
PROFITS. 227 
 
 the average amount of real wages received by each one ; and a 
 decrease of population will bring about the reverse. The rate of 
 wages, however, now that we are considering the matter from 
 the point of view of the capitalist, is but one of the things to 
 be considered affecting cost of labor. The former question was 
 one as to the distribution of capital ; the latter is one as to the 
 amount by which the total production is greater than the total 
 capital advanced. Since all capital consists of advances to labor, 
 the present inquiry is one in regard to the quantity of advances 
 compared with the quantity returned ; that is, the relation of 
 the total capital to the total production arising from the use of 
 that capital. In the diagram before used (p. 179) the question 
 is not how the contents of circle B are to be distributed, but the 
 relative size of circle B to circle A. In order to produce circle 
 A, it is necessary to advance what is represented by circle B. 
 
 Wages and the cost of labor ; what labor brings in to 
 the laborer and what it costs to the capitalist are ideas 
 quite distinct, and which it is of the utmost importance to 
 keep so. For this purpose it is essential not to designate 
 them, as is almost always done, by the same name. Wages, 
 in public discussions, both oral and printed, being looked 
 upon from the same point of view of the payers, much 
 oftener than from that of the receivers, nothing is more com- 
 mon than to say that wages are high or low, meaning only 
 that the cost of labor [to the capitalist] is high or low. The 
 reverse of this would be oftener the truth : the cost of labor 
 is frequently at its highest where wages are lowest. This 
 may arise from two causes. (1.) In the first place, the labor, 
 though cheap, may be inefficient. 
 
 The facts presented by Mr. Brassey ' very fully illustrate 
 this principle. Although French workmen in their ship-yards 
 receive less wages for the same kind of work than the English 
 workmen in English yards, yet it costs less per ton to build 
 ships in England than in France. The same correspondence 
 between high wages and efficient work was found to be true of 
 railway construction in different parts of the world. With 
 different character, varying amounts of industrial energy, vary- 
 ing intelligence, and endurance, different people do not have 
 the same efficiency of labor. It is ascertained that inefficiency 
 is, as a rule, accompanied by low wages. Even though wages 
 paid for ordinary labor in constructing railways were in India 
 
 1 " Work and Wages." 
 
228 DISTRIBUTION. 
 
 only from nine to twelve cents a day, and in England from 
 seventy-five to eighty-seven cents a day, yet it cost as much to 
 build a mile of railway in India as in England. The English 
 laborer gave a full equivalent for his higher wages. Moreover, 
 while an English weaver tends from two to three times as 
 many looms as his Russian competitor, the workman in the 
 United States, it is said, will tend even more than the English- 
 man. In American sailing-vessels, also, a less number of sailors, 
 relatively to the tonnage, is required than in English sailing- 
 ships. Mr. Brassey, besides, came to the conclusion that the 
 working power, or efficiency, of ordinary English laborers was 
 to the French as five to three. 
 
 (2.) The other cause which renders wages and the cost of 
 labor no real criteria of one another is the varying costliness 
 of the articles which the laborer consumes. If these are 
 cheap, wages, in the sense which is of importance to the 
 laborer, may be high, and yet the cost of labor may be low ; 
 if dear, the laborer may be wretchedly off, though his labor 
 may cost much to the capitalist. This last is the condition 
 of a country over-peopled in relation to its land ; in which, 
 food being dear, the poorness of the laborer's real reward 
 does not prevent labor from costing much to the purchaser, 
 and low wages and low profits coexist. The opposite case 
 is exemplified in the United States of America. The laborer 
 there enjoys a greater abundance of comforts than in any 
 other country of the world, except some of the newest colo- 
 nies ; but owing to the cheap price at which these comforts 
 can be obtained (combined with the great efficiency of the 
 labor), the cost of labor to the capitalist is considerably lower 
 than in Europe. It must be so, since the rate of profit is 
 higher ; as indicated by the rate of interest, which is six per 
 cent at New York when it is three or three and a quarter 
 per cent in London. 
 
 The cost of labor, then, is, in the language of mathemat- 
 ics, a function of three variables : (1) the efficiency of labor ; 
 (2) the wages of labor (meaning thereby the real reward [or 
 real wages] of the laborer) ; and (3) the greater or less cost x 
 
 1 The reader is advised to consider, in connection with this, the former dis- 
 cussion on the relation between wages and the price of food (pp. 185, 186). 
 
PROFITS. 229 
 
 at which the articles composing that real reward can be pro- 
 duced or purchased. It is plain that the cost of labor to the 
 capitalist must be influenced by each of these three circum- 
 stances, and by no others. These, therefore, are also the cir- 
 cumstances which determine the rate of profit ; and it can not 
 be in any way affected except through one or other of them. 
 
 The efficiency of labor, in this connection, is highly impor- 
 tant in its practical aspects, and as affecting the labor ques- 
 tion, because as a function of cost of labor, that is, as an ele- 
 ment affecting the quantity of things advanced to the laborers 
 in comparison with the quantity of things returned to the em- 
 ployer, it includes the whole influence of machinery, labor- 
 saving devices, and the results of invention. The quantity of 
 produce depends, for a given advance, on the kind of machin- 
 ery, the speed with which it is run, and on the general state of 
 the arts and industrial inventions. The extent to which the 
 productive capacity of a single laborer has been increased in 
 the United States has been almost incredible. Instead of 
 weaving cloth by hand, as was done a hundred years ago, 
 " one operative in Lowell, working one year, can produce the 
 cotton fabric needed for the year's supply of 1,500 to 1,800 
 Chinese." Moreover, there is no question as to the fact that 
 no nation in the world compares with ours in the power to in- 
 vent, construct, and manage the most ingenious and compli- 
 cated machinery. The inventive faculty belongs to every class 
 in our country ; and, in studying cost of labor, it must be well 
 borne in mind that the efficiency of American labor, particu- 
 larly as combined with mechanical appliances, is one of the 
 great causes of our enormous production. The result of this, 
 for instance, has been that, without lowering profits, although 
 the price of cloth has been greatly reduced, employers have 
 been able to raise the wages of operatives, and shorten their 
 hours of labor, because machinery has so vastly increased the 
 production for a given outlay. As one of a few facts showing 
 this tendency in the last fifty years, note the following table, 
 taken from the books of the Namquit cotton-mill in Bristol, 
 Rhode Island : 
 
 The hours per week 
 have decreased in the 
 same time from 84 to 66, 
 while the product of the 
 mill in pounds has in- 
 creased 25 per cent. It 
 may be unnecessary, per- 
 haps, to say that these figures represent the current wages in 
 
 KIND OF LABOR. 
 
 1811. 1884. 
 
 Carding-room overseer " 
 
 $3 28 
 4 98 
 4 75 
 7 00 
 
 $5 40 
 6 00 
 6 00 
 
 13 50 
 
230 DISTRIBUTION. 
 
 other mills at the same periods ; and that these facts can be 
 sustained by the records of other mills. 
 
 In its economic effect we must also consider, under effi- 
 ciency, the whole question of natural advantages of soil, cli- 
 mate, and natural resources. Laborers of the same skill, paid 
 the same real wages, of the same cost, will produce a vastly 
 greater amount of wheat in Dakota than in Vermont or Eng- 
 land. This is the chief reason why profits are so high in the 
 United States. In many industries we have very marked natu- 
 ral advantages, which permits a high reward to labor, and yet 
 yields a high profit to the capitalist. This applies not merely 
 to agriculture, but to all the extractive industries, such as the 
 production of petroleum, wood, copper, etc. 
 
 In short, the whole matter of ease and difficulty of produc- 
 tion, of high or low cost of production, taking it in the sense 
 of great or little sacrifice (compare carefully Book III, Chap. 
 II, § 4), comes in under the element of efficiency, in cost of 
 labor. The reader can not be too strongly urged to connect 
 different parts of the economic system together. And the 
 questions of Cost of Labor and Cost of Production are of 
 paramount importance to a proper understanding of political 
 economy. 
 
 « 
 
 If labor generally became more efficient, without being 
 more highly rewarded ; if, without its becoming less effi- 
 cient, its remuneration fell, no increase taking place in the 
 cost of the articles composing that remuneration ; or if those 
 articles became less costly, without the laborers obtaining 
 more of them ; in any one of these three cases, profits would 
 rise. If, on the contrary, labor became less efficient (as it 
 might do from diminished bodily vigor in the people, de- 
 struction of fixed capital, or deteriorated education); or if 
 the laborer obtained a higher remuneration, without any in- 
 creased cheapness in the things composing it ; or if, without 
 his obtaining more, that which he did obtain' became more 
 costly ; profits, in all these cases, would suffer a diminution. 
 And there is no other combination of circumstances in which 
 the general rate of profit of a country, in all employments 
 indifferently, can either fall or rise. 
 
 The connection of profit with the three constituents of cost 
 of labor may probably be better seen by aid of the following 
 illustration ; it being premised that as yet money is not used, 
 
PROFITS. 231 
 
 and that the laborers are paid in the articles which their 
 money wages would have bought had money been used. For 
 simplicity we will suppose that all articles of the laborer's con- 
 sumption are represented by corn. Imagine a large woolen- 
 mill employing 500 men, and paying them in corn ; and suppose 
 that one yard of woolen cloth exchanges for one bushel of corn 
 in the open market. In the beginning, with a given condition 
 of efficiency, suppose that each man produces on an average 
 1,200 yards of cloth, for which he is paid 1,000 bushels of corn: 
 
 500 men, each producing 1,200 yards, give a total product of 600,000 yards. 
 " " paid 1,000 bushels, cause an outlay of . 500,000 " 
 
 Profit . . 100,000 " 
 
 (1.) Now suppose a change increasing the efficiency of la- 
 bor to such an extent that each laborer produces 1,300 instead 
 of 1,200 yards, then the account will stand, if the other ele- 
 ments remain unchanged : 
 
 500 men, each producing 1,300 yards, give a total product of 650,000 yards. 
 " " paid 1,000 bushels, cause an outlay of . 500,000 " 
 
 Profit . . 150,000 " 
 
 (2.) If efficiency and the cost of producing food remain 
 the same as at first, suppose a change to occur which raises 
 the quantity of corn each laborer receives from 1,000 to 1,100, 
 or, as it is called, increases his real wages — then the account 
 will be : 
 
 500 men, each producing 1,200 yards, give a total product of 600,000 yards. 
 " " paid 1,100 bushels, cause an outlay of . 550,000 " 
 
 Profit . . 50,000 " 
 
 (3.) If efficiency and real wages remain the same, suppose 
 such an increase in the cost to the employers of obtaining 
 corn that they are obliged to give one and one tenth yard of 
 their goods for one bushel of corn (1,000 bushels of corn cost- 
 ing them 1,100 yards of cloth), then the statement will read : 
 
 500 men, each producing 1,200 yards, give a total product of 600,000 yards. 
 " " paid 1,000 bushels cause an outlay of . 550,000 " 
 
 Profit . 50,000 
 
CHAPTEE VI. 
 
 OF KENT. 
 
 § 1. The requisites of production being labor, capital, 
 and natural agents, the only person, besides the laborer and 
 the capitalist, whose consent is necessary to production, and 
 who can claim a share of the produce as the price of that 
 consent, is the person who, by the arrangements of society, 
 possesses exclusive power over some natural agent. The 
 land is the principal of the natural agents which are capable 
 of being appropriated, and the consideration paid for its use 
 is called rent. Landed proprietors are the only class, of any 
 numbers or importance, who have a claim to a share in the 
 distribution of the produce, through their ownership of some- 
 thing which neither they nor any one else have produced. 
 If there be any other cases of a similar nature, they will be 
 easily understood, when the nature and laws of rent are 
 comprehended. 
 
 It is at once evident that rent is the effect of a monop- 
 oly. The reason why land-owners are able to require rent 
 for their land is, that it is a commodity which many want, 
 and which no one can obtain but from them. If all the land 
 of the country belonged to one person, he could fix the rent 
 at his pleasure. This case, however, is nowhere known to 
 exist; and the only remaining supposition is that of free 
 competition ; the land-owners being supposed to be, as in 
 fact they are, too numerous to combine. 
 
 The ratio of the land to the cultivators is that which limits 
 the quantity of land. It is very desirable to keep the connec- 
 
RENT. 233 
 
 tion of one part of the subject with another wherever possible. 
 " Agricultural rent, as it actually exists," says Mr. Cairnes, 1 
 truly, " is not a consequence of the monopoly of the soil, but 
 of its diminishing productiveness." The doctrine of rent de- 
 pends upon the law of diminishing returns ; and it is only by 
 the pressure of population upon land that the lessened produc- 
 tiveness of land, whether because of poorer qualities or poorer 
 situations, is made apparent. Or, to take things in their natu- 
 ral sequence, an increase of population necessitates more food ; 
 and this implies a resort to more expensive methods, or poorer 
 soils, so soon as land is pushed to the extent that it will not 
 yield an increased crop at the same application of labor and 
 capital as formerly. Different qualities of land, then, being 
 in cultivation at the same time, the better qualities must, of 
 course, yield a greater return than the poorer, and the condi- 
 tions then exist under which land pays rent. Those, therefore, 
 who admit the law of diminishing returns are inevitably led to 
 the doctrine of rent. 
 
 § 2. A thing which is limited in quantity, even though 
 its possessors do not act in concert, is still a monopolized 
 article. But even when monopolized, a thing which is the 
 gift of nature, and requires no labor or outlay as the con- 
 dition of its existence, will, if there be competition among 
 the holders of it, command a price only if it exist in less 
 quantity than the demand. 
 
 If the whole land of a country were required for cultiva- 
 tion, all of it might yield a rent. But in no country of any 
 extent do the wants of the population require that all the 
 land, which is capable of cultivation, should be cultivated. 
 The food and other agricultural produce which the people 
 need, and which they are willing and able to pay for at a 
 price which remunerates the grower, may always be obtained 
 without cultivating all the laud; sometimes without culti- 
 vating more than a small part of it ; the more fertile lands, 
 or those in the more convenient situations, being of course 
 preferred. There is always, therefore, some land which can 
 not, in existing circumstances, pay any rent ; and no land 
 ever pays rent unless, in point of fertility or situation, it 
 belongs to those superior kinds which exist in less quantity 
 
 1 " Logical Method," p. 206. 
 
234 DISTRIBUTION. 
 
 than the demand — which can not be made to yield all the 
 produce required for the community, unless on terms still 
 less advantageous than the resort to less favored soils. (1.) 
 The worst land which can be cultivated as a means of sub- 
 sistence is that which will just replace the seed and the food 
 of the laborers employed on it, together with what Dr. Chal- 
 mers calls their secondaries ; that is, the laborers required 
 for supplying them with tools, and with the remaining neces- 
 saries of life. Whether any given land is capable of doing 
 more than this is not a question of political economy, but of 
 physical fact. The supposition leaves nothing for profits, 
 nor anything for the laborers except necessaries : the land, 
 therefore, can only be cultivated by the laborers themselves, 
 or else at a pecuniary loss ; and, a fortiori, can not in any 
 contingency afford a rent. (2.) The worst land which can be 
 cultivated as an investment for capital is that which, after 
 replacing the seed, not only feeds the agricultural laborers 
 and their secondaries, but affords them the current rate of 
 wages, which may extend to much more than mere necessa- 
 ries, and leaves, for those who have advanced the wages of 
 these two classes of laborers, a surplus equal to the profit 
 they could have expected from any other employment of 
 their capital. (3.) "Whether any given land can do more than 
 this is not merely a physical question, but depends partly 
 on the market value of agricultural produce. What the 
 land can do for the laborers and for the capitalist, beyond 
 feeding all whom it directly or indirectly employs, of course 
 depends upon what the remainder of the produce can be 
 sold for. The higher the market value of produce, the 
 lower are the soils to which cultivation can descend, consist- 
 ently with affording to the capital employed the ordinary 
 rate of profit. 
 
 As, however, differences of fertility slide into one an- 
 other by insensible gradations; and differences of accessi- 
 bility, that is, of distance from markets do the same ; and 
 since there is land so barren that it could not pay for its 
 cultivation at any price; it is evident that, whatever the 
 
RENT. 235 
 
 price may be, there must in any extensive region be some 
 land which at that price will just pay the wages of the cul- 
 tivators, and yield to the capital employed the ordinary 
 profit, and no more. Until, therefore, the price rises higher, 
 or until some improvement raises that particular land to a 
 higher place in the scale of fertility, it can not pay any rent. 
 It is evident, however, that the community needs the prod- 
 uce of this quality of land ; since, if the lands more fertile 
 or better situated than it could have sufficed to supply the 
 wants of society, the price would not have risen so high as 
 to render its cultivation profitable. This land, therefore, 
 will be cultivated ; and we may lay it down as a principle 
 that, so long as any of the land of a country which is fit for 
 cultivation, and not withheld from it by legal or other fac- 
 titious obstacles, is not cultivated, the worst land in actual 
 cultivation (in point of fertility and situation together) pays 
 no rent. 
 
 § 3. If, then, of the land in cultivation, the part which 
 yields least return to the labor and capital employed on it 
 gives only the ordinary profit of capital, without leaving 
 anything for rent, a standard [i. e., the " margin of cultiva- 
 tion " ] is afforded for estimating the amount of rent which 
 will be yielded by all other land. Any land yields just as 
 much more than the ordinaiy profits of stock as it yields 
 more than what is returned by the worst land in cultivation. 
 The surplus is what the farmer can afford to pay as rent to 
 the landlord ; and since, if he did not so pay it, he would 
 receive more than the ordinary rate of profit, the competi- 
 tion of other capitalists, that competition which equalizes 
 the profits of different capitals, will enable the landlord to 
 appropriate it. The rent, therefore, which any land will 
 yield, is the excess of its produce, beyond what would be 
 returned to the same capital if employed on the worst land 
 in cultivation. 
 
 It has been denied that there can be any land in cultiva- 
 tion which pays no rent, because landlords (it is contended) 
 would not allow their land to be occupied without payment. 
 
236 DISTRIBUTION. 
 
 Inferior land, however, does not usually occupy, without 
 interruption, many square miles of ground ; it is dispersed 
 here and there, with patches of better land intermixed, and 
 the same person who rents the better land obtains along 
 with it the inferior soils which alternate with it. He pays 
 a rent, nominally for the whole farm, but calculated on the 
 produce of those parts alone (however small a portion of 
 the whole) which are capable of returning more than the 
 common rate of profit. It is thus scientifically true that 
 the remaining parts pay no rent. 
 
 This point seems to need some illustration. Suppose that 
 all the lands in a community are of five different grades of 
 productiveness. When the price of agricultural produce was 
 such that grades one, two, and three all came into cultivation, 
 lands of poorer quality would not be cultivated. When a man 
 rents a farm, he always gets land of varying degrees of fertil- 
 ity within its limits. Now, in determining what he ought to 
 pay as rent, the farmer will agree to give that which will still 
 leave him a profit on his working capital ; if in his fields he 
 finds land which would not enter into the question of rental, 
 because it did not yield more than the profit on working it, 
 after he rented the farm he would find it to his interest to cul- 
 tivate it, simply because it yielded him a profit, and because 
 he was not obliged to pay rent upon it ; if required to pay rent 
 for it, he would lose the ordinary rate of profit, would have no 
 reason for cultivating it, of course, and would throw it out of 
 cultivation. Moreover, suppose that lands down to grade three 
 paid rent when A took the farm ; now, if the price of produce 
 rises slightly, grade four may pay something, but possibly not 
 enough to warrant any rent going to a landlord. A will put 
 capital on it for this return, but certainly not until the price 
 warrants it ; that is, not until the price will return him at least 
 the cost of working the land, plus the profit on his outlay. But 
 the community needed this land, or the price would not have 
 gone up to the point which makes possible its cultivation even 
 for a profit, without rent. There must always be somewhere 
 some land affected in just this way. 
 
 § 4. Let us, however, suppose that there were a validity 
 in this objection, which can by no means be conceded to it ; 
 that, when the demand of the community had forced up food 
 to such a price as would remunerate the expense of produc- 
 ing it from a certain quality of soil, it happened nevertheless 
 
RENT. 237 
 
 that all the soil of that quality was withheld from cultivation, 
 the increase of produce, which the wants of society required, 
 would for the time be obtained wholly (as it always is partial- 
 ly), not by an extension of cultivation, but by an increased 
 application of labor and capital to land already cultivated. 
 
 Now we have already seen that this increased application 
 of capital, other things being unaltered, is always attended 
 with a smaller proportional return. The rise of price enables 
 measures to be taken for increasing the produce, which could 
 not have been taken with profit at the previous price. The 
 farmer uses more expensive manures, or manures land which 
 he formerly left to nature ; or procures lime or marl from a 
 distance, as a dressing for the soil ; or pulverizes or weeds 
 it more thoroughly ; or drains, irrigates, or subsoils portions 
 of it, which at former prices would not have paid the cost 
 of the operation ; and so forth. The farmer or improver 
 will only consider whether the outlay he makes for the pur- 
 pose will be returned to him with the ordinary profit, and 
 not whether any surplus will remain for rent. Even, there- 
 fore, if it were the fact that there is never any land taken 
 into cultivation, for which rent, and that too of an amount 
 worth taking into consideration, was not paid, it would be 
 true, nevertheless, that there is always some agricultural 
 capital which pays no rent, because it returns nothing be- 
 yond the ordinary rate of profit : this capital being the por- 
 tion of capital last applied — that to which the last addition 
 to the produce was due ; or (to express the essentials of the 
 case in one phrase) that which is applied in the least favor- 
 able circumstances. But the same amount of demand and 
 the same price, which enable this least productive portion of 
 capital barely to replace itself with the ordinary profit, en- 
 able every other portion to yield a surplus proportioned to 
 the advantage it possesses. And this surplus it is which 
 competition enables the landlord to appropriate. 
 
 If land were all occupied, and of only one grade, the first 
 installment of labor and capital produced, we will say, twenty 
 bushels of wheat ; when the price of wheat rose, and it became 
 
238 DISTRIBUTION. 
 
 profitable to resort to greater expense on the soil, a second in- 
 stallment of the same amount of labor and capital when applied, 
 however, only yielded fifteen bushels more; a third, ten bushels 
 more; and a fourth, five bushels more. The soil now gives fifty 
 bushels only under the highest pressure. But, if it was profit- 
 able to invest the same installment of labor and capital simply 
 for the five bushels that at first had received a return of twenty 
 bushels, the price must have gone up so that five bushels should 
 sell for as much as the twenty did formerly ; so, mutatis mu- 
 tandis, of installments second and third. So that if the demand 
 is such as to require all of the fifty bushels, the agricultural 
 capital which produced the five bushels will be the standard 
 according to which the rent of the capital, which grew twenty, 
 fifteen, and ten bushels respectively, is measured. The prin- 
 ciple is exactly the same as if equal installments of capital and 
 labor were invested on four different grades of land returning 
 twenty, fifteen, ten, and five bushels for each installment. Or, 
 as if in the table on page 240, A, B, C, and D each represented 
 different installments of the same amount of labor and capital 
 put upon the same spot of ground, instead of being, as there, 
 put upon different grades of land. 
 
 The rent of all land is measured by the excess of the re- 
 turn to the whole capital employed on it above what is neces- 
 sary to replace the capital with the ordinary rate of profit, 
 or, in other words, above what the same capital would yield 
 if it were all employed in as disadvantageous circumstances 
 as the least productive portion of it : whether that least pro- 
 ductive portion of capital is rendered so by being employed 
 on the worst soil, or by being expended in extorting more 
 produce from land which already yielded as much as it could 
 be made to part with on easier terms. 
 
 It will be true that the farmer requires the ordinary rate 
 of profit on the whole of his capital ; that whatever it returns 
 to him beyond this he is obliged to pay to the landlord, but 
 will not consent to pay more ; that there is a portion of capi- 
 tal applied to agriculture in such circumstances of produc- 
 tiveness as to yield only the ordinary profits ; and that the 
 difference between the produce of this and of any other capi- 
 tal of similar ampunt is the measure of the tribute which that 
 other capital can and will pay, under the name of rent, to 
 the landlord. This constitutes » law of rent, as near the 
 
RENT. 239 
 
 truth as such a law can possibly be ; though of course modi- 
 fied or disturbed, in individual cases, by pending contracts, 
 individual miscalculations, the influence of habit, and even 
 the particular feelings and dispositions of the persons con- 
 cerned. 
 
 The law of rent, in the economic sense, operates in the 
 United States as truly as elsewhere, although there is no sepa- 
 rate class of landlords here. With us, almost all land is owned 
 by the cultivator ; so that two functions, those of the landlord 
 and farmer, are, both united in one person. Although one pay- 
 ment is made, it is still just as distinctly made up of two parts, 
 one of which is a payment to the owner for the superior quality 
 of his soil, and the other a payment (to the same person, if the 
 owner is the cultivator) of profit on the farmer's working capi- 
 tal. Land which in the United States will only return enough 
 to pay a profit on this capital can not pay any rent. And land 
 which can pay more than a profit on this working capital, re- 
 turns that excess as rent, even if the farmer is also the owner 
 and landlord. The principle which regulates the amount of 
 that excess — which is the essential point — is the principle which 
 determines the amount of economic rent, and it holds true in 
 the United States or Finland, provided only that different 
 grades of land are called into cultivation. The governing 
 principle is the same, no matter whether a payment is made to 
 one man as profit and to another as rent, or whether the two 
 payments are made to the same man in two capacities. It has 
 been urged that the law of rent does not hold in the United 
 States, because "the price of grain and other agricultural prod- 
 uce has not risen in proportion to the increase of our numbers, 
 as it ought to have done if Ricardo's theory were true, but has 
 fallen, since 1830, though since that time our population has 
 been more than tripled." ' This overlooks the fact that we 
 have not even yet taken up all our best agricultural lands, so 
 that for some products the law of diminishing productiveness 
 has not yet shown itself. The reason is, that the extension of 
 our railway system has only of late years brought the really 
 good grain-lands into cultivation. The fact that there has been 
 no rise in agricultural products is due to the enormous extent of 
 marvelously fertile grain-lands in the West, and to the cheap- 
 ness of transportation from those districts to the seaboard. 
 
 For a general understanding of the law of rent the follow- 
 ing table will show how, under constant increase of population 
 (represented by four different advances of population, in the 
 
 1 "American Political Economy," p. 164. 
 
240 
 
 DISTRIBUTION. 
 
 first column), first the best and then the poorer lands are 
 brought into cultivation. We will suppose (1) that the most 
 fertile land, A, at first pays no rent ; then (2), when more food 
 is wanted than land A can supply, it will be profitable to till 
 land B, but which, as yet, pays no rent. But if eighteen bush- 
 els are a sufficient return to a given amount of labor and capi- 
 tal, then when an equal amount of labor and capital engaged 
 on A returns twenty-four bushels, six of that are beyond the 
 ordinary profit, and form the rent on land A, and so on; C will 
 next be the line of comparison, and then D ; as the poorer soils 
 are cultivated, the rent of A increases : 
 
 
 A 
 
 B 
 
 C 
 
 D 
 
 Increase 
 
 op 
 Popula- 
 
 24 bushels to the 
 acre. 
 
 18 bushels to the 
 acre. 
 
 12 bushels to the 
 acre. 
 
 6 bushels to the 
 acre. 
 
 tion. 
 
 Total 
 product. 
 
 Kent in 
 bushels. 
 
 Total 
 product. 
 
 Rent in 
 bushels. 
 
 Total 
 product. 
 
 Bent in 
 bushels. 
 
 Total 
 product. 
 
 Eent in 
 bushels. 
 
 I 
 
 II 
 III 
 IV 
 
 24 
 24 
 24 
 24 
 
 
 
 6 
 
 12 
 
 18 
 
 18 
 18 
 18 
 
 6 
 
 S 
 12 
 
 12 
 12 
 
 
 6 
 
 6 
 
 6 
 
 § 5. Under the name of rent, many payments are com- 
 monly included, which are not a remuneration for the origi- 
 nal powers of the land itself, but for capital expended on 
 it. The buildings are as distinct a thing from the farm as 
 the stock or the timber on it ; and what is paid for them can 
 no more be called rent of land than a payment for cattle 
 would be, if it were the custom that the landlord should 
 stock the farm for the tenant. The buildings, like the cattle, 
 are not land, but capital, regularly consumed and reproduced ; 
 and all payments made in consideration for them are prop- 
 erly interest. 
 
 But with regard to capital actually sunk in improvements, 
 and not requiring periodical renewal, but spent once for all 
 in giving the land a permanent increase of productiveness, 
 it appears to me that the return made to such capital loses 
 altogether the character of profits, and is governed by the 
 principles of rent. It is true that a landlord will not expend 
 capital in improving his estate unless he expects from the 
 improvement an increase of income surpassing the interest 
 
RENT. 241 
 
 of his outlay. Prospectively, this increase of income may 
 be regarded as profit ; but, when the expense bas been in- 
 curred and tbe improvement made, the rent of tbe improved 
 land is governed by tbe same rules as that of the unimproved. 
 
 Mr. Carey (as well as Bastiat) bas declared that there is a 
 law of increasing returns from land. He points out that every- 
 thing now existing could be reproduced to-day at a less cost 
 than that involved in its original production, owing to our 
 advance in skill, knowledge, and all the arts of production ; 
 that, for example, it costs less to make an axe now than it did 
 five hundred years ago ; so also with a farm, since a farm of a 
 given amount of productiveness can be brought into cultiva- 
 tion at less cost to-day than that originally spent upon it. 
 The gain of society has, we all admit, been such that we pro- 
 duce almost everything at a less cost now than long ago ; but 
 to class a farm and an axe together overlooks, in the most 
 remarkable way, the fact that land can not be created by labor 
 and capital, while axes can, and that too indefinitely. Nor can 
 the produce from the land be increased indefinitely at a dimin- 
 ishing cost. This is sometimes denied by the appeal to facts : 
 "It can be abundantly proved that, if we take any two periods 
 sufficiently distant to afford a fair test, whether fifty or one 
 hundred or five hundred years, the production of the land 
 relatively to the labor employed upon it has progressively be- 
 come greater and greater." ' But this does not prove that an 
 existing tendency to diminishing returns has not been more 
 than offset by the progress of the arts and improvements. 
 " The advance of a ship against wind and tide is [no] proof 
 that there is no wind and tide." 
 
 In a work entitled " The Past, the Present, and the 
 Future," Mr. Carey takes [a] ground of objection to the 
 Bicardo theory of rent, namely, that in point of historical 
 fact the lands first brought under cultivation are not the 
 most fertile, but the barren lands. " TVe find the settler in- 
 variably occupying the high and thin lands requiring little 
 clearing and no drainage. With the growth of population 
 and wealth, other soils yielding a larger return to labor are 
 always brought into activity, with a constantly increasing 
 return to the labor expended upon them." 
 
 In whatever order the lands come into cultivation, those 
 
 1 Rickards, " Population and Capital," p. 135. 
 16 
 
242 DISTRIBUTION. 
 
 which when cultivated yield the least return, in proportion 
 to the labor required for their culture, will always regulate 
 the price of agricultural produce ; and all other lands will 
 pay a rent simply equivalent to the excess of their produce 
 over this minimum. Whatever unguarded expressions may 
 have been occasionally used in describing the law of rent, 
 these two propositions are all that was ever intended by it. 
 If, indeed, Mr. Carey could show that the return to labor 
 from the land, agricultural skill and science being supposed 
 the same, is not a diminishing return, he would overthrow a 
 principle much more fundamental than any law of rent. 
 Bat in this he has wholly failed. 
 
 Another objection taken against the law of diminishing 
 returns, and so against the law of rent, is that the potential in- 
 crease of food, e. g., of a grain of wheat, is far greater than 
 that of man. 1 No one disputes the fact that one grain of wheat 
 can reproduce itself more times than man, and that too in a 
 geometric increase ; but not without land. A grain of wheat 
 needs land in which it can multiply itself, and this necessary 
 element of its increase is limited ; and it is the very thing 
 which limits the multiplication of the grains of wheat. On 
 the same piece of land, one can not get more than what comes 
 from one act of reproduction in the grain. If one grain pro- 
 duces 100 of its kind, doubling the capital will not repeatedly 
 cause a geometric increase in the ratio of reproduction of each 
 grain on this same land, so that one grain, by one process, pro- 
 duces of its kind 200, 400, 800, or 1,600, because you can not 
 multiply the land in any such ratio as would accompany this 
 potential reduplication of the grain. This objection would not 
 seem worth answering, were it not that it furnishes some diffi- 
 culty to really honest inquirers. 
 
 Others, again, allege as an objection against Ricardo, that 
 if all land were of equal fertility it might still yield a rent. 
 But Ricardo says precisely the same. It is also distinctly a 
 portion of Ricardo's doctrine that, even apart from differ- 
 ences of situation, the land of a country supposed to be of 
 uniform fertility would, all of it, on a certain supposition, 
 pay rent, namely, if the demand of the community required 
 
 1 Rickards, ibid., p. 15. 
 
RENT. 243 
 
 that it should all be cultivated, and cultivated beyond the 
 point at -which a further application of capital begins to be 
 attended with a smaller proportional return. 
 
 This is simply the question, before discussed, whether, if 
 only one class of land were cultivated, some agricultural capi- 
 tal would pay rent or not. It all depends on the fact whether 
 population — and so the demand for food — has increased to the 
 point where it calls out a recognition of the diminishing pro- 
 ductiveness of the soil. In that case different capitals would 
 be invested, so that there would be different returns to the 
 same amount of capital ; and the prior or more advantageous 
 investments of capital on the land would yield more than the 
 ordinary rate of profit, which could be claimed as rent. 
 
 A. L. Perry 1 admits the law of diminishing returns, but 
 holds that, "as land is capital, and as every form of capital 
 may be loaned or rented, and thus become fruitful in the hands 
 of another, the rent of land does not differ essentially in its 
 nature from the rent of buildings in cities, or from the interest 
 of money." Henry George admits Ricardo's law of rent to its 
 full extent, but very curiously says : "Irrespective of the in- 
 crease of population, the effect of improvements in methods of 
 production and exchange is to increase rent. . . . The effect of 
 labor-saving improvements will be to increase the production 
 of wealth. Now, for the production of wealth, two things are 
 required, labor and land. Therefore, the effect of labor-sav- 
 ing improvements will be to extend the demand for land, and, 
 wherever the limit of the quality of land in use is reached, to 
 bring into cultivation lands of less natural productiveness, or 
 to extend cultivation on the same lands to a point of lower 
 natural productiveness. And thus, while the primary effect of 
 labor-saving improvements is to increase the power of labor, 
 the secondary effect is to extend cultivation, and, where this 
 lowers the margin of cultivation, to increase rent."* Francis 
 Bowen s rejects Ricardo's law, and says, "Rent depends, not 
 on the increase, but on the distribution, of the population " — 
 asserting that the existence of large cities and towns deter- 
 mines the amount of rent paid by neighboring land. * 
 
 1 " Political Economy," p. 288. 
 
 8 "Progress and Poverty," pp. 220, 221. 
 
 3 " American Political Economy," p. 164. 
 
 4 For other writers opposed to the doctrine of Rent as maintained by Ricardo 
 and Mill, see Bonamy Price, " Practical Political Economy," chap, x ; McLeod, 
 " Principles of Economic Philosophy," chap, x ; and J. E. T. Rogers, " Manual 
 of Political Economy," chap. xii. 
 
244 DISTRIBUTION. 
 
 § 6. Rent does not really form any part of the expenses 
 of [agricultural] production, or of the advances of the capi- 
 talist. The grounds on which this assertion was made are 
 now apparent. It is true that all tenant-farmers, and many 
 other classes of producers, pay rent. But we have now seen 
 that whoever cultivates land, paying a rent for it, gets in re- 
 turn for his rent an instrument of superior power to other 
 instruments of the same kind for which no rent is paid. The 
 superiority of the instrument is in exact proportion to the 
 rent paid for it. If a few persons had steam-engines of su- 
 perior power to all others in existence, but limited by physi-. 
 cal laws to a number short of the demand, the rent which a 
 manufacturer would be willing to pay for one of these steam- 
 engines could not be looked upon as an addition to his outlay, 
 because by the use of it he would save in his other expenses 
 the equivalent of what it cost him : without it he could not 
 do the same quantity of work, unless at an additional ex- 
 pense equal to the rent. The same thing is true of land. 
 The real expenses of production are those incurred on the 
 worst land, or by the capital employed in the least favorable 
 circumstances. This land or capital pays, as we have seen, 
 no rent, but the expenses to which it is subject cause all 
 other land or agricultural capital to be subjected to an equiva- 
 lent expense in the form of rent. Whoever does pay rent 
 gets back its full value in extra advantages, and the rent 
 which he pays does not place him in a worse position than, 
 but only in the same position as, his fellow-producer who pays 
 no rent, but whose instrument is one of inferior efficiency. 
 
 Soils are of every grade : some, which if cultivated, might 
 replace the capital, but give no profit ; some give a slight 
 but not an ordinary profit ; some, the ordinary profit. That 
 is, " there is a point up to which it is profitable to cultivate, 
 and beyond which it is not profitable to cultivate. The price 
 of corn will not, for any long time, remain at a higher rate 
 than is sufficient to cover with ordinary profit the cost of that 
 portion of the general crop which is raised at greatest ex- 
 pense." 1 For similar reasons the price will not remain at a 
 
 1 Caimes, " Logical Method," p. 199. 
 
RENT. 245 
 
 lower rate. If, then, the cost of production of grain is deter- 
 mined by that land which replaces the capital, yields only the 
 ordinary profit, and pays no rent, rent forms no part of this 
 cost, since that land does not and can not pay any rent. Mc- 
 Leod, 1 however, says it is not the cost of production which 
 regulates the value of agricultural produce, but the value which 
 regulates the cost. 
 
 1 " Theory and Practice of Banking," vol. i, p. 13. Cf. Cairnes, " Logical 
 Method," p. 106. 
 
BOOK III. 
 
 EXCHANGE. 
 
BOOK III. 
 EXCHANGE. 
 
 CHAPTER I. 
 
 OF VALUE. 
 
 § 1. It is evident that, of the two great departments of 
 Political Economy, the production of wealth and its distribu- 
 tion, the consideration of Yalue has to do with the latter 
 alone ; and with that only so far as competition, and not 
 usage or custom, is the distributing agency. 
 
 The use of a thing, in political economy, means its ca- 
 pacity to satisfy a desire, or serve a purpose. Diamonds 
 have this capacity in a high degree, and, unless they had it, 
 would not bear any price. Yalue in use, or, as Mr. De Quin- 
 cey calls it, teleologio value, is the extreme limit of value in 
 exchange. The exchange value of a thing may fall short, to 
 any amount, of its value in use ; but that it can ever exceed 
 the value in use implies a contradiction ; it supposes that 
 persons will give, to possess a thing, more than the utmost 
 value which they themselves put upon it, as a means of grati- 
 fying their inclinations. 
 
 The word Yalue, when used without adjunct, always 
 means, in political economy, value in exchange. 
 
 Exchange value requires to be distinguished from Price. 
 "Writers have employed Price to express the value of a thing 
 in relation to money — the quantity of money for which it 
 will exchange. By the price of a thing, therefore, we shall 
 
250 EXCHANGE. 
 
 henceforth understand its value in money ; by the value, or 
 exchange value cf a thing, its general power of purchasing ; 
 the command which its possession gives over purchasable 
 commodities in general. What is meant by command over 
 commodities in general? The same thing exchanges for a 
 greater quantity of some commodities, and for a very small 
 quantity of others. A coat may exchange for less bread this 
 year than last, if the harvest has been bad, but for more glass 
 or iron, if a tax has been taken off those commodities, or an 
 improvement made in their manufacture. Has the value of 
 the coat, under these circumstances, fallen or risen ? It is 
 impossible to say : all that can be said is, that it has fallen in 
 relation to one thing, and risen in respect to another. Sup- 
 pose, for example, that an invention has been made in ma- 
 chinery, by which broadcloth could be woven at half the 
 former cost. The effect of this would be to lower the value 
 of a coat, and, if lowered by this cause, it would be lowered 
 not in relation to bread only or to glass only, but to all pur- 
 chasable things, except such as happened to be affected at 
 the very time by a similar depressing cause. Those [changes] 
 which originate in the commodities with which we compare 
 it affect its value in relation to those commodities ; but those 
 which originate in itself affect its value in relation to all 
 commodities. 
 
 There is such a thing as a general rise of prices. All 
 commodities may rise in their money price. But there can 
 not be a general rise of values. It is a contradiction in 
 terms. A can only rise in value by exchanging for a greater 
 quantity of B and C ; in which case these must exchange for 
 a smaller quantity of A. All things can not rise relatively 
 to one another. If one half of the commodities in the mar- 
 ket rise in exchange value, the very terms imply a fall of the 
 other half ; and, E reciprocally, the fall implies a rise. Things 
 which are exchanged for one another can no more all fall, or 
 all rise, than a dozen runners can each outrun all the rest, or 
 a hundred trees all overtop one another. A general rise or a 
 general fall of prices is merely tantamount to an alteration 
 
VALUE. 251 
 
 in the value of money, and is a matter of complete indiffer- 
 ence, save in so far as it affects existing contracts for receiv- 
 ing and paying fixed pecuniary amounts. 
 
 Before commencing the inquiry into the laws of value 
 and price, I have one further observation to make. I must 
 give warning, once for all, that the cases I contemplate are 
 those in which values and prices are determined by competi- 
 tion alone. In so far only as they are thus determined, can 
 they be reduced to any assignable law. The buyers must be 
 supposed as studious to buy cheap as the sellers to sell dear. 
 
 The reader is advised to study the definitions of value given 
 by other writers. Cairnes 1 defines value as "the ratio in which 
 commodities in open market are exchanged against each other." 
 F. A. Walker 2 holds that " value is the power which an article 
 confers upon its possessor, irrespective of legal authority or 
 personal sentiments, of commanding, in exchange for itself, 
 the labor, or the products of the labor, of others." Carey* 
 says, " Value is the measure of the resistance to be overcome 
 in obtaining those commodities or things required for our pur- 
 poses — of the power of nature over man." Value is thus, with 
 him, the antithesis of wealth, which is (according to Carey) the 
 power of man over nature. In this school, value is the ser- 
 vice rendered by any one who supplies the article for the use 
 of another. This is also Bastiat's idea, 4 " le rapport de deux 
 services echanges." Following Bastiat, A. L. Perry* defines 
 value as " always and everywhere the relation of mutual pur- 
 chase established between two services by their exchange." 
 Roscher " explains exchange value as " the quality which makes 
 them exchangeable against other goods." He also makes a 
 distinction between utility and value in use : " Utility is a 
 quality of things themselves, in relation, it is true, to human 
 wants. Value in use is a quality imputed to them, the result 
 of man's thought, or his view of them. Thus, for instance, in 
 a beleaguered city, the stores of food do not increase in utility, 
 but their value in use does." Levasseur' regards value as "the 
 relation resulting from exchange" — le rapport resultant de 
 Fechange. Cherbuliez 8 asserts that " the value of a product or 
 
 1 "Leading Principles," p. 11. * "Political Economy," p. 5. 
 
 3 " Social Science," vol. i, p. 158. * " Harmonies," p. 171. 
 
 5 " Political Economy," p. 126. 
 
 6 " Political Economy," Introduction, Chap. I, § 5. 
 * "Precis d'Economie politique," p. 175. 
 
 8 " Pr6cis de la Science 6conomique," vol. i, p. 202. 
 
252 EXCHANGE. 
 
 of a service can be expressed only as the products or services 
 which it obtains in exchange. ... If I exchange the thing A 
 against B, A is the "value of B, B is the value of A." Jevons ' 
 defines value as "proportion in exchange." 
 
 § 2. That a thing may have any value in exchange, two 
 conditions are necessary. 1. It must be of some use ; that is 
 (as already explained), it must conduce to some purpose, sat- 
 isfy some desire. ~No one will pay a price, or part with any- 
 thing which serves some of his purposes, to obtain a thing 
 which serves none of them. 2. But, secondly, the thing 
 must not only have some utility, there must also be some 
 difficulty in its attainment. 
 
 The question is one as to the conditions essential to the ex- 
 istence of any value. Very justly Cairnes 9 adds also a third 
 condition, " the possibility of transferring the possession of the 
 articles which are the subject of the exchange." For instance, 
 a cargo of wheat at the bottom of the sea has value in use and 
 difficulty of attainment, but it is not transferable. Jevons (fol- 
 lowing J. B. Say) maintains that " value depends entirely on 
 utility." If utility means the power to satisfy a desire, things 
 which merely have utility and no difficulty of attainment could 
 have no exchange value. 8 F. A. Walker* believes that "value 
 depends wholly on the relation between demand and supply." 
 Carey 5 holds that value depends merely on the cost of repro- 
 duction of the given article. Roscher 8 finds that exchange value 
 is "based on a combination of value in use with cost value." 
 Cherbuliez 7 calls the conditions of value two, " the ability to 
 give satisfaction, and inability of attainment without effort. 
 The first element is subjective ; it is determined wholly by the 
 needs or desires of the parties to the exchange. The second is 
 objective ; it depends upon material considerations, which are 
 the conditions of the existence of the thing, and upon which the 
 needs of the persons exchanging have no influence whatever." 
 It is, as usual, one of Cherbuliez's clear expositions. A. L. 
 Perry 8 states that, " while value always takes its rise in the 
 desires of men, it is never realized except through the efforts of 
 men, and through these efforts as mutually exchanged." 
 
 1 " Political Economy Primer," p. 98. 
 ' " Leading Principles," p. 15. 
 
 3 " Theory of Political Economy," pp. 82-91. See Cairnes, ibid., pp. 17-19. 
 
 4 " Political Economy," p. 92. 6 " Social Science," vol. ii, p. 335. 
 
 6 " Political Economy," Introduction, Chap. I, § 5. 
 
 7 " Precis," p. 206. 8 " Political Economy," p. 165. 
 
Exch.Value. 
 
 VALUE. 253 
 
 The difficulty of attainment which determines value is 
 not always the same kind of difficulty : (1.) It sometimes 
 consists in an absolute limitation of the supply. There are 
 things of which it is physically impossible to increase the 
 quantity beyond certain narrow limits. Such are those wines 
 which can be grown only in peculiar circumstances of soil, cli- 
 mate, and exposure. Such also are ancient sculptures ; pictures 
 by the old masters ; rare books or coins, or other articles of 
 antiquarian curiosity. Among such may also be reckoned 
 houses and building-ground, in a town of definite extent. 
 
 De Quincey 1 has presented some ingenious diagrams to 
 represent the operations of the two constituents of value in 
 each of the three following cases : U represents the 
 power of the article to satisfy some desire, and D 
 difficulty of attainment. In the first case, exchange 
 value is not hindered by D from goirg up to any 
 height, and so it rises and falls entirely according 
 to the force of U. D being practically infinite, 
 the horizontal line, exchange value, is not kept 
 down by D, but it rises just as far as U, the desires 
 of purchasers, may carry it. d u 
 
 (2.) But there is another category (embracing the major- 
 ity of all things that are bought and sold), in which the ob- 
 stacle to attainment consists only in the labor and expense 
 requisite to produce the commodity. Without a certain 
 labor and expense it can not be had ; but, when any one is 
 willing to incur these, there needs be no limit to the multi- 
 plication of the product. If there were laborers enough and 
 machinery enough, cottons, woolens, or linens might be pro- 
 duced by thousands of yards for every single yard now man- 
 ufactured, ir. 
 
 In case (2) the horizontal line, representing Exch.Value 
 exchange value, follows the force of D entirely. 
 The utility of the article is very great, but the 
 value is only limited by the difficulty of obtain- 
 ing it. So far as U is concerned, exchange 
 value can go up a great distance, but will go no 
 higher than the point where the article can be u 
 
 1 " Logic of Political Economy." 
 
£54 EXCHANGE. 
 
 obtained. The dotted lines underneath the horizontal line in- 
 dicate that the exchange value of articles in this class tend to 
 fall in value. 
 
 (3.) There is a third case, intermediate between the two 
 preceding, and rather more complex, which I shall at pres- 
 ent merely indicate, but the importance of which in political 
 economy is extremely great. There are commodities which 
 can be multiplied to an indefinite extent by labor and ex- 
 penditure, but not by a fixed amount of labor and expendi- 
 ture. Only a limited quantity can be produced at a given 
 cost ; if more is wanted, it must be produced at a greater 
 cost. To this class, as has been often repeated, agricultural 
 produce belongs, and generally all the rude produce of the 
 earth ; and this peculiarity is a source of very important con- 
 sequences ; one of which is the necessity of a limit to popu- 
 lation ; and another, the payment of rent. 
 
 In case (3) articles like agricultural produce have a very 
 great power to satisfy desires, and if scarce would 
 nI - have a high value. So far as U is concerned, here 
 also, as in case (2), exchange value might mount 
 upward to almost any height, but it can go no 
 higher than D permits. In commodities of this 
 class, affected by the law of diminishing returns, 
 the tendency is for D to increase, and so for ex- 
 change value to rise, as indicated by the dotted lines 
 " above that of the exchange value. 
 
 § 3. These being the three classes, in one or other of 
 which all things that are bought and sold must take their 
 place, we shall consider them in their order. And first, of 
 things absolutely limited in quantity, such as ancient sculpt- 
 ures or pictures. 
 
 Of such things it is commonly said that their value de- 
 pends on their scarcity ; others say that the value depends 
 on the demand and supply. But this statement requires 
 much explanation. The supply of a commodity is an intel- 
 ligible expression : it means the quantity offered for sale ; 
 the quantity that is to be had, at a given time and place, by 
 those who wish to purchase it. But what is meant by the 
 demand % Not the mere desire for the commodity. A beg- 
 
 Exch.Value 
 
VALUE. 255 
 
 gar may desire a diamond ; but bis desire, bowever great, 
 will have no influence on tbe price. Writers bave there- 
 fore given a more limited sense to demand, and bave defined 
 it, the wish to possess, combined with the power of purchas- 
 ing. 1 To distinguish demand in this technical sense from 
 the demand which is synonymous with desire, they call the 
 former effectual demand. 
 
 General supply consists in the commodities offered in ex- 
 change for other commodities ; general demand likewise, if no 
 money exists, consists in the commodities offered as purchasing 
 power in exchange for other commodities. That is, one can 
 not increase the demand for certain things without increasing 
 the supply of some articles which will be received in exchange 
 for the desired commodities. Demand is based upon the pro- 
 duction of articles having exchange value, in its economic 
 sense ; and the measure of this demand is necessarily the quan- 
 tity of commodities offered in exchange for the desired goods. 
 General demand and supply are thus reciprocal to each other. 
 Bat as soon as money, or general purchasing power, is intro- 
 duced, Mr. Cairnes 2 defines "demand as the desire for com- 
 modities or services, seeking its end by an offer of general pur- 
 chasing power ; and supply, as the desire for general purchasing 
 power, seeking its end by an offer of specific commodities or 
 services." But many persons find a difficulty because they 
 insist upon separating the idea of supply from that of demand, 
 owing to the fact that producers seem to be a distinct class in 
 the community, different from consumers. That they are in 
 reality the same persons can be easily explained by the follow- 
 ing statement : " A certain number of people, A, B, C, D, E, 
 F, etc., are engaged in industrial occupations — A produces for 
 B, C, D, E, F ; B for A, C, D, E, F ; C for A, B, D, E, F, and 
 so on. In each case the producer and the consumers are dis- 
 tinct, and hence, by a very natural fallacy, it is concluded that 
 the whole body of consumers is distinct from the whole body of 
 producers, whereas they consist of precisely the same persons." 
 
 But in regard to demand and supply of particular commodi- 
 ties (not general demand and supply), the increase of the de- 
 
 1 Although here using demand in its proper sense, a little later Mr. Mill de- 
 fines it as the " quantity demanded." As he again uses it in the proper sense 
 in discussing excess of money (Book III, Chap. V), supply (Book III, Chap. XI), 
 and foreign trade (Book III, Chap. XIV), I have on " tf pd from his present expo- 
 sition his evidently inconsistent use of the word. 
 
 9 " Leading Principles," p. 25. 
 
256 EXCHANGE. 
 
 mand is not necessarily followed by an increased supply, or 
 vice versa. Out of the total production (which constitutes 
 general demand) a varying amount, sometimes more, sometimes 
 less, may be directed by the desires of men to the purchase of 
 some given thing. This should be borne in mind, in connec- 
 tion with the future discussion of over-production. The iden- 
 tity of general demand with general supply shows there can be 
 no general over-production : but so long as there exists the pos- 
 sibility that the demand for a particular commodity may dimin- 
 ish without a corresponding effect being thereby produced on 
 the supply of that commodity, by a necessary connection, we 
 see that there may be over-production of particular commodi- 
 ties ; that is, a production in excess of the demand. 
 
 The proper mathematical analogy [between demand and 
 supply] is that of an equation. If unequal at any moment, 
 competition equalizes them, and the manner in which this is 
 done is by an adjustment of the value. If the demand in- 
 creases, the value rises ; if the demand diminishes, the value 
 falls ; again, if the supply falls off, the value rises ; and falls, 
 if the supply is increased. The rise or the fall continues 
 until the demand and supply are again equal to one another : 
 and the value which a commodity will bring in any market 
 is no other than the value which, in that market, gives a 
 demand just sufficient to carry off the existing or expected 
 supply. 
 
 Mr. Cairnes 1 finally defined market value as the price 
 " which is sufficient, and no more than sufficient, to carry the 
 existing supply over, with such a surplus as circumstances 
 may render advisable, to meet the new supplies forthcoming," 
 which is nothing more than a paraphrase of the words "ex- 
 isting or expected supply" just used by Mr. Mill. It seems 
 unnecessary, therefore, that Mr. Cairnes should have added : 
 " According to Mr. Mill, the actual market price is the price 
 which equalizes supply and demand in a given market ; as I 
 view the case, the ' proper market price ' is the price which 
 equalizes supply and demand, not as existing in the particular 
 market, but in the larger sense which I have assigned to the 
 terms. To this price the actual market price will, according 
 to my view, approximate, in proportion to the intelligence and 
 knowledge of the dealers." 
 
 1 " Leading Principles," p. 108. 
 
VALUE. 257 
 
 Adam Smith, who introduced the expression " effectual 
 demand," employed it to denote the demand of those who 
 are willing and able to give for the commodity what he calls 
 its natural price — that is, the price which will enable it to be 
 permanently produced and brought to market. 1 
 
 This, then, is the Law of Yalue, with respect to all com- 
 modities not susceptible of being multiplied at pleasure. 
 
 § 4. There are but few commodities which are naturally 
 and necessarily limited in supply. But any commodity 
 whatever may be artificially so. The monopolist can fix the 
 value as high as he pleases, short of what the consumer either 
 could not or would not pay ; but he can only do so by limit- 
 ing the supply. Monopoly value, therefore, does not depend 
 on any peculiar principle, but is a mere variety of the ordi- 
 nary case of demand and supply. 
 
 Again, though there are few commodities which are at 
 all times and forever unsusceptible of increase of supply, 
 any commodity whatever may be temporarily so ; and with 
 some commodities this is habitually the case. Agricultural 
 produce, for example, can not be increased in quantity before 
 the next harvest ; the quantity of corn already existing in 
 the world is all that can be had for sometimes a year to 
 come. During that interval, corn is practically assimilated 
 to things of which the quantity can not be increased. In the 
 case of most commodities, it requires a certain time to in- 
 crease their quantity ; and if the demand increases, then, 
 until a corresponding supply can be brought forward, that 
 is, until the supply can accommodate itself to the demand, 
 the value will so rise as to accommodate the demand to the 
 supply. 
 
 There is another case the exact converse of this. There 
 are some articles of which the supply may be indefinitely 
 increased, but can not be rapidly diminished. There are 
 things so durable that the quantity in existence is at all times 
 very great in comparison with the annual produce. Gold 
 
 1 See his chapter on " Natural and Market Price," book i, chap. vii. 
 17 
 
258 EXCHANGE. 
 
 and the more durable metals are things of this sort, and 
 also houses. The supply of such things might be at once 
 diminished by destroying them ; but to do this could only 
 be the interest of the possessor if he had a monopoly of the 
 article, aud could repay himself for the destruction of a part 
 by the increased value of the remainder. The value, there- 
 fore, of such things may continue for a long time so low, 
 either from excess of supply or falling off in the demand, as 
 to put a complete stop to further production ; the diminu- 
 tion of supply by wearing out being so slow a process that a 
 long time is requisite, even under a total suspension of pro- 
 duction, to restore the original value. During that interval 
 the value will be regulated solely by supply and demand, 
 and will rise very gradually as the existing stock wears out, 
 until there is again a remunerating value, and production 
 resumes its course. 
 
 The total value of gold and silver in the world is variously 
 estimated at from $10,000,000,000 to $14,000,000,000 ; while 
 the annual production of both gold and silver in the world 
 during 1882 l was only 1212,000,000. The loss of gold by 
 abrasion is about l0 * 00 annually, and of silver about y^-, but 
 much depends on the size of the coin. A change in the annual 
 production of the precious metals can have a perceptible effect 
 on their value only after such a time as will permit the change 
 to affect the existing quantity in a way somewhat comparable 
 with its previous amount. The quantity, however, of wheat 
 produced is nearly all consumed between harvests ; and the 
 annual supply bears a very large ratio to the existing quantity. 
 Consequently the price of wheat will be very seriously affected 
 by the quantity coming from the annual product. 
 
 Finally, there are commodities of which, though capable 
 of being increased or diminished to a great and even an un- 
 limited extent, the value never depends upon anything but 
 demand and supply. This is the case, in particular, with the 
 commodity Labor, of the value of which we have treated 
 copiously in the preceding book ; and there are many cases 
 besides in which we shall find it necessary to call in this 
 
 1 " Report of the Director of the Mint," 1883, p. 69. 
 
VALUE. 259 
 
 principle to solve difficult questions of exchange value. This 
 will be particularly exemplified when we treat of Interna- 
 tional Values ; that is, of the terms of interchange between 
 things produced in different countries, or, to speak more gen- 
 erally, in distant places. 
 
 § 5. When the production of a commodity is the effect of 
 labor and expenditure, whether the commodity is susceptible 
 of unlimited multiplication or not, there is a minimum value 
 which is the essential condition of its being permanently 
 produced. The value at any particular time is the result of 
 supply and demand, and is always that which is necessary 
 to create a market for the existing supply. But unless that 
 value is sufficient to repay the Cost of Production, and to 
 afford, besides, the ordinary expectation of profit, the com- 
 modity will not continue to be produced. Capitalists will 
 not go on permanently producing at a loss. When such 
 profit is evidently not to be had, if people do not actually 
 withdraw their capital, they at least abstain from replacing 
 it when consumed. The cost of production, together with 
 the ordinary profit, may, therefore, be called the necessary 
 price or value of all things made by labor and capital. No- 
 body willingly produces in the prospect of loss. 
 
 When a commodity is not only made by labor and capi- 
 tal, but can be made by them in indefinite quantity, this 
 Necessary Value, the minimum with which the producers 
 will be content, is also, if competition is free and active, the 
 maximum which they can expect. If the value of a com- 
 modity is such that it repays the cost of production not only 
 with the customary but with a higher rate of profit, capital 
 rushes to share in this extra gain, and, by increasing the sup- 
 ply of the article, reduces its value. This is not a mere sup- 
 position or surmise, but a fact familiar to those conversant 
 with commercial operations. Whenever a new line of busi- 
 ness presents itself, offering a hope of unusual profits, and 
 whenever any established trade or manufacture is believed 
 to be yielding a greater profit than customary, there is sure 
 to be in a short time so large a production or importation of 
 
260 EXCHANGE. 
 
 the commodity as not only destroys the extra profit, but 
 generally goes beyond the mark, and sinks the value as much 
 too low as it had before been raised too high, until the over- 
 supply is corrected by a total or partial suspension of further 
 production. As already intimated, 1 these variations in the 
 quantity produced do not presuppose or require that any 
 person should change his employment. Those whose busi- 
 ness is thriving, increase their produce by availing them- 
 selves more largely of their credit, while those who are not 
 making the ordinary profit, restrict their operations, and (in 
 manufacturing phrase) work short time. In this mode is 
 surely and speedily effected the equalization, not of profits, 
 perhaps, but of the expectations of profit, in different occu- 
 pations. 
 
 As a general rule, then, things tend to exchange for one 
 another at such values as will enable each producer to be 
 repaid the cost of production with the ordinary profit; in 
 other words, such as will give to all producers the same rate 
 of profit on their outlay. But in order that the profit may 
 be equal where the outlay, that is, the cost of production, 
 is equal, things must on the average exchange for one an- 
 other in the ratio of their cost of production; things of 
 which the cost of production is the same, must be of the 
 same value. 
 
 Mr. Mill has here used cost of production almost exactly 
 in the sense of cost of labor, and as excluding profit (while in 
 the next chapter he includes some part of profit in the analy- 
 sis). It will be well, for the sake of definiteness, to collect the 
 phrases above in which he describes cost of production : " Un- 
 less that value is sufficient to repay the cost of production, and 
 to afford, besides, the ordinary expectation of profit, the com- 
 modity will not continue to be produced " ; "the cost of pro- 
 duction, together with the ordinary profit, may therefore be 
 called the necessary price, or value " ; " it repays the cost of 
 production, not only with the customary, but with a higher 
 rate of profit " ; "the cost of production with the ordinary 
 profit — in other words, such as will give to all producers the 
 same rate of profit on their outlay " ; " that the profit may be 
 
 1 Supra, p. 222. 
 
VALUE. 261 
 
 equal where the outlay, that is, the cost of production, is equal." 
 This is a view which distinctly uses cost of production in the 
 sense of the outlay to the capitalist, or cost of labor. In no 
 other way can profit vary with "cost of production" than in the 
 sense that it is what a given article " costs to the capitalist " ; 
 but that is Mr. Mill's definition of cost of labor (p. 227). It is, 
 however, very puzzling when in the next section he speaks of 
 " the natural value, that is, the cost of production." Above, 
 value included cost of production and profit also. Having 
 thus pointed out what is Mr. Mill's conception of cost of pro- 
 duction, it will remain for us in the next chapter to consider 
 whether any other view of it is more satisfactory. 
 
 Adam Smith and Ricardo have called that value of a 
 thing which is proportional to its cost of production, its 
 Natural Value (or its Natural Price). They meant by this, 
 the point about which the value oscillates, and to which it 
 always tends to return ; the center value, toward which, as 
 Adam Smith expresses it, the market value of a thing is 
 constantly gravitating; and any deviation from which is 
 but a temporary irregularity which, the moment it exists, 
 sets forces in motion tending to correct it. On an average 
 of years sufficient to enable the oscillations on one side of 
 the central line to be compensated by those on the other, 
 the market value agrees with the natural value ; but it very 
 seldom coincides exactly with it at any particular time. The 
 sea everywhere tends to a level, but it never is at an exact 
 level ; its surface is always ruffled by waves, and often agi- 
 tated by storms. It is enough that no point, at least in the 
 open sea, is permanently higher than another. Each place 
 is alternately elevated and depressed; but the ocean pre- 
 serves its level. 
 
 § 6. The latent influence by which the values of things 
 are made to conform in the long run to the cost of produc- 
 tion is the variation that would otherwise take place in the 
 supply of the commodity. The supply would be increased 
 if the thing continued to sell above the ratio of its cost of pro- 
 duction, and would be diminished if it fell below that ratio. 
 
 If one dollar covers the expense of making one spade, when 
 spades, by virtue of a sudden demand, rise in value to one 
 
262 EXCHANGE. 
 
 dollar and ten cents, the manufacturers get an extra profit of 
 ten cents. This could not long remain so, because other capi- 
 tal would enter this industry, and so increase the supply that 
 one spade would sell for only one dollar; then all would receive 
 the average profit. If, owing to a cessation of demand for 
 spades, the price fell to ninety cents, then the manufacturers 
 would lose ten cents on each one made and sold. Thereupon 
 they would cease to do a losing business, capital would be 
 withdrawn, and spades would not be made until the supply was 
 suited to the necessary expense of making them (one dollar). 
 In this way, whenever there is a departure of the value from 
 the normal cost, there is set in motion ipso facto a series of 
 forces which automatically restores the value to that cost. So 
 here again we see the nature of an economic law : the value 
 may not often correspond exactly with cost of production, but 
 there is a tendency in all values to conform to that cost, and 
 this tendency they irresistibly obey; A body possessing weight 
 does not move downward under all circumstances (stones may 
 be thrown upward), but the law of gravitation holds true, nev- 
 ertheless. 
 
 There is no need that there should be any actual altera- 
 tion of supply ; and when there is, the alteration, if perma- 
 nent, is not the cause but the consequence of the alteration 
 in value. If, indeed, the supply could not be increased, no 
 diminution in the cost of production would lower the value ; 
 but there is by no means any necessity that it should. The 
 mere possibility often suffices ; the dealers are aware of what 
 would happen, and their mutual competition makes them 
 anticipate the result by lowering the price. 
 
 Before the electric light was yet known as a feasible means 
 of lighting (in 18T8), the mere rumor of Edison's invention, 
 before it was made public, and long before it became practi- 
 cable, caused a serious fall in the price of gas stocks. 
 
 It is, therefore, strictly correct to say that the value of 
 things which can be increased in quantity at pleasure does 
 not depend (except accidentally, and during the time neces- 
 sary for production to adjust itself) upon demand and sup- 
 ply ; on the contrary, demand and supply depend upon it. 
 There is a demand for a certain quantity of the commodity 
 at its natural or cost value, and to that the supply in the 
 long run endeavors to conform. 
 
VALUE. 263 
 
 Mr. Cairnes ' fitly says : " The supply of a commodity al- 
 ways tends to adapt itself to the demand at the normal price. 
 I may here say briefly that by the normal price of a commod- 
 ity I mean that price which suffices, and no more than suf- 
 fices, to yield to the producers what is considered to be the 
 average and usual remuneration on such sacrifices as they 
 undergo." 
 
 When at any time it fails of so conforming, it is either 
 from miscalculation, or from a change in some of the ele- 
 ments of the problem ; either in the natural value, that is, 
 in the cost of j>roduction, or in the demand, from an altera- 
 tion in public taste, or in the number or wealth of the con- 
 sumers. If a value different from the natural value be neces- 
 sary to make the demand equal to the supply, the market 
 value will deviate from the natural value; but only for a 
 time, for the permanent tendency of supply is to conform 
 itself to the demand which is found by experience to exist 
 for the commodity when selling at its natural value. If the 
 supply is either more or less than this, it is so accidentally, 
 and affords either more or less than the ordinary rate of 
 profit, which, under free and active competition, can not 
 long continue to be the case. 
 
 To recapitulate: demand and supply govern the value 
 of all things which can not be indefinitely increased ; except 
 that even for them, when produced by industry, there is a 
 minimum value, determined by the cost of production. But 
 in all things which admit of indefinite multiplication, de- 
 mand and supply only determine the perturbations of value 
 during a period which can not exceed the length of time 
 necessary for altering the supply. While thus ruling the 
 oscillations of value, they themselves obey a superior force, 
 which makes value gravitate toward Cost of Production, and 
 which would settle it and keep it there, if fresh disturbing 
 influences were not continually arising to make it again de- 
 viate. 
 
 1 " Leading Principles," p. 41. 
 
CHAPTER II. 
 
 ULTIMATE ANALYSIS OF COST OF PRODUCTION. 
 
 § 1. The component elements of Cost of Production have 
 been set forth in the First Part of this inquiry. 1 The prin- 
 cipal of them, and so much the principal as to be nearly the 
 sole, was found to be Labor. What the production of a thing 
 costs to its producer, or its series of producers, is the labor 
 expended in producing it. If we consider as the producer 
 the capitalist who makes the advances, the word Labor may 
 be replaced by the word Wages : what the produce costs to 
 him, is the wages which he has had to pay. At the first 
 glance, indeed, this seems to be only a part of his outlay, 
 since he has not only paid wages to laborers, but has likewise 
 provided them with tools, materials, and perhaps buildings. 
 These tools, materials, and buildings, however, were pro- 
 duced by labor and capital; and their value, like that of the 
 article to the production of which they are subservient, de- 
 pends on cost of production, which again is resolvable into 
 labor. The cost of production of broadcloth does not wholly 
 consist in the wages of weavers ; which alone are directly 
 paid by the cloth-manufacturer. It consists also of the wages 
 of spinners and wool-combers, and, it may be added, of shep- 
 herds, all of which the clothier has paid for in the price of 
 yarn. It consists, too, of the wages of builders and brick- 
 makers, which he has reimbursed in the contract price of 
 erecting his factory. It partly consists of the wages of ma- 
 chine-makers, iron-founders, and miners. And to these must 
 be added the wages of the carriers who transported any of 
 
 1 Book I, Chap. I, § 2. 
 
ULTIMATE ANALYSIS OF COST OF PRODUCTION. 265 
 
 the means and appliances of the production to the place 
 where they were to be used, and the product itself to the 
 place where it is to be sold. 
 
 Confirmation is here given, in the above words, of the 
 opinion that, in Mr. Mill's mind, Cost of Production was looked 
 at wholly from the stand-point of the capitalist, and was identi- 
 cal with Cost of Labor to the capitalist. 
 
 The value of commodities, therefore, depends principally 
 (we shall presently see whether it depends solely) on the 
 quantity of labor required for their production, including 
 in the idea of production that of conveyance to the market. 
 But since the cost of production to the capitalist is not labor 
 but wages, and since wages may be either greater or less, the 
 quantity of labor being the same, it would seem that the 
 value of the product can not be determined solely by the 
 quantity of labor, but by the quantity together with the re- 
 muneration, and that values must partly depend on wages. 
 
 Now the relation of one thing to another can not be altered 
 by any cause which affects them both alike. A rise or fall of 
 general wages is a fact which affects all commodities in the 
 same manner, and therefore affords no reason why they should 
 exchange for each other in one rather than in another pro- 
 portion. Though there is no such thing as a general rise of 
 values, there is such a thing as a general rise of prices. As 
 soon as we form distinctly the idea of values, we see that 
 high or low wages can have nothing to do with them ; but 
 that high wages make high prices, is a popular and widely 
 spread opinion. The whole amount of error involved in this 
 proposition can only be seen thoroughly when we come to 
 the theory of money ; at present we need only say that if it 
 be true, there can be no such thing as a real rise of wages ; 
 for if wages could not rise without a proportional rise of the 
 price of everything, they could not, for any substantial pur- 
 pose, rise at all. It must be remembered, too, that general 
 high prices, even supposing them to exist, can be of no use 
 to a producer or dealer, considered as such ; for, if they in- 
 crease his money returns, they increase in the same degree 
 
266 EXCHANGE. 
 
 all his expenses. There is no mode in which capitalists can 
 compensate themselves for a high cost of labor, through any 
 action on values or prices. It can not be prevented from 
 taking its effect in low profits. If the laborers really get 
 more, that is, get the produce of more labor, a smaller per- 
 centage must remain for profit. 
 
 § 2. Although, however, general wages, whether high or 
 low, do not affect values, yet if wages are higher in one em- 
 ployment than another, or if they rise or fall permanently in 
 one employment without doing so in others, these inequali- 
 ties do really operate upon values. Things, for example, 
 which are made by skilled labor, exchange for the produce 
 of a much greater quantity of unskilled labor, for no reason 
 but because the labor is more highly paid. We have before 
 remarked that the difficulty of passing from one class of em- 
 ployments to a class greatly superior has hitherto caused the 
 wages of all those classes of laborers who are separated from 
 one another by any very marked barrier to depend more 
 than might be supposed upon the increase of the population 
 of each class considered separately, and that the inequalities 
 in the remuneration of labor are much greater than could 
 exist if the competition of the laboring people generally 
 could be brought practically to bear on each particular em- 
 ployment. It follows from this that wages in different em- 
 ployments do not rise or fall simultaneously, but are, for 
 short and sometimes even for long periods, nearly independ- 
 ent of one another. All such disparities evidently alter the 
 relative cost of production of different commodities, and will 
 therefore be completely represented in their natural or aver- 
 age value. 
 
 This is again a clear recognition of the influence of Mr. 
 Cairnes's theory of " non-competing groups." ' 
 
 Wages do enter into value. The relative wages of the 
 labor necessary for producing different commodities affect 
 their value just as much as the relative quantities of labor. 
 
 2 See supra, p. 210. 
 
ULTIMATE ANALYSIS OF COST OF PRODUCTION. 267 
 
 It is true, the absolute wages paid have no effect upon values ; 
 but neither has the absolute quantity of labor. If that were 
 to vary simultaneously and equally in all commodities, values 
 would not be affected. If, for instance, the general efficiency 
 of all labor were increased, so that all things without excep- 
 tion could be produced in the same quantity as before with a 
 smaller amount of labor, no trace of this general diminution 
 of cost of production would show itself in the values of com- 
 modities. 
 
 § 3. Thus far of labor or wages as an element in cost of 
 production. But in our analysis, in the First Book, of the 
 requisites of production, we found that there is another neces- 
 sary element in it besides labor. There is also capital ; and 
 this being the result of abstinence, the produce, or its value, 
 must be sufficient to remunerate, not only all the labor re- 
 quired, but the abstinence of all the persons by whom the 
 remuneration of the different classes of laborers was ad- 
 vanced. The return from abstinence is Profit. And profit, 
 we have also seen, is not exclusively the surplus remaining 
 to the capitalist after he has been compensated for his outlay, 
 but forms, in most cases, no unimportant part of the outlay 
 itself. The flax-spinner, part of whose expenses consists of 
 the purchase of flax and of machinery, has had to pay, in 
 their price, not only the wages of the labor by which the flax 
 was grown and the machinery made, but the profits of the 
 grower, the flax-dresser, the miner, the iron-founder, and the 
 machine-maker. All these profits, together with those of 
 the spinner himself, were again advanced by the weaver, in 
 the price of his material — linen yarn ; and along with them 
 the profits of a fresh set of machine-makers, and of the min- 
 ers and iron-workers who supplied them with their metallic 
 material. All these advances form part of the cost of pro- 
 duction of linen. Profits, therefore, as well as wages, enter 
 into the cost of production which determines the value of 
 the produce. 
 
 § 4. In discussing Cost of Labor (supra, pp. 225, 226), Mr. 
 Mill found that the advances of the immediate producer con- 
 
268 
 
 EXCHANGE. 
 
 sisted not only of wages, but also of tools, materials, etc., in the 
 price of which he was including the profits of an auxiliary cap- 
 italist who advanced the capital for making these tools, etc. 
 But, then, if a line of division were to be passed down through 
 all these advances, separating wages from profits, he urged that, 
 if all the capitalists (auxiliary and immediate both) were one, 
 all the advances of the capitalist might be considered as wages. 
 Profits did not form a part of the outlay to the capitalists in 
 the former analysis. And this seems correct enough. Now, 
 however, he suggests that the outlay of the immediate producers 
 should include the profit of the auxiliary capitalist. More 
 than this, Mr. Mill now includes in cost to the capitalist the 
 profit of the immediate capitalist. For example, in his illus- 
 tration of the manufacture of linen, he includes not merely 
 the profit of the auxiliary capital engaged in spinning and 
 weaving, but the profit of the immediate and last capitalist, the 
 linen-manufacturer, also. This includes in the cost of produc- 
 ing an article a profit not realized until after the commodity is 
 produced. 
 
 It is now time to give a more correct idea of cost of produc- 
 tion. Every one admits that the " cost of production " of wheat 
 is less in the United States than in England. For example, 
 three men with a capital of one hundred dollars may on a plot 
 of ground, A, in the United States produce one hundred bushels 
 of wheat ; and we will suppose that the same men and capital 
 will only produce sixty bushels on ground, B, in England. 
 
 100 bu. 
 
 60 bu. 
 
 In ordinary language, then, we say that the cost of produc- 
 tion is greater in England than in the United States, because the 
 same labor and capital here produce one hundred bushels for 
 sixty in England ; or, what amounts to the same thing, that less 
 labor and capital could produce sixty bushels in the United 
 States than sixty bushels in England. If we suppose that one 
 fourth of the crop is profit, and three fourths is assigned to 
 wages in both countries, then in the United States the one 
 hundred dollars of capital receives twenty-five bushels of profit, 
 while in England it receives only fifteen ; and the three men 
 receive as wages in the United States twenty -five bushels each, 
 while in England they receive only fifteen bushels each. The 
 first important induction to be made is that where cost of pro- 
 
ULTIMATE ANALYSIS OF COST OF PKODUCTION. 2C9 
 
 duction is low, wages and profits are high. The high produc- 
 tiveness of extractive industries in the United States is the 
 reason why wages and profits are higher here than in older 
 countries. 
 
 Now the second important question is, Is cost of production 
 made up of wages and profits, and is it true that the cost rises 
 with a rise of wages and profits ? Certainly not. Wages and 
 profits are hoth higher in the United States than in England, 
 but no one is so absurd as to say that the cost of production of 
 wheat (as above explained) is higher here than there. It is 
 exactly because cost of production of wheat is lower in the 
 United. States that wages and profits measured in wheat are 
 higher here than in England. Therefore, it can not be granted, 
 as Mr. Mill expounds the doctrine, that cost of production is 
 made up of wages and profits. When we speak of an in- 
 creased cost of production of a given article, we mean that its 
 production requires more labor and capital than before ; and of 
 a decrease in cost of production, that it requires less labor and 
 capital than before ; meaning by " more labor " that a given 
 quality of labor is exerted for a longer or shorter time, and by 
 " more capital " that a greater or less quantity of wealth ab- 
 stained from is employed for a longer or shorter time ; or, in 
 other words, that laborers and capitalists undergo more or less 
 sacrifice in exertion and abstinence, respectively, to attain a 
 given result. This is the contribution to cost of production 
 made by Mr. Cairnes, and briefly defined as follows : "In the 
 case of labor, the cost of producing a given commodity will be 
 represented by the number of average laborers employed in its 
 production — regard at the same time being had to the severity 
 of the work and the degree of risk it involves — multiplied by 
 the duration of their labors. In that of abstinence, the principle 
 is analogous ; the sacrifice will be measured by the quantity of 
 wealth abstained from, taken in connection with the risk in- 
 curred, and multiplied by the duration of the abstinence." l 
 
 This view of cost of production takes into consideration, 
 in the act of production, what Mr. Mill does not include, the 
 cost, or real sacrifice, of the laborer as well as of the capitalist. 
 It may, then, be well to state the relations of cost of produc- 
 tion, taken in this better sense, to value. 
 
 Within competing groups, where there is free choice for 
 labor and capital to select the most remunerative occupa- 
 tions, the hardest and most disagreeable employments will be 
 best paid, and the wages and profits will be in proportion to 
 the sacrifice involved in each case. If so, the amount paid 
 in wages and profits represents the sacrifices in each case. 
 
 1 •' Leading Principles," part i, chap, iii, p. 87. 
 
270 EXCHANGE. 
 
 Now, the aggregate product of an industry is the source from 
 which is drawn its wages and profits,: the aggregate wages 
 and profits, therefore, must vary with the value of the total 
 product. If the total value depart from the sum hitherto suffi- 
 cient to pay the given wages and profits, then some will he 
 paid proportionally less than their sacrifice. The value of a 
 commodity, therefore, within the competing group, must con- 
 form to the costs of production. If, for example («), the value 
 at any time were such as not to give the laborer the usual 
 equivalent for his sacrifice, he would change his employment 
 to another within the group where he could get it ; if (b) the 
 share of the capitalist were at any time insufficient to give him 
 the usual reward for his abstinence, he would change the invest- 
 ment of bis capital. Therefore, within such limits as allow a 
 free competition of labor and capital, value must conform itself 
 to cost of production. 
 
 Not so, however, with the products of non-competing indus- 
 trial groups. As shown by Mr. Mill, labor does not pass freely 
 from one employment to another ; and it must be said that 
 capital does not either, although vastly more ready to move 
 than labor. In a large and thinly settled country capital does 
 not move freely over the whole area of industry ; if it did, dif- 
 ferent rates of profit would not prevail, as we all know they 
 do, in the United States. Now, -as before stated, the total 
 value of the commodities resulting from the exertions of each 
 group of producers is the source from which wages and profits 
 are drawn. The aggregate wages and profits in each industry 
 will vary with the value of the aggregate products. But this 
 total value depends upon what it will exchange for of the 
 products of other groups ; that is, this value depends on the 
 reciprocal demand of one group for the commodities of the 
 other groups, as compared with the demand of the other groups 
 for its products. For example, although cost of production is 
 low in group A, if the demand from outside groups were to be 
 strong, the exchange value of A's products would rise, and A 
 would get more of other goods in exchange ; that is, the total 
 produce is large, but a second increment, arising from a higher 
 exchange value, is to be shared among laborers and capitalists. 
 A few years ago, about 1878-1879, the value of wheat in the 
 United States rose because of the increased demand from 
 Europe, where the harvests had been unusually deficient. 
 There had been no falling off in the productiveness of the 
 farming industry of the United States to cause the increased 
 price ; but the relative demand of other industrial groups for 
 wheat, the product of the farming industry, raised the ex- 
 change value of wheat, and so increased the industrial rewards 
 of those engaged as laborers and capitalists in farming. So 
 
ULTIMATE ANALYSIS OF COST OF PRODUCTION. 271 
 
 it is to be concluded that since there is no free movement of 
 labor and capital between non-competing groups, wages and 
 profits may constantly remain at rates which are not in corre- 
 spondence with the actual sacrifice, or cost, to labor and capital 
 in different groups ; hence, their products do not exchange for 
 each other in proportion to their costs of production. Recip- 
 rocal demand is the law of their value. 
 
 It will be said, at once, that the foregoing conception of 
 cost of production is entirely opposed to the language of prac- 
 tical men of affairs. They constantly speak of higher or lower 
 wages as increasing their cost of production, or as affecting 
 their ability to compete with foreigners. So universal a usage 
 implies a foundation of truth which demands attention. Wages 
 do represent cost to the capitalist, that is, the chief part of the 
 outlay he makes in order to get a given return ; but we have 
 already seen this, and, in the language of Political Economy, 
 termed it "cost of labor" to the capitalist. When the business 
 world use the phrase cost of production, they use it in the 
 sense of cost of labor, as hitherto explained. When they are 
 obliged by strikers to pay more wages, they say that it increases 
 their " cost of production," meaning the cost to them of get- 
 ting their product, and that it affects their profits. This, then, 
 will show that there is no objection to be urged, in its true 
 sense, against the phrase cost of production, owing to the com- 
 mon language of business. 
 
 The real connection between the proper conception of cost 
 of production and- cost of labor is, however, worth attention. 
 It touches cost of labor through that one of its elements called 
 " efficiency of labor." The more productive an industry is, the 
 higher its wages and profits may be, and it is exactly at this 
 point that more attention should be given to the relations of 
 labor and capital. If productiveness can be increased, higher 
 wages as well as higher profits are possible. The proper un- 
 derstanding of the idea that where cost of production is low 
 wages and profits are high, throws a flood of light on many 
 industrial questions in the United States. In the connection 
 in which it stands, as I have shown, to cost of labor, it means 
 that if commodities can be produced at a less sacrifice to labor 
 and capital by the use of machinery and new processes, higher 
 wages are consistent with a lower price of the given product. 
 It explains the fact that, owing to skill or natural resources, 
 labor, although paid much higher rates, can produce articles 
 cheaper than laborers who are less highly paid. Mr. Brassey 1 
 has pointed out that English wages are higher than on the 
 Continent ; and yet England, through low cost of production, 
 
 1 " Work and Wages." 
 
272 EXCHANGE. 
 
 owing to skill, natural resources, etc., can produce so much 
 more of commodities for a given outlay that (while keeping 
 her usual rate of profit) she can generally undersell her com- 
 petitors who employ cheaper labor. The same observations 
 apply to the United States ; but the question of foreign com- 
 petition will be further discussed (Book III., Chap. XX) after 
 we have studied international trade and values. 
 
 " And here it may be well to state precisely what is to be 
 understood by a 'fluctuation of the market,' as distinguished 
 from those changes of normal price which we have been con- 
 sidering. Normal price, as we have seen, is governed, accord- 
 ing to the circumstances of the case [as to whether there is 
 free industrial competition or not], by one or other of two 
 causes — cost of production and reciprocal demand. A change 
 in normal price, therefore, is a change which is the consequence 
 of an alteration in one or other of these conditions. So long 
 as the determining condition — be it cost of production or recip- 
 rocal demand — remains constant, the normal price must be con- 
 sidered as remaining constant ; but, the normal price remain- 
 ing constant, the market price (which, as we have seen, depends 
 on the opinion of dealers respecting the state of supply and 
 demand in relation to the particular article) may undergo a 
 change — may deviate, that is to say, either upward or down- 
 ward from the normal level. Such changes of price, occurring 
 while the permanent conditions of production remain unaffect- 
 ed, can only be temporary, calling into action, as they do, 
 forces which at once tend to restore the normal state of things: 
 they may therefore be properly described as 'fluctuations of 
 the market.' " ' 
 
 § 5. Yalue, however, being purely relative, can not de- 
 pend upon absolute profits, no more than upon absolute 
 wages, but upon relative profits only. High general profits 
 can not, any more than high general wages, be a cause of 
 high values, because high general values are an absurdity and 
 a contradiction. In so far as profits enter into the cost of 
 production of all things, they can not affect the value of any. 
 It is only by entering in a greater degree into the cost of 
 production of some things than of others, that they can have 
 any influence on value. 
 
 Profits, however, may enter more largely into the condi- 
 tions of production of one commodity than of another, even 
 
 1 " Leading Principles," p. 136. 
 
ULTIMATE ANALYSIS OF COST OF PRODUCTION. 273 
 
 though there be no difference in the rate of profit between 
 the two employments. The one commodity may be called 
 upon to yield a profit during a longer period of time than 
 the other. The example by which this case is usually illus- 
 trated is that of wine. Suppose a quantity of wine and a 
 quantity of cloth, made by equal amounts of labor, and that 
 labor paid at the same rate. The cloth does not improve by 
 keeping; the wine does. Suppose that, to attain the desired 
 quality, the wine requires to be kept five years. The pro- 
 ducer or dealer will not keep it, unless at the end of five 
 years he can sell it for as much more than the cloth as 
 amounts to five years' profit, accumulated at compound inter- 
 est. The wine and the cloth were made by the same origi- 
 nal outlay. Here, then, is a case in which the natural values, 
 relatively to one another, of two commodities, do not conform 
 to their cost of production alone, but to their cost of produc- 
 tion plus something else — unless, indeed, for the sake of 
 generality in the expression, we include the profit which the 
 wine-merchant foregoes during the five years, in the cost of 
 production of the wine, looking upon it as a kind of addi- 
 tional outlay, over and above his other advances, for which 
 outlay lie must be indemnified at last. 
 
 Regarding cost of production as the amounts of labor and 
 abstinence required in production, and not as Mr. Mill regards 
 it, as the amounts of wages and profits, the above is simply a 
 case where, in the production of wine, there is a longer 'dura- 
 tion of the abstinence than in the production of cloth. If there 
 is a free movement of labor and capital between the two indus- 
 tries, they will exchange for each other in proportion to the 
 sacrifices involved ; so that the wine would exchange for more 
 of cloth, because there was more sacrifice undergone. The 
 same explanation also holds good in the following illustration : 
 
 All commodities made by machinery are assimilated, at 
 least approximately, to the wine in the preceding example. 
 In comparison with things made wholly by immediate labor, 
 profits enter more largely into their cost of production. 
 Suppose two commodities, A and B, eacli requiring a year 
 for its production, by means of a capital which we will on 
 
 18 
 
274: EXCHANGE. 
 
 this occasion denote by money, and suppose it to be £1,000. 
 A is made wholly by immediate labor, the whole £1,000 
 being expended directly in wages. B is made by means 
 of labor which cost £500 and a machine which cost £500, 
 and the machine is worn out by one year's use. The two 
 commodities will be of exactly the same value, which, if 
 computed in money, and if profits are 20 per cent per an- 
 num, will be £1,200. But of this £1,200, in the case of A, 
 only £200, or one sixth, is profit ; while in the case of B 
 there is not only the £200, but as much of £500 (the price 
 of the machine) as consisted of the profits of the machine- 
 maker ; which, if we suppose the machine also to have taken 
 a year for its production, is again one sixth. So that in the 
 case of A only one sixth of the entire return is profit, while 
 in B the element of profit comprises not only a sixth of the 
 whole, but an additional sixth of a large part. 
 
 From the unequal proportion in which, in different em- 
 ployments, profits enter into the advances of the capitalist, 
 and therefore into the returns required by him, two conse- 
 quences follow in regard to value. (1). One is, that commodi- 
 ties do not exchange in the ratio simply of the quantities of 
 labor required to produce them ; not even if we allow for 
 the unequal rates at which different kinds of labor are per- 
 manently remunerated. 
 
 (2.) A second consequence is, that every rise or fall of gen- 
 eral profits will have an effect on values. Not, indeed, by 
 raising or lowering them generally (which, as we have so often 
 said, is a contradiction and an impossibility), but by altering 
 the proportion in which the values of things are affected by 
 the unequal lengths of time for which profit is due. When 
 two things, thougli made by equal labor, are of unequal value 
 because the one is called upon to yield profit for a greater 
 number of years or months than the other, this difference of 
 value will be greater when profits are greater, and less when 
 they are less. The wine which has to yield five years' profit 
 more than the cloth will surpass it in value much more if 
 profits are forty per cent than if they are only twenty. 
 
ULTIMATE ANALYSIS OF COST OF PRODUCTION. 275 
 
 It follows from this that even a general rise of wages, 
 when it involves a real increase in the cost of labor, does in 
 some degree influence values. It does not affect them in the 
 manner vulgarly supposed, by raising them universally ; but 
 an increase in the cost of labor lowers profits, and therefore 
 lowers in natural values the things into which profits enter 
 in a greater proportion than the average, and raises those 
 into which they enter in a less proportion than the average. 
 All commodities in the production of which machinery bears 
 a large part, especially if the machinery is very durable, are 
 lowered in their relative value when profits fall ; or, what 
 is equivalent, other things are raised in value relatively to 
 them. This truth is sometimes expressed in a phraseology 
 more plausible than sound, by saying that a rise of wages 
 raises the value of things made by labor in comparison with 
 those made by machinery. But things made by machinery, 
 just as much as any other things, are made by labor — namely, 
 the labor which made the machinery itself — the only differ- 
 ence being that profits enter somewhat more largely into the 
 production of things for which machinery is used, though 
 the principal item of the outlay is still labor. 
 
 § 6. Cost of Production consists of several elements, some 
 of which are constant and universal, others occasional. The 
 universal elements of cost of production are the wages of 
 the labor, and the profits of the capital. The occasional ele- 
 ments are taxes, and any extra cost occasioned by a scarcity 
 value of some of the requisites. Besides the natural and 
 necessary elements in cost of production — labor and profits — 
 there are others which are artificial and casual, as, for in- 
 stance, a tax. The taxes on hops and malt are as much a 
 part of the cost of production of those articles as the wages 
 of the laborers. The expenses which the law imposes, as 
 well as those which the nature of things imposes, must be 
 reimbursed with the ordinary profit from the value of the 
 produce, or the things will not continue to be produced. 
 But the influence of taxation on value is subject to the same 
 conditions as the influence of wages and of profits. It is not 
 
276 EXCHANGE. 
 
 general taxation, but differential taxation, that produces the 
 effect. If all productions were taxed so as to take an equal 
 percentage from all profits, relative values would be in no 
 way disturbed. If only a few commodities were taxed, their 
 value would rise ; and if only a few were left untaxed, their 
 value would fall. 
 
 But the case in which scarcity value chiefly operates in 
 adding to cost of production is the case of natural agents. 
 These, when unappropriated, and to be had for the taking, 
 do not enter into the cost of production, save to the extent 
 of the labor which may be necessary to fit them for use. 
 Even when appropriated, they do not (as we have already 
 seen) bear a value from the mere fact of the appropriation, 
 but only from scarcity — that is, from limitation of supply. 
 But it is equally certain that they often do bear a scarcity 
 value. 
 
 JSTo one can deny that rent sometimes enters into cost of 
 production [of other than agricultural products]. If I buy 
 or rent a piece of ground, and build a cloth-manufactory on 
 it, the ground-rent forms legitimately a part of my expenses 
 of production,, which must be repaid by the product. And 
 since all factories are built on ground, and most of them in 
 places where ground is peculiarly valuable, the rent paid for 
 it must, on the average, be compensated in the values of all 
 things made in factories. In what sense it is true that rent 
 does not enter into the cost of production or affect the value 
 of agricultural produce will be shown in the succeeding 
 chapter. 
 
 These occasional elements in cost of production, such as 
 taxes, insurance, ground-rent, etc., are to be considered as just 
 so much of an increase in the quantity of capital required for 
 the operation involved in the particular production, and, con- 
 sequently, result in an increased cost of production, because 
 there is either more abstinence, or abstinence for a longer time, 
 to be rewarded. These elements, therefore, if they are not uni- 
 versal (or common to all articles), will affect the exchange value 
 of commodities, wherever there is a free competition. 
 
CHAPTER III. 
 
 OF RENT, IN ITS RELATION TO VALUE. 
 
 § 1. We have investigated the laws which determine the 
 value of two classes of commodities — the small class which, 
 being limited to a definite quantity, have their value entirely 
 determined by demand and supply, save that their cost of 
 production (if they have any) constitutes a minimum below 
 which they can not permanently fall ; and the large class, 
 which can be multiplied ad libitum by labor and capital, and 
 of which the cost of production fixes the maximum as well 
 as the minimum at which they can permanently exchange [if 
 there be free competition]. But there is still a third kind of 
 commodities to be considered — those which have, not one, 
 but several costs of production ; which can always be in- 
 creased in quantity by labor and capital, but not by the same 
 amount of labor and capital ; of which so much may be pro- 
 duced at a given cost, but a further quantity not without a 
 greater cost. These commodities form an intermediate class, 
 partaking of the character of both the others. The principal 
 of them is agricultural produce. We have already made 
 abundant reference to the fundamental truth that in agri- 
 culture, the state of the art being given, doubling the labor 
 does not double the produce ; that, if an increased quantity 
 of produce is required, the additional supply is obtained at 
 a greater cost than the first. Where a hundred quarters of 
 corn are all that is at present required from the lands of a 
 given village, if the growth of population made it necessary 
 to raise a hundred more, either by breaking up worse land 
 now uncultivated, or by a more elaborate cultivation of the 
 land already under the plow, the additional hundred, or 
 some part of them, at least, might cost double or treble as 
 much per quarter as the former supply. 
 
278 EXCHANGE. 
 
 If the first hundred quarters were all raised at the same 
 expense (only the best land being cultivated), and if that 
 expense would be remunerated with the ordinary profit by 
 a price of 20s. the quarter, the natural price of wheat, so 
 long as no more than that quantity was required, would be 
 20s. ; and it could only rise above or fall below that price 
 from vicissitudes of seasons, or other casual variations in sup- 
 ply. But if the population of the district advanced, a time 
 would arrive when more than a hundred quarters would be 
 necessary to feed it. We must suppose that there is no 
 access to any foreign supply. By the hypothesis, no more 
 than a hundred quarters can be produced in the district, un- 
 less by either bringing worse land into cultivation, or alter- 
 ing the system of culture to a more expensive one. Neither 
 of these things will be done without a rise in price. This 
 rise of price will gradually be brought about by the increas- 
 ing demand. So long as the price has risen, but not risen 
 enough to repay with the ordinary profit the cost of pro- 
 ducing an additional quantity, the increased value of the 
 limited supply partakes of the nature of a scarcity value. 
 Suppose that it will not answer to cultivate the second best 
 land, or land of the second degree of remoteness, for a less 
 return than 25s. the quarter ; and that this price is also neces- 
 sary to remunerate the expensive operations by which an 
 increased produce might be raised from land of the first 
 quality. If so, the price will rise, through the increased de- 
 mand, until it reaches 25s. That will now be the natural 
 price ; being the price without which the quantity, for which 
 society has a demand at that price, will not be produced. At 
 that price, however, society can go on for some time longer ; 
 could go on perhaps forever, if population did not increase. 
 The price, having attained that point, will not again perma- 
 nently recede (though it may fall temporarily from accidental 
 abundance) ; nor will it advance further, so long as society 
 can obtain the supply it requires without a second increase 
 of the cost of production. 
 
 In the case supposed, different portions of the supply of 
 
RENT, IN ITS RELATION TO VALUE. 279 
 
 corn have different costs of production. Though the twenty, 
 or fifty, or one hundred and fifty quarters additional have 
 been produced at a cost proportional to 25s., the original 
 hundred quarters per annum are still produced at a cost only 
 proportional to 20s. This is self-evident, if the original and 
 the additional supply are produced on different qualities of 
 land. It is equally true if they are produced on the same 
 land. Suppose that land of the best quality, which produced 
 one hundred quarters at 20s., has been made to produce one 
 hundred and fifty by an expensive process, which it would 
 not answer to undertake without a price of 25s. The cost 
 which requires 25s. is incurred for the sake of fifty quarters 
 alone: the first hundred might have continued forever to 
 be produced at the original cost, and with the benefit, on 
 that quantity, of the whole rise of price caused by the in- 
 creased demand : no one, therefore, will incur the additional 
 expense for the sake of the additional fifty, unless they alone 
 will pay for the whole of it. The fifty, therefore, will be 
 produced at their natural price, proportioned to the cost of 
 their production ; while the other hundred will now bring in 
 5s. a quarter more than their natural price — than the price 
 corresponding to, and sufficing to remunerate, their lower 
 cost of production. 
 
 If the production of any, even the smallest, portion of 
 the supply requires as a necessary condition a certain price, 
 that price will be obtained for all the rest. We are not able 
 to buy one loaf cheaper than another because the corn from 
 which it was made, being grown on a richer soil, has cost less 
 to the grower. The value, therefore, of an article (meaning 
 its natural, which is the same with its average value) is de- 
 termined by the cost of that portion of the supply which is 
 produced and brought to market at the greatest expense. 
 This is the Law of Value of the third of the three classes 
 into which all commodities are divided. 
 
 § 2. If the portion of produce raised in the most unfavor- 
 able circumstances obtains a value proportioned to its cost 
 of production, all the portions raised in more favorable cir- 
 
280 
 
 EXCHANGE. 
 
 cumstances, selling as they must do at the same value, obtain 
 a value more than proportioned to their cost of production. 
 
 The owners, however, of those portions of the produce 
 enjoy a privilege ; they obtain a value which yields them 
 more than the ordinary profit. The advantage depends on 
 the possession of a natural agent of peculiar quality, as, for 
 instance, of more fertile land than that which determines the 
 general value of the commodity; and when this natural 
 agent is not owned by themselves, the person who does 
 own it is able to exact from them, in the form of rent, the 
 whole extra gain derived from its use. We are thus brought 
 by another road to the Law of Eent, investigated in the con- 
 cluding chapter of the Second Book. Rent, we again see, 
 is the difference between the unequal returns to different 
 parts of the capital employed on the soil. Whatever sur- 
 plus any portion of agricultural capital produces, beyond 
 what is produced by the same amount of capital on the 
 worst soil, or under the most expensive mode of cultivation, 
 which the existing demands of society compel a recourse to, 
 that surplus will naturally be paid as rent from that capital, 
 to the owner of the land on which it is employed. 
 
 The discussion of rent is here followed wholly from the 
 point of view of value, while before (Book II, Chap. VI) the 
 law of rent was reached through a limitation of the quantity 
 of land due to the influence of population. In the former case 
 the rent and produce were stated in bushels. By introducing 
 price now (as the convenient symbol of value), instead of the 
 separate increased demands of population in our illustration 
 than used (p. 240), it will be seen how the same operation, look- 
 ing at it solely in respect to value, brings us to the same law : 
 
 
 A 
 
 B 
 
 c 
 
 D 
 
 Pkicb 
 
 24 bushels to the 
 acre. 
 
 18 bushels to the 
 acre. 
 
 12 bushels to the 
 acre. 
 
 6 bushels to the 
 acre. 
 
 BUDHBL. 
 
 Total 
 value of 
 product. 
 
 Eent. 
 
 Total 
 value of 
 product. 
 
 Eent. 
 
 Total 
 value of 
 product. 
 
 Eent. 
 
 Total 
 value of 
 product. 
 
 Eent 
 
 $1 00 
 133£ 
 2 00 
 4 00 
 
 $24 00 
 32 00 
 48 00 
 96 00 
 
 $0 00 
 
 8 00 
 
 24 00 
 
 72 00 
 
 $24 00 
 36 00 
 72 00 
 
 $o'o6 
 
 12 00 
 48 00 
 
 $24 00 
 48 00 
 
 $6*00 
 24 00 
 
 $24 00 
 
 $6 00 
 
RENT, IN ITS RELATION TO VALUE. 281 
 
 It was long thought by political economists, among the 
 rest even by Adam Smith, that the produce of land is al- 
 ways at a monopoly value, because (they said), in addition 
 to the ordinary rate of profit, it always yields something 
 further for rent. This we now see to be erroneous. A thing 
 can not be at a monopoly value when its supply can be in- 
 creased to an indefinite extent if we are only willing to 
 incur the cost. As long as there is any land fit for cultiva- 
 tion, which at the existing price can not be profitably culti- 
 vated at all, there must be some land a little better, which 
 will yield the ordinary profit, but allow nothing for rent: 
 and that land, if within the boundary of a farm, will be 
 cultivated by the farmer; if not so, probably by the pro- 
 prietor, or by some other person on sufferance. Some such 
 land at least, under cultivation, there can scarcely fail to be. 
 
 Rent, therefore, forms no part of the cost of production 
 which determines the value of agricultural produce. The 
 land or the capital most unfavorably circumstanced among 
 those actually employed, pays no rent, and that land or capi- 
 tal determines the cost of production which regulates the 
 value of the whole produce. Thus rent is, as we have al- 
 ready seen, no cause of value, but the price of the privilege 
 which the inequality of the returns to different portions of 
 agricultural produce confers on all except the least favored 
 portion. 
 
 Rent, in short, merely equalizes the profits of different 
 farming capitals, by enabling the landlord to appropriate 
 all extra gains occasioned by superiority of natural advan- 
 tages. If all landlords were unanimously to forego their 
 rent, they would but transfer it to the farmers, without 
 benefiting the consumer ; for the existing price of corn 
 would still be an indispensable condition of the production 
 of part of the existing supply, and if a part obtained that 
 price the whole would obtain it. Rent, therefore, unless 
 artificially increased by restrictive laws, is no burden on 
 the consumer: it does not raise the price of corn, and is no 
 otherwise a detriment to the public than inasmuch as if the 
 
282 EXCHANGE. 
 
 state had retained it, or imposed an equivalent in the shape 
 of a land-tax, it would then have been a fund applicable to 
 general instead of private advantage. 
 
 The nationalization of the land, consequently, would not 
 benefit the laboring-classes a whit through lowering the price 
 to them, or any consumer, of food or agricultural produce. 
 
 § 3. Agricultural productions are not the only commodi- 
 ties which have several different costs of production at once, 
 and which, in consequence of that difference, and in propor- 
 tion to it, afford a rent. Mines are also an instance. Al- 
 most all kinds of raw material extracted from the interior 
 of the earth — metals, coals, precious stones, etc. — are ob- 
 tained from mines differing considerably in fertility — that 
 is, yielding very different quantities of the product to the 
 same quantity of labor and capital. There are, perhaps, 
 cases in which it is impossible to extract from a particular 
 vein, in a given time, more than a certain quantity of ore, 
 because there is only a limited surface of the vein exposed, 
 on which more than a certain number of laborers can not be 
 simultaneously employed. But this is not true of all mines. 
 In collieries, for example, some other cause of limitation 
 must be sought for. In some instances the owners limit the 
 quantity raised, in order not too rapidly to exhaust the mine ; 
 in others there are said to be combinations of owners, to keep 
 up a monopoly price by limiting the production. Whatever 
 be the causes, it is a fact that mines of different degrees of 
 richness are in operation, and since the value of the produce 
 must be proportional to the cost of production at the worst 
 mine (fertility and situation taken together), it is more than 
 proportional to that of the best. All mines superior in pro- 
 duce to the worst actually worked will yield, therefore, a 
 rent equal to the excess. They may yield more; and the 
 worst mine may itself yield a rent. Mines being compara- 
 tively few, their qualities do not graduate gently into one 
 another, as the qualities of land do ; and the demand may be 
 such as to keep the value of the produce considerably above 
 the cost of production at the worst mine now worked, with- 
 
RENT, IN ITS RELATION TO VALUE. 283 
 
 out being sufficient to bring into operation a still worse. 
 During the interval, the produce is really at a scarcity value. 
 
 Fisheries are another example. Fisheries in the open sea 
 are not appropriated, but fisheries in lakes or rivers almost 
 always are so, and likewise oyster-beds or other particular 
 fishing-grounds on coasts. We may take salmon-fisheries as 
 an example of the whole class. Some rivers are far more 
 productive in salmon than others. None, however, without 
 being exhausted, can supply more than a very limited de- 
 mand. All others, therefore, will, if appropriated, afford a 
 rent equal to the value of their superiority. 
 
 Both in the case of mines and of fisheries, the natural 
 order of events is liable to be interrupted by the opening of 
 a new mine, or a new fishery, of superior quality to some of 
 those already in use. In this case, when things have perma- 
 nently adjusted themselves, the result will be that the scale 
 of qualities which supply the market will have been cut 
 short at the lower end, while a new insertion will have been 
 made in the scale at some point higher up ; and the worst 
 mine or fishery in use — the one which regulates the rents 
 of the superior qualities and the value of the commodity 
 — will be a mine or fishery of better quality than that by 
 which they were previously regulated. 
 
 The ground-rent of a building, and the rent of a garden 
 or park attached to it, will not be less than the rent which 
 the same land would afford in agriculture, but may be greater 
 than this to an indefinite amount ; the surplus being either 
 in consideration of beauty or of convenience, the convenience 
 often consisting in superior facilities for pecuniary gain. 
 Sites of remarkable beauty are generally limited in supply, 
 and therefore, if in great demand, are at a scarcity value. 
 Sites superior only in convenience are governed as to their 
 value by the ordinary principles of rent. The ground-rent 
 of a house in a small village is but little higher than the rent 
 of a similar patch of ground in the open fields. 
 
 Suppose the various kinds of land to be represented by the 
 alphabet ; that those below O pay no agricultural rent, and that 
 
284 EXCHANGE. 
 
 all lands increase in fertility and situation as we approach the 
 beginning of the alphabet, but which, as far up as K, are used 
 in agriculture ; that higher than K all are more profitably used 
 for building purposes, viz. : 
 
 A, B, C, . . . | K, L, M, N, 0, | ... X, Y, Z. 
 
 Now it will happen that land is chosen for building purposes 
 irrespective of its fertility for agricultural purposes. It will 
 not be true, as some may think, that no land will be used for 
 building until it will pay a ground-rent greater than the great- 
 est agricultural rent paid by any piece of land. It is not true, 
 for example, if N be selected for a building-lot, that it must 
 pay a ground-rent as high as the agricultural rent of K, the 
 most fertile land cultivated in agriculture. It must pay a 
 ground-rent higher only than it itself would pay, if cultivated. 
 It is only necessary that it pay more than the same (not better) 
 land would pay as rent if used only in agriculture. 
 
 The rents of wharfage, dock, and harbor room, water- 
 power, and many other privileges, may be analyzed on simi- 
 lar principles. Take the case, for example, of a patent or 
 exclusive privilege for the use of a process by which the 
 cost of production is lessened. If the value of the product 
 continues to be regulated by what it costs to those who are 
 obliged to persist in the old process, the patentee will make 
 an extra profit equal to the advantage which his process pos- 
 sesses over theirs. This extra profit is essentially similar to 
 rent, and sometimes even assumes the form of it, the patentee 
 allowing to other producers the use of his privilege in con- 
 sideration of an annual payment. 
 
 The extra gains which any producer or dealer obtains 
 through superior talents for business, or superior business 
 arrangements, are very much of a similar kind. If all his 
 competitors had the same advantages, and used them, the 
 benefit would be transferred to their customers through the 
 diminished value of the article ; he only retains it for him- 
 self because he is able to bring his commodity to market at 
 a lower cost, while its value is determined by a higher. 1 
 
 1 F. A. Walker (" Political Economy," pp. 248-259) expands this idea, and 
 makes it the pivotal part of his whole theory of distribution among laborers, 
 capitalists, and landlords. 
 
RENT, IN ITS RELATION TO VALUE. 
 
 285 
 
 § 4. A general resume of the laws of value, where a free 
 movement of labor and capital exists, may now be briefly made 
 in the following form : 
 
 fl. 
 
 ' 1. Utility, or ability 
 to satisfy a de- 
 sire (U). 
 
 Exchange val 
 ue has three ■{ 
 conditions, 
 viz. : 
 
 Those limited 
 in supply — e. 
 g., ancient pic- 
 tures or mo- 
 nopolized arti- 
 cles. 
 
 2. Difficulty of at- 
 tainment (D), ac- 
 cording to which i 
 there are three ' 
 classes of com- 
 modities, viz. : 
 
 3. Transferable- 
 ness. 
 
 2. Those whose 
 supply is ca- 
 pable of in- 
 definite in- 
 crease by the 
 use of labor 
 and capital. 
 
 3. Those whose 
 supply is 
 gained at a 
 -gradually in- 
 creasing cost, 
 under the law 
 of diminishing 
 returns. 
 
 Their value is regu- 
 lated by Demand 
 and Supply. The 
 only limit is U. 
 
 f Their normal and per- 
 manent value is 
 regulated by Cost 
 of Production, and 
 their temporary or 
 market value is 
 regulated by De- 
 mand and Supply, 
 oscillating around 
 Cost of Production 
 (which consists of 
 the amount of la- 
 bor and abstinence 
 required). 
 Their normal value is 
 regulated by the 
 Cost of Production 
 of that portion of 
 the whole amount 
 needed, which is 
 brought to market 
 at the greatest ex- 
 pense, and their 
 market value is 
 regulated by De- 
 mand and Supply 
 (as in class 2). 
 
 If there be no free competition between industries, then the 
 value of those commodities which has been said, in the above 
 classification, to depend on cost of production, will be governed 
 by the law of Reciprocal Demand. 
 
CHAPTER IV. 
 
 OF MONEY. 
 
 § 1. Having proceeded thus far in ascertaining the gen- 
 eral laws of Value, without introducing the idea of Money 
 (except occasionally for illustration), it is time that we should 
 now superadd that idea, and consider in what manner the 
 principles of the mutual interchange of commodities are 
 affected by the use of what is termed a Medium of Exchange. 
 
 As Professor Jevons 1 has pointed out, money performs three 
 distinct services, capable of being separated by the mind, and 
 worthy of separate definition and explanation : 
 
 1. A Common Measure, or Common Denominator, of Value. 
 
 2. A Medium of Exchange. 
 
 3. A Standard of Value. 
 
 F. A. Walker, 2 however, says : " Money is the medium of 
 exchange. Whatever performs this function, does this work, 
 is money, no matter what it is made of. . . . That which does 
 the money-work is the money-thing." 
 
 (1.) [If we had no money] the first and most obvious [in- 
 convenience] would be the want of a common measure for 
 values of different sorts. If a tailor had only coats, and 
 wanted to buy bread or a horse, it would be very troublesome 
 to ascertain how much bread he ought to obtain for a coat, 
 or how many coats he should give for a. horse. The calcula- 
 tion must be recommenced on different data every time he 
 bartered his coats for a different kind of article, and there 
 could be no current price or regular quotations of value. As 
 it is much easier to compare different lengths by expressing 
 
 1 " Money and the Mechanism of Exchange," chap. iii. 
 * "Political Economy," p. 121. 
 
MONEY. 287 
 
 them in a common language of feet and inches, so it is much 
 easier to compare values by means of a common language of 
 [dollars and cents]. 
 
 The need of a common denominator of values (an excellent 
 term, introduced by Storch), to whose terms the values of all 
 other commodities may be reduced, and so compared, is as 
 great as that the inhabitants of the different States of the 
 United States should have a common language as a means by 
 which ideas could be communicated to the whole nation. A 
 man may have a horse, whose value he wishes to compare in 
 some common term with the value of his house, although he 
 might not wish to sell either. A valuation by the State for 
 taxation could not exist but for this common denominator, or 
 register, of value. 
 
 (2.) The second function is that of a medium of exchange. 
 The distinction between this function and the common denomi- 
 nator of value is that the latter measures value, the former 
 transfers value. The man owning the horse, after having meas- 
 ured its value by comparison with a given thing, may now wish 
 to exchange it for other things. This discloses the need of an- 
 other quality in money. 
 
 The inconveniences of barter are so great that, without 
 some more commodious means of effecting exchanges, the 
 division of employments could hardly have been carried to 
 any considerable extent. A tailor, who had nothing but 
 coats, might starve before he could find any person having 
 bread to sell who wanted a coat: besides, he would not want 
 as much bread at a time as would be worth a coat, and the 
 coat could not be divided. Every person, therefore, would 
 at all times hasten to dispose of his commodity in exchange 
 for anything which, though it might not be fitted to his own 
 immediate wants, was in great and general demand, and 
 easily divisible, so that he might be sure of being able to 
 purchase with it whatever was offered for sale. The thing 
 which people would select to keep by them for making pur- 
 chases must be one which, besides being divisible and gen- 
 erally desired, does not deteriorate by keeping. This re- 
 duces the choice to a small number of articles. 
 
 This need is well explained by the following facts furnished 
 by Professor Jevons : " Some years since, Mademoiselle Zelie, 
 
288 EXCHANGE. 
 
 a singer of the Theatre Lyrique at Paris, made a professional 
 tour round the world, and gave a concert in the Society Islands. 
 In exchange for an air from ' Norma ' and a few other songs, 
 she was to receive a third part of the receipts. When counted, 
 her share was found to consist of three pigs, twenty-three tur- 
 keys, forty-four chickens, five thousand cocoanuts, besides con- 
 siderable quantities of bananas, lemons, and oranges. In the 
 Society Islands, however, pieces of money were very scarce ; 
 and, as mademoiselle could not consume any considerable por- 
 tion of the receipts herself, it became necessary in the mean 
 time to feed the pigs and poultry with the fruit." ' 
 
 (3.) The third function desired of money is what is usually 
 termed a "standard of value." It is, perhaps, better expressed 
 by F. A. Walker 2 as a "standard of deferred payments." Its 
 existence is due to the desire to have a means of comparing the 
 purchasing power of a commodity at one time with its purchas- 
 ing power at another distant time ; that is, that for long con- 
 tracts, exchanges may be in unchanged ratios at the beginning 
 and at the end of the contracts. There is no distinction be- 
 tween this function and the first, except one arising from the 
 introduction of time. At the same time and place, the " stand- 
 ard of value " is given in the common denominator of value. 
 
 A Measure of Yalue, 3 in the ordinary sense of the word 
 measure, would mean something by comparison with which 
 we may ascertain what is the value of any other thing. 
 When we consider, further, that value itself is relative, and 
 that two things are necessary to constitute it, independently 
 of the third thing which is to measure it, we may define a 
 Measure of Yalue to be something, by comparing with which 
 any two other things, we may infer their value in relation 
 to one another. 
 
 In this sense, any commodity will serve as a measure of 
 value at a given time and place ; since we can always infer 
 the proportion in which things exchange for one another, 
 when we know the proportion in which each exchanges for 
 any third thing. To serve as a convenient measure of value 
 is one of the functions of the commodity selected as a me- 
 
 1 "Money and the Mechanism of Exchange," p. 1. 
 
 2 " Political Economy," p. 144. 
 
 3 The substance of Mr. Mill's former chapter, XV (Book III), is here inserted 
 in its direct connection with the functions of money. 
 
MONEY. 2S9 
 
 dium of exchange. It is in that commodity that the values 
 of all other things are habitually estimated. 
 
 But the desideratum sought by political economists is 
 not a measure of the value of things at the same time and 
 place, but a measure of the value of the same thing at dif- 
 ferent times and places : something by comparison with 
 which it may be known whether any given thing is of 
 greater or less value now than a century ago, or in this 
 country than in America or China. To enable the money 
 price of a thing at two different periods to measure the 
 quantity of things in general which it will exchange for, the 
 same sum of money must correspond at both periods to the 
 same quantity of things in general — that is, money must 
 always have the same exchange value, the same general pur- 
 chasing power. JSTow, not only is this not true of money, or 
 of any other commodity, but we can not even suppose any 
 state of circumstances in which it would be true. 
 
 It being very clear that money, or the precious metals, do 
 not themselves remain absolutely stable in value for long peri- 
 ods, the only way in which a " standard of value " can be prop- 
 erly established is by the proposed "multiple standard of 
 value," stated as follows : 
 
 " A number of articles in general use — corn, beef, potatoes, 
 wool, cotton, silk, tea, sugar, coffee, indigo, timber, iron, coal, 
 and others — shall be taken, in a definite quantity of each, so 
 many pounds, or bushels, or cords, or yards, to form a standard 
 required. The value of these articles, in the quantities speci- 
 fied, and all of standard quality, shall be ascertained monthly 
 or weekly by Government, and the total sum [in money] which 
 would then purchase this bill of goods shall be, thereupon, 
 officially promulgated. Persons may then, if they choose, make 
 their contracts for future payments in terms of this multiple 
 or tabular standard." ' A, who had borrowed $1,000 of B in 
 1870 for ten years, would make note of the total money value 
 of all these articles composing the multiple standard, which we 
 will suppose is $125 in 1870. Consequently, A would promise 
 to pay B eight multiple units in ten years (that is, eight times 
 $125, or $1,000). But, if other things change in value rela- 
 
 1 F. A. Walker, " Political Economy," p. 363. A German, Count Soden 
 (1805), Joseph Lowe (1822), and G. Poulett Scrope (1833), proposed this scheme. 
 See Jevons, " Money and the Mechanism of Exchange," chap. xxv. 
 19 
 
290 EXCHANGE. 
 
 tively to money during these ten years, the same sum of money 
 — $1,000 — in 1880 will not return to B the same just amount 
 of purchasing power which he parted with in 1870. Now, if, 
 in 1880, when his note falls due, the government list is exam- 
 ined, and it is found that commodities in general have fallen in 
 value relatively to gold, the multiple unit will not amount to 
 as much gold as it did in 1870 ; perhaps each unit may be 
 rated only at $100. In that case, A is obliged to pay back only 
 eight multiple units, which costs him only $800 in money, while 
 B receives from A the same amount of purchasing power over 
 other commodities which he loaned to him. B had no just claim 
 to ten units, since the fall of all commodities relatively to gold 
 was not due to his exertions. On the other hand, if, between 
 1870 and 1880, prices had risen, mutatis mutandis, the eight 
 units would have cost A more than $1,000 in gold ; but he would 
 have been justly obliged to return the same amount of purchas- 
 ing power to B which he received from him. 
 
 § 2. By a tacit concurrence, almost all nations, at a very 
 early period, fixed upon certain metals, and especially gold 
 and silver, to serve this purpose. No other substances unite 
 the necessary qualities in s<» great a degree, with so many 
 subordinate advantages. These were the things which it 
 most pleased every one to possess, and which there was most 
 certainty of finding others willing to receive in exchange 
 for any kind of produce. They were among the most im- 
 perishable of all substances. They were also portable, and, 
 containing great value in small bulk, were easily hid ; a con- 
 sideration of much importance in an age of insecurity. 
 Jewels are inferior to gold and silver in the quality of 
 divisibility ; and are of very various qualities, not to be ac- 
 curately discriminated without great trouble. Gold and sil- 
 ver are eminently divisible, and, when pure, always of the 
 same quality ; and their purity may be ascertained and certi- 
 fied by a public authority. 
 
 Jevons 1 has more fully stated the requisites for a perfect 
 money as — 
 
 1. Value. 4. Homogeneity. 
 
 2. Portability. 5. Divisibility. 
 
 3. Indestructibility. 6. Stability of value. 
 
 7. Cognizability. 
 
 1 "Money and the Mechanism of Exchange," p. 31. 
 
MONEY. 291 
 
 Accordingly, though furs have been employed as money 
 in some countries, cattle in others, in Chinese Tartary cubes 
 of tea closely pressed together, the shells called cowries on 
 the coast of Western Africa, and in Abyssinia at this day 
 blocks of rock-salt, gold and silver have been generally pre- 
 ferred by nations which were able to obtain them, either by 
 industry, commerce, or conquest. To the qualities which 
 originally recommended them, another came to be added, 
 the importance of which only unfolded itself by degrees. 
 Of all commodities, they are among the least influenced by 
 any of the causes which produce fluctuations of value. No 
 commodity is quite free from such fluctuations. Gold and 
 silver have sustained, since the beginning of history, one 
 great permanent alteration of value, from the discovery of 
 the American mines. 
 
 In the present age the opening of new sources of supply, 
 so abundant as the Ural Mountains, California, and Australia, 
 may be the commencement of another period of decline, on 
 the limits of which it would be useless at present to specu- 
 late. Bat, on the whole, no commodities are so little ex- 
 posed to causes of variation. They fluctuate less than almost 
 any other things in their cost of production. And, from 
 their durability, the total quantity in existence is at all times 
 so great in proportion to the annual supply, that the effect 
 on value even of a change in the cost of production is not 
 sudden : a very long time being required to diminish mate- 
 rially the quantity in existence, and even to increase it very 
 greatly not being a rapid process. Gold and silver, there- 
 fore, are more fit than any other commodity to be the sub- 
 ject of engagements for receiving or paying a given quantity 
 at some distant period. 
 
 Since Mr. Mill wrote, two great changes in the production 
 of the precious metals have occurred. The discoveries of gold, 
 briefly referred to by him, have led to an enormous increase of 
 the existing fund of gold (see chart No. IX, Chap. VI), and a 
 fall in the value of gold within twenty years after the discov- 
 eries, according to Mr. Jevons's celebrated study, 1 of from nine 
 
 1 "A Serious Fall in the Value of Gold " (1863). 
 
292 EXCHANGE. 
 
 to fifteen per cent. Another change took place, a change in 
 the value of silver, in 1876, which has resulted in a permanent 
 fall of its value since that time (see chart No. X, Chap. VII). 
 Before that date, silver sold at about 60c?. per ounce in the cen- 
 tral market of the world, London ; and now it remains about 
 52c?. per ounce, although it once fell to 47c?., in July, 1876. In 
 spite of Mr. Mill's expressions of confidence in their stability of 
 value — although certainly more stable than other commodities 
 — the events of the last thirty-five years have fully shown that 
 neither gold nor silver — silver far less than gold — can success- 
 fully serve as a perfect " standard of value " for any consider- 
 able length of time. 
 
 "When gold and silver had become virtually a medium 
 of exchange, by becoming the things for which people gen- 
 erally sold, and with which they generally bought, whatever 
 they had to sell or to buy, the contrivance of coming ob- 
 viously suggested itself. By this process the metal was 
 divided into convenient portions, of any degree of smallness, 
 and bearing a recognized proportion to one another ; and the 
 trouble was saved of weighing and assaying at every change 
 of possessors — an inconvenience which, on the occasion of 
 small purchases, would soon have become insupportable. 
 Governments found it their interest to take the operation 
 into their own hands, and to interdict all coining by private 
 persons. $ 
 
 § 3. It must be evident, however, that the mere intro- 
 duction of a particular mode of exchanging things for one 
 another, by first exchanging a thing for money, and then ex- 
 changing the money for something else, makes no difference 
 in the essential character of transactions. It is not with 
 money that things are really purchased. Nobody's income 
 (except that of the gold or silver miner) is derived from the 
 precious metals. The [dollars or cents] which a person re- 
 ceives weekly or yearly are not what constitutes his income ; 
 they are a sort of tickets or orders which he can present for 
 payment at any shop he pleases, and which entitle him to re- 
 ceive a certain value of any commodity that he makes choice 
 of. The farmer pays his laborers and his landlord in these 
 tickets, as the most convenient plan for himself and them ; 
 
MONEY. 293 
 
 "but their real income is their share of his corn, cattle, and 
 hay, and it makes no essential difference whether he dis- 
 tributes it to them directly, or sells it for them and gives 
 them the price. There can not, in short, be intrinsically a 
 more insignificant thing, in the economy of society, than 
 money ; except in the character of a contrivance for sparing 
 time and labor. It is a machine for doing quickly and com- 
 modiously what would be done, though less quickly and 
 commodiously, without it ; and, like many other kinds of 
 machinery, it only exerts a distinct and independent influ- 
 ence of its own when it gets out of order. 
 
 The introduction of money does not interfere with the 
 operation of any of the Laws of Value laid down in the pre- 
 ceding chapters. The reasons which make the temporary or 
 market value of things depend on the demand and supply, 
 and their average and permanent values upon their cost of 
 production, are as applicable to a money system as to a sys- 
 tem of barter. Things which by barter would exchange for 
 one another will, if sold for money, sell for an equal amount 
 of it, and so will exchange for one another still, though the 
 process of exchanging them will consist of two operations 
 instead of only one. The relations of commodities to one 
 another remain unaltered by money ; the only new relation 
 introduced is their relation to money itself ; how much or 
 how little money they will exchange for ; in other words, 
 how the Exchange Yalue of money itself is determined. 
 Money is a commodity, and its value is determined like that 
 of other commodities, temporarily by demand and supply, 
 permanently and on the average by cost of production. 
 
CHAPTER Y. 
 
 OF THE VALUE OF MONEY, AS DEPENDED ON DEMAND AND 
 
 SUPPLY. 
 
 § 1. The Value of Money is to appearance an expression as 
 precise, as free from possibility of misunderstanding, as any 
 in science. The value of a thing is what it will exchange 
 for ; the value of money is what money will exchange for, 
 the purchasing power of money. If prices are low, money 
 will buy much of other things, and is of high value ; if prices 
 are high, it will buy little of other things, and is of low 
 value. The value of money is inversely as general prices ; 
 falling as they rise, and rising as they fall. When one per- 
 son lends to another, as well as when he pays wages or rent 
 to another, what he transfers is not the mere money, but a 
 right to a certain value of the produce of the country, to be 
 selected at pleasure; the lender having first bought this 
 right, by giving for it a portion of his capital. What he 
 really lends is so much capital ; the money is the mere instru- 
 ment of transfer. But the capital usually passes from the 
 lender to the receiver through the means either of money, or 
 of an order to receive money, and at any rate it is in money 
 that the capital is computed and estimated. Hence, borrow- 
 ing capital is universally called borrowing money ; the loan 
 market is called the money market ; those who have their 
 capital disposable for investment on loan are called the mon- 
 eyed class ; and the equivalent given for the use of capital, 
 or, in other words, interest, is not only called the interest of 
 money, but, by a grosser perversion of terms, the value of 
 money. 
 
 § 2. The value or purchasing power of money depends, 
 
THE VALUE OF MONEY. 295 
 
 in the first instance, on demand and supply. But demand 
 and supply, in relation to money, present themselves in a 
 somewhat different shape from the demand and supply of 
 other things. 
 
 The supply of a commodity means the quantity offered 
 for sale. But it is not usual to speak of offering money for 
 sale. People are not usually said to buy or sell money. 
 This, however, is merely an accident of language. In point 
 of fact, money is bought and sold like other things, whenever 
 other things are bought and sold for money. Whoever sells 
 corn, or tallow, or cotton, buys money. Whoever buys bread, 
 or wine, or clothes, sells money to the dealer in those articles,, 
 The money with which people are offering to buy, is money 
 offered for sale. The supply of money, then, is the quantity 
 of it which people are wanting to lay out ; that is, all the 
 money they have in their possession, except what they are 
 hoarding, or at least keeping by them as a reserve for future 
 contingencies. The supply of money, in short, is all the 
 money in circulation at the time. 
 
 The demand for money, again, consists of all the goods 
 offered for sale. Every seller of goods is a buyer of money, 
 and the goods he brings w r ith him constitute his demand. 
 The demand for money differs from the demand for other 
 things in this, that it is limited only by the means of the 
 purchaser. 
 
 In this last statement Mr. Mill is misled by his former defini- 
 tion of demand as " quantity demanded." He has the true idea 
 of demand in this case regarding money ; but the demand for 
 money does not, as he thinks, differ from the demand for other 
 things, inasmuch as, in our corrected view of demand for other 
 things (p. 255), it was found that the demand for other things 
 than money was also limited by the means of the purchaser. 1 
 
 1 F. A. Walker defines the demand for money as " the occasion for the use 
 of money in effecting exchanges ; in other words, it is the amount of money- 
 work to be done" (Political Economy," p. 133); and the supply of money as 
 " the money-force available to do the money-work which the demand for money 
 indicates as required to be done, in the given community, at the given time. The 
 amount of money is measured by . . . the amount of money and the rapidity of 
 circulation" (ibid., p. 136). 
 
296 EXCHANGE. 
 
 As the whole of the goods in the market compose the 
 demand for money, so the whole of the money constitutes 
 the demand for goods. The money and the goods are seek- . 
 ing eath other for the purpose of being exchanged. They 
 are reciprocally supply and demand to one another. It is 
 indifferent whether, in characterizing the phenomena, we 
 speak of the demand and supply of goods, or the supply and 
 the demand of money. They are equivalent expressions. 
 
 Supposing the money in the hands of individuals to be 
 increased, the wants and inclinations of the community col- 
 lectively in respect to consumption remaining exactly the 
 same, the increase of demand would reach all things equally, 
 and there would be a universal rise of prices. Let us rather 
 suppose, therefore, that to every pound, or shilling, or penny 
 in the possession of any one, another pound, shilling, or 
 penny were suddenly added. There would be an increased 
 money demand, and consequently an increased money value, 
 or price, for things of all sorts. This increased value would 
 do no good to any one ; would make no difference, except 
 that of having to reckon [dollars and cents] in higher num- 
 bers. It would be an increase of values only as estimated in 
 money, a thing only wanted to buy other things with ; and 
 would not enable any one to buy more of them than before. 
 Prices would have risen in a certain ratio, and the value of 
 money would have fallen in the same ratio. 
 
 It is to be remarked that this ratio would be precisely 
 that in which the quantity of money had been increased. If 
 the whole money in circulation was doubled, prices would be 
 doubled. If it was only increased one fourth, prices would 
 rise one fourth. There would be one fourth more money, all 
 of Which would be used to purchase goods of some descrip- 
 tion. When there had been time for the increased supply 
 of money to reach all markets, or (according to the conven- 
 tional metaphor) to permeate all the channels of circulation, 
 all prices would have risen one fourth. But the general rise 
 of price is independent of this diffusing and equalizing pro- 
 cess. Even if some prices were raised more, and others less, 
 
THE VALUE OF MONEY. 
 
 the average rise would be one fourth. Thi' ,ry 
 
 consequence of the fact that a fourth mor ,uld 
 
 have been given for only the same quantity Gen- 
 
 eral prices, therefore, would in any case bf ^her. 
 
 So that the value of money, other thi? 3 same, 
 
 varies inversely as its quantity ; every increase of quantity 
 lowering the value, and every diminution raising it, in a ratio 
 exactly equivalent. This, it must be observed, is a property 
 peculiar to money. We did not find it to be true of com- 
 modities generally, that every diminution of supply raised 
 the value exactly in proportion to the deficiency, or that 
 every increase lowered it in the precise ratio of the excess. 
 Some things are usually affected in a greater ratio than that 
 of the excess or deficiency, others usually in a less ; because, 
 in ordinary cases of demand, the desire, being for the thing 
 itself, may be stronger or weaker ; and the amount of what 
 people are willing to expend on it, being in any case a limit- 
 ed quantity, may be affected in very unequal degrees by 
 difficulty or facility of attainment. But in the case of 
 money, which is desired as the means of universal purchase, 
 the demand consists of everything which people have to sell ; 
 and the only limit to what they are willing to give, is the 
 limit set by their having nothing more to offer. The whole 
 of the goods being in any case exchanged for the whole of 
 the money which comes into the market to be laid out, they 
 will sell for less or more of it, exactly according as less or 
 more is brought. 
 
 § 3. It might be supposed that there is always in circula- 
 tion in a country a quantity of money equal in value to the 
 whole of the goods then and there on sale. But this would 
 be a complete misapprehension. The money laid out is 
 equal in value to the goods it purchases ; but the quantity of 
 money laid out is not the same thing with the quantity in 
 circulation. As the money passes from hand to hand, the 
 same piece of money is laid out many times before all the 
 things on sale at one time are purchased and finally removed 
 from the market ; and each pound or dollar must be counted 
 
298 EXCHANGE. 
 
 for as many pounds or dollars as the number of times it 
 changes hands in order to effect this object. 
 
 If we assume the quantity of goods on sale, and the num- 
 ber of times those goods are resold, to be fixed quantities, the 
 value of money will depend upon its quantity, together with 
 the average number of times that each piece changes hands 
 in the process. The w T hole of the goods sold (counting each 
 resale of the same goods as so much added to the goods) have 
 been exchanged for the whole of the money, multiplied by 
 the number of purchases made on the average by each piece. 
 Consequently, the amount of goods and of transactions being 
 the same, the value of money is inversely as its quantity 
 multiplied by what is called the rapidity of circulation. And 
 the quantity of money in circulation is equal to the money 
 value of all the goods sold, divided by the number which 
 expresses the rapidity of circulation. 
 
 This may be expressed in mathematical language, where V 
 is the value of money, Q is the quantity in circulation, and R 
 the number expressing the rapidity of circulation, as follows : 
 
 v = -±- 
 
 QXR. 
 
 The phrase, rapidity of circulation, requires some com- 
 ment. It must not be understood to mean the number of 
 purchases made by each piece of money in a given time. 
 Time is not the thing to be considered. The state of society 
 may be such that each piece of money hardly performs more 
 than one purchase in a year; but if this arises from the 
 small number of transactions — from the small amount of 
 business done, the want of activity in traffic, or because 
 what traffic there is mostly takes place by barter — it consti- 
 tutes no reason why prices should be lower, or the value of 
 money higher. The essential point is, not how often the 
 same money changes hands in a given time, but how often 
 it changes hands in order to perform a given amount of 
 traffic. "We must compare the number of purchases made 
 by the money in a given time, not with the time itself, but 
 with the goods sold in that same time. If each piece of 
 
THE VALUE OP MONEY. 299 
 
 money changes hands on an average ten times while goods 
 are sold to the value of a million sterling, it is evident that 
 the money required to circulate those goods is £100,000. 
 And, conversely, if the money in circulation is £100,000, and 
 each piece changes hands, by the purchase of goods, ten times 
 in a month, the sales of goods for money which take place 
 every month must amount, on the average, to £1,000,000. 
 [The essential point to be considered is] the average number 
 of purchases made by each piece in order to affect a given 
 pecuniary amount of transactions. 
 
 "There is no doubt that the rapidity of circulation varies 
 very much between one country and another. A thrifty peo- 
 ple with slight banking facilities, like the French, Swiss, Bel- 
 gians, and Dutch, hoard coin much more than an improvident 
 people like the English, or even a careful people, with a per- 
 fect banking system, like the Scotch. Many circumstances, 
 too, affect the rapidity of circulation. Railways and rapid 
 steamboats enable coin and bullion to be more swiftly remitted 
 than of old ; telegraphs prevent its needless removal, and the 
 acceleration of the mails has a like effect." " So different are 
 the commercial habits of different peoples, that there evidently 
 exists no proportion whatever between the amount of currency 
 in a country and the aggregate of the exchanges which can be 
 effected by it." ' 
 
 § 4. The proposition which we have laid down respecting 
 the dependence of general prices upon the quantity of money 
 in circulation must be understood as applying only to a state 
 of things in which money — that is, gold or silver — is the ex- 
 clusive instrument of exchange, and actually passes from 
 hand to hand at every purchase, credit in any of its shapes 
 being unknown. "When credit comes into play as a means 
 of purchasing, distinct from money in hand, we shall here- 
 after find that the connection between prices and the amount 
 of the circulating medium is much less direct and intimate, 
 and that such connection as does exist no longer admits of 
 so simple a mode of expression. That an increase of the 
 quantity of money raises prices, and a diminution lowers 
 them, is the most elementary proposition in the theory of 
 
 1 Jevons, " Money and the Mechanism of Exchange," pp. 336, 337. 
 
300 
 
 EXCHANGE. 
 
 currency, and without it we should have no key to any of 
 the others. In any state of things, however, except the 
 simple and primitive one which we have supposed, the 
 proposition is only true, other things being the same. 
 
 It is habitually assumed that whenever there is a greater 
 amount of money in the country, or in existence, a rise of 
 prices must necessarily follow. But this is by no means an 
 inevitable consequence. In no commodity is it the quantity 
 in existence, but the quantity offered for sale, that deter- 
 mines the value. Whatever may be the quantity of money 
 in the country, only that part of it will affect prices which 
 goes into the market of commodities, and is there actually 
 exchanged against goods. "Whatever increases the amount 
 of this portion of the money in the country tends to raise 
 prices. 
 
 This statement needs modification, since the change in the 
 amounts of specie in the bank reserves, particularly of Eng- 
 land and the United States, determines the amount of credit 
 and purchasing power granted, and so affects prices in that 
 way ; but prices are affected not by this specie being actually 
 exchanged against goods. 
 
 It frequently happens that money to a considerable 
 amount is brought into the country, is there actually in- 
 vested as capita], and again flows out, without having ever 
 once acted upon the markets of commodities, but only upon 
 the market of securities, or, as it is commonly though im- 
 properly called, the money market. 
 
 A foreigner landing in the country with a treasure might 
 very probably prefer to invest his fortune at interest ; which 
 we shall suppose him to do in the most obvious way by be- 
 coming a competitor for a portion of the stock, railway de- 
 bentures, mercantile bills, mortgages, etc., which are at all 
 times in the hands of the public. By doing this he would 
 raise the prices of those different securities, or in other 
 words would lower the rate of interest ; and since this 
 would disturb the relation previously existing between the 
 rate of interest on capital in the country itself and that in 
 
THE VALUE OF MONEY. 301 
 
 foreign countries, it would probably induce some of those 
 who had floating capital seeking employment to send it 
 abroad for foreign investment, rather than buy securities at 
 home at the advanced price. As much money might thus 
 go out as had previously come in, while the prices of com- 
 modities would have shown no trace of its temporary pres- 
 ence. This is a case highly deserving of attention ; and it is 
 a fact now beginning to be recognized that the passage of 
 the precious metals from country to country is determined 
 much more than was formerly supposed by the state of the 
 loan market in different countries, and much less by the state 
 of prices. 
 
 If there be, at any time, an increase in the number of 
 money transactions, a thing continually liable to happen 
 from differences in the activity of speculation, and even in 
 the time of year (since certain kinds of business are trans- 
 acted only at particular seasons), an increase of the currency 
 which is only proportional to this increase of transactions, 
 and is of no longer duration, has no tendency to raise prices. 
 
 For example, bankers in Eastern cities each year send in 
 the autumn to the West, as the crops are gathered, very large 
 sums of money, to settle transactions in the buying and selling 
 of grain, wool, etc., but it again flows back to the great cen- 
 ters of business in a short time, in payment of purchases from 
 Eastern merchants. 
 
CHAPTER VI. 
 
 OF THE VALUE OP MONET, AS DEPENDENT ON COST OF PRO- 
 DUCTION. 
 
 § 1. But money, no more than commodities in general, 
 has its value definitely determined by demand and supply. 
 The ultimate regulator of its value is Cost of Production. 
 
 "We are supposing, of course, that things are left to them- 
 selves. Governments have not always left things to them- 
 selves. It was, until lately, the policy of all governments to 
 interdict the exportation and the melting of money ; while, 
 by encouraging the exportation and impeding the importa- 
 tion of other things, they endeavored to have a stream of 
 money constantly flowing in. By this course they gratified 
 two prejudices : they drew, or thought that they drew, more 
 money into the country, which they believed to be tanta- 
 mount to more wealth ; and they gave, or thought that they 
 gave, to all producers and dealers, high prices, which, though 
 no real advantage, people are always inclined to suppose to 
 be one. 
 
 "We are, however, to suppose a state, not of artificial regu- 
 lation, but of freedom. In that state, and assuming no charge 
 to be made for coinage, the value of money will conform to 
 the value of the bullion of which it is made. A pound-weight 
 of gold or silver in coin, and the same weight in an ingot, 
 will precisely exchange for one another. On the supposition 
 of freedom, the metal can not be worth more in the state of 
 bullion than of coin ; for as it can be melted without any loss 
 of time, and with hardly any expense, this would of course 
 be done until the quantity in circulation was so much dimin- 
 
THE VALUE OF MONEY. 303 
 
 ished as to equalize its value with that of the same weight in 
 bullioD. It may be thought, however, that the coin, though 
 it can not be of less, may be, and being a manufactured ar- 
 ticle will naturally be, of greater value than the bullion con- 
 tained in it, on the same principle on which linen cloth is 
 of more value than an equal weight of linen yarn. This 
 would be true, were it not that Government, in this country 
 and in some others, coins money gratis for any one who fur- 
 nishes the metal. If Government, however, throws the ex- 
 pense of coinage, as is reasonable, upon the holder, by making 
 a charge to cover the expense (which is done by giving back 
 rather less in coin than has been received in bullion, and is 
 called levying a seigniorage), the coin will rise, to the extent 
 of the seigniorage, above the value of the bullion. If the 
 mint kept back one per cent, to pay the expense of coinage, 
 it would be against the interest of the holders of bullion to 
 have it coined, until the coin was more valuable than the 
 bullion by at least that fraction. The coin, therefore, would 
 be kept one per cent higher in value, which could only be 
 by keeping it one per cent less in quantity, than if its coin- 
 age were gratuitous. 
 
 In the United States there was no charge for seigniorage 
 on gold and silver to 1853, when one half of one per cent was 
 charged as interest on the delay if coin was immediately de- 
 livered on the deposit of bullion ; in 18T3 it was reduced to 
 one fifth of one per cent ; and in 1875, by a provision of the 
 Resumption Act, it was wholly abolished (the depositor, how- 
 ever, paying for the copper alloy). For the trade-dollars, as 
 was consistent with their being only coined ingots and not le- 
 gal money, a seigniorage was charged equal simply to the ex- 
 pense of coinage, which was one and a quarter per cent at 
 Philadelphia, and one and a half per cent at San Francisco on 
 the tale value. 
 
 § 2. The value of money, then, conforms permanently, 
 and in a state of freedom almost immediately, to the value 
 of the metal of which it is made ; with the addition, or not, 
 of the expenses of coinage, according as those expenses are 
 borne by the individual or by the state. 
 
 To the majority of civilized countries gold and silver are 
 
304 EXCHANGE. 
 
 foreign products : and the circumstances which govern the 
 values of foreign products present some questions which we 
 are not yet ready to examine. For the present, therefore, 
 we must suppose the country which is the subject of our in- 
 quiries to be supplied with gold and silver by its own mines 
 [as in the case of the United States], reserving for future 
 consideration how far our conclusions require modification 
 to adapt them to the more usual case. 
 
 Of the three classes into which commodities are divided 
 — those absolutely limited in supply, those which may be 
 had in unlimited quantity at a given cost of production, and 
 those which may be had in unlimited quantity, but at an 
 increasing cost of production — the precious metals, being the 
 produce of mines, belong to the third class. Their natural 
 value, therefore, is in the long run proportional to their cost 
 of production in the most unfavorable existing circumstances, 
 that is, at the worst mine which it is necessary to work in 
 order to obtain the required supply. A pound weight of 
 gold will, in the gold-producing countries, ultimately tend 
 to exchange for as much of every other commodity as is 
 produced at a cost equal to its own ; meaning by its own 
 cost the cost in labor and expense at the least productive 
 sources of supply which the then existing demand makes it 
 necessary to work. The average value of gold is made to 
 conform to its natural value in the same manner as the values 
 of other things are made to conform to their natural value. 
 Suppose that it were selling above its natural value ; that is, 
 above the value which is an equivalent for the labor and ex- 
 pense of mining, and for the risks attending a branch of in- 
 dustry in which nine out of ten experiments have usually 
 been failures. A part of the mass of floating capital which 
 is on the lookout for investment would take the direction 
 of mining enterprise ; the supply would thus be increased, 
 and the value would fall. If, on the contrary, it were sell- 
 ing below its natural value, miners would not be obtaining 
 the ordinary profit ; they would slacken their works ; if the 
 depreciation was great, some of the inferior mines would 
 
THE VALUE OF MONEY. 305 
 
 perhaps stop working altogether: and a falling off in the 
 annual supply, preventing the annual wear and tear from 
 being completely compensated, would by degrees reduce the 
 quantity, and restore the value. 
 
 When examined more closely, the following are the de- 
 tails of the process : If gold is above its natural or cost 
 value — the coin, as we have seen, conforming in its value 
 to the bullion — money will be of high value, and the prices 
 of all things, labor included, will be low. These low prices 
 will lower the expenses of all producers ; but, as their returns 
 will also be lowered, no advantage will be obtained by any 
 producer, except the producer of gold ; whose returns from 
 his mine, not depending on price, will be the same as before, 
 and, his expenses being less, he will obtain extra profits, and 
 will be stimulated to increase his production. E converso, 
 if the metal is below its natural value ; since this is as much 
 as to say that prices are high, and the money expenses of all 
 producers unusually great ; for this, however, all other pro- 
 ducers will be compensated by increased money returns ; the 
 miner alone will extract from his mine no more metal than 
 before, while his expenses will be greater : his profits, there- 
 fore, being diminished or annihilated, he will diminish his 
 production, if not abandon his employment. 
 
 In this manner it is that the value of money is made to 
 conform to the cost of production of the metal of which it is 
 made. It may be well, however, to repeat (what has been 
 said before) that the adjustment takes a long time to effect, 
 in the case of a commodity so generally desired and at the 
 same time so durable as the precious metals. Being so 
 largely used, not only as money but for plate and ornament, 
 there is at all times a very large quantity of these metals in 
 existence : while they are so slowly worn out that a com- 
 paratively small annual production is sufficient to keep up 
 the supply, and to make any addition to it which may be 
 required by the increase of goods to be circulated, or by the 
 increased demand for gold and silver articles by wealthy con- 
 sumers. Even if this small annual supply were stopped en- 
 
 20 
 
306 EXCHANGE. 
 
 tirely, it would require many years to reduce the quantity 
 bo much as to make any very material difference in prices. 
 The quantity may be increased much more rapidly than it 
 can be diminished ; but the increase must be very great be- 
 fore it can make itself much felt over such a mass of the 
 precious metals as exists in the whole commercial world. 
 And hence the effects of all changes in the conditions of 
 production of the precious metals are at first, and continue 
 to be for many years, questions of quantity only, with little 
 reference to cost of production. More especially is this the 
 case when, as at the present time, many new sources of sup- 
 ply have been simultaneously opened, most of them practi- 
 cable by labor alone, without any capital in advance beyond 
 a pickaxe and a week's food, and when the operations are as 
 yet wholly experimental, the comparative permanent produc- 
 tiveness of the different sources being entirely unascertained. 
 
 For the facts in regard to the production of the precious met- 
 als, see the investigation by Dr. Adolf Soetbeer, 1 from which 
 Chart IX has been taken. It is worthy of careful study. The 
 figures in each period, at the top of the respective colors, give the 
 average annual production during those years. The last period 
 has been added by me from figures taken from the reports of 
 the Director of the United States Mint. Other accessible 
 sources, for the production of the precious metals, are the 
 tables in the appendices to the Report of the Committee to 
 the House of Commons on the "Depreciation of Silver" 
 (1876) ; the French official Proces-Verbaux of the Interna- 
 tional Monetary Conference of 1881, which give Soetbeer's 
 figures to a later date than his publication above mentioned ; 
 the various papers in the British parliamentary documents ; 
 and the reports of the director of our mint. Since 1850 more 
 gold has been produced than in the whole period preceding, 
 from 1492 to 1850. Previous to 1849 the annual average pro- 
 duct of gold, out of the total product of both gold and silver, 
 was thirty-six per cent ; for the twenty-six years ending in 
 1875, it has been seventy and one half per cent. The result 
 has been a rise in gold prices certainly down to 1862," as shown 
 by the following chart, which shows the departure of the line 
 
 1 " Edelmetall-Production," in Petermann's " Mittheilungen," Erganzung- 
 sheft, No. 57. 
 
 2 See Jevons's " A Serious Fall in the Value of Gold." 
 
THE VALUE OF MONEY. 
 
 307 
 
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308 
 
 EXCHANGE. 
 
 of prices from the horizontal line, representing the average 
 prices from 1845 to 1850. 
 
 1845 
 
 1850 
 
 1860 
 
 Railway speculation. 
 
 \ _ Commercial panic. 
 
 Great depression. 
 
 It will be observed how much 
 higher the line of prices rose 
 during the depression after 1858 
 than it was during a period of 
 similar conditions after 1848. 
 The result, it may be said, was 
 predicted by Chevalier. 1 
 
 The fall of prices from 1873 
 to 1879, owing to the commer- 
 cial panic in the former year, 
 however, is regarded, somewhat 
 unjustly, in my opinion, as an 
 evidence of an appreciation of 
 gold. Mr. Giffen's paper in 
 the " Statistical Journal," vol. 
 xlii, is the basis on which Mr. 
 Goschen founded an argument 
 in the " Journal of the Institute 
 of Bankers" (London), May, 
 1883, and which attracted con- 
 siderable attention. On the oth- 
 er side, see Bourne, " Statistical 
 Journal," vol. xlii. The claim 
 that the value of gold has risen 
 seems particularly hasty, espe- 
 cially when we consider that af- 
 ter the panics of 1857 and 1866 
 the value of money rose, for rea- 
 sons not affecting gold, respec- 
 tively fifteen and twenty-five 
 per cent. 
 The very thing for which the precious metals are most rec- 
 ommended for use as the materials of money — their durability 
 — is also the very thing which has, for all practical purposes, 
 excepted them from the law of cost of production, and caused 
 
 Speculation. 
 
 Peace. 
 
 Depression. 
 
 Chart showing rise of average gold prices 
 after the gold discoveries in 1849 to 1862. 
 
 1 In his book "De la Baisse probable de l'Or" (1859). See also Cairnes's 
 " Essays." For authorities on the new gold, see Robinson's " California " (Lar- 
 kin's and Mason's Reports, pp. 1*7, 33) ; Executive Documents of United States, 
 1848, I, 1; Westgarth's "Colony of Victoria," pp. 122, 315; Wood, "Sixteen 
 Months in the Gold Diggings," p. 125; Lalor's " Cyclopaedia," II, p. 851; 
 Walker, " Money," part i, chaps, vii, viii. For the probable effects, see " North 
 American Review," October, 1852 ; Tooke's " History of Prices," vi, p. 224 ; 
 "Statistical Journal," 18*78, p. 230; Levasseur, "Question de l'Or." As to how 
 far the value of gold was lowered, Jevons, " Serious Fall," etc. ; " Statistical 
 Journal," 1865; ibid., 1869, p. 445; and Giffen's "Essays in Finance," p. 82. 
 
THE VALUE OF MONEY. 309 
 
 their value to depend practically upon the law of demand and 
 supply. Their durability is the reason of the vast accumula- 
 tions in existence, and this it is which makes the annual prod- 
 uct very small in relation to the whole existing supply, and so 
 prevents its value from conforming, except after a long term 
 of years, to the cost of production of the annual supply. 
 
 § 3. Since, however, the value of money really conforms, 
 like that of other things, though more slowly, to its cost of 
 production, some political economists have objected alto- 
 gether to the statement that the value of money depends on 
 its quantity combined with the rapidity of circulation, which, 
 they think, is assuming a law for money that does not exist 
 for any other commodity, when the truth is that it is gov- 
 erned by the very same laws. To this we may answer, in 
 the first place, that the statement in question assumes no 
 peculiar law. It is simply the law of demand and supply, 
 which is acknowledged to be applicable to all commodities, 
 and which, in the case of money, as of most other things, is 
 controlled, but not set aside, by the law of cost of produc- 
 tion, since cost of production would have no effect on value 
 if it could have none on supply. But, secondly, there really 
 is, in one respect, a closer connection between the value of 
 money and its quantity than between the values of other 
 things and their quantity. The value of other things con- 
 forms to the changes in the cost of production, without re- 
 quiring, as a condition, that there should be any actual 
 alteration of the supply : the potential alteration is suffi- 
 cient ; and, if there even be an actual alteration, it is but a 
 temporary one, except in so far as the altered value may 
 make a difference in the demand, and so require an increase 
 or diminution of supply, as a consequence, not a cause, of the 
 alteration in value. Now, this is also true of gold and silver, 
 considered as articles of expenditure for ornament and lux- 
 ury ; but it is not true of money. If the permanent cost of 
 production of gold were reduced one fourth, it might hap- 
 pen that there would not be more of it bought for plate, 
 gilding, or jewelry, than before ; and if so, though the value 
 would fall, the quantity extracted from the mines for these 
 
310 EXCHANGE. 
 
 purposes would be no greater than previously. Not so with 
 the portion used as money: that portion could not fall in 
 value one fourth unless actually increased one fourth ; for, 
 at prices one fourth higher, one fourth more money would 
 be required to make the accustomed purchases ; and, if this 
 were not forthcoming, some of the commodities would be 
 without purchasers, and prices could not be kept up. Al- 
 terations, therefore, in the cost of production of the precious 
 metals do not act upon the value of money except just in 
 proportion as they increase or diminish its quantity ; which 
 can not be said of any other commodity. It would, therefore, 
 I conceive, be an error, both scientifically and practically, to 
 discard the proposition which asserts a connection between 
 the value of money and its quantity. 
 
 There are cases, however, in which the potential change of 
 the precious metals affects their value as money in the same 
 way that it affects the value of other things. Such a case 
 was the change in the value of silver in 1876. The usual causes 
 assigned for that serious fall in value were the greatly increased 
 production from the mines of Nevada ; the demonetization of 
 silver by Germany ; and the decreased demand for export to 
 India. It is true that the exports of silver from England to 
 India fell off from about $32,000,000 in 1871-1872 to about 
 $23,000,000 in 1874-1875 ; but none of the increased Nevada 
 silver was exported from the United States to London, nor had 
 Germany put more than $30,000,000 of her silver on the mar- 
 ket ; ' and yet the price of silver so fell that the depreciation 
 amounted to 20£ per cent as compared with the average price 
 between 1867 and 1872. The change in value, however, took 
 place without any corresponding change in the actual quantity 
 in circulation. The relation between prices and the quantities 
 of the precious metals is, therefore, not so exact, certainly as 
 regards silver, as Mr. Mill would have us believe ; and thus 
 their values conform more nearly to the general law of Demand 
 and Supply in the same way that it affects things other than 
 money. 
 
 It is evident, however, that the cost of production, in 
 the long run, regulates the quantity ; and that every country 
 (temporary fluctuation excepted) will possess, and have in 
 
 1 " Report of the House of Commons on Depreciation of Silver," 1876, p. v. 
 
THE VALUE OF MONEY. 3H 
 
 circulation, just that quantity of money which will perform 
 all the exchanges required of it, consistently with maintain- 
 ing a value conformable to its cost of production. The 
 prices of things will, on the average, be such that money 
 will exchange for its own cost in all other goods : and, pre- 
 cisely because the quantity can not be prevented from affect- 
 ing the value, the quantity itself will (by a sort of self-acting 
 machinery) be kept at the amount consistent with that stand- 
 ard of prices — at the amount necessary for performing, at 
 those prices, all the business required of it. 
 
CHAPTER VII. 
 
 OF A DOUBLE STANDARD AND SUBSIDIARY COINS. 
 
 § 1. Though the qualities necessary to fit any commodity 
 for being used as money are rarely united in any consider- 
 able perfection, there are two commodities which possess 
 them in an eminent and nearly an equal degree — the two 
 precious metals, as they are called — gold and silver. Some 
 nations have accordingly attempted to compose their circu- 
 lating medium of these two metals indiscriminately. 
 
 There is an obvious convenience in making use of the 
 more costly metal for larger payments, and the cheaper one 
 for smaller ; and the only question relates to the mode in 
 which this can best be done. The mode most frequently 
 adopted has been to establish between the two metals a fixed 
 proportion [to decide by law, for example, that sixteen 
 silver dollars should be equivalent to one gold dollar] ; and 
 it being left free to every one who has a [dollar] to pay, either 
 to pay it in the one metal or in the other. 
 
 If [their] natural or cost values always continued to bear 
 the same ratio to one another, the arrangement would be un- 
 objectionable. This, however, is far from being the fact. 
 Gold and silver, though the least variable in value of all 
 commodities, are not invariable, and do not always vary 
 simultaneously. Silver, for example, was lowered in perma- 
 nent value more than gold by the discovery of the American 
 mines ; and those small variations of value which take place 
 occasionally do not affect both metals alike. Suppose such 
 a variation to take place — the value of the two metals rela- 
 tively to one another no longer agreeing with their rated 
 
A DOUBLE STANDARD AND SUBSIDIARY COINS. 313 
 
 proportion — one or other of them will now be rated below its 
 bullion value, and there will be a profit to be made by melt- 
 ing it. 
 
 Suppose, for example, that gold rises in value relatively 
 to silver, so that the quantity of gold in a sovereign is now 
 worth more than the quantity of silver in twenty shillings. 
 Two consequences will ensue. No debtor will any longer 
 find it his interest to pay in gold. He will always pay in 
 silver, because twenty shillings are a legal tender for a debt 
 of one pound, and he can procure silver convertible into 
 twenty shillings for less gold than that contained in a sov- 
 ereign. The other consequence will be that, unless a sov- 
 ereign can be sold for more than twenty shillings, all the 
 sovereigns will be melted, since as bullion they will purchase 
 a greater number of shillings than they exchange for as coin. 
 The converse of all this would happen if silver, instead of 
 gold, were the metal which had risen in comparative value. 
 A sovereign would not now be worth so much as twenty 
 shillings, and whoever had a pound to pay would prefer pay- 
 ing it by a sovereign ; while the silver coins would be col- 
 lected for the purpose of being melted, and sold as bullion 
 for gold at their real value — that is, above the legal valua- 
 tion. The money of the community, therefore, would never 
 really consist of both metals, but of the one only which, at 
 the particular time, best suited the interest of debtors ; and 
 the standard of the currency would be constantly liable to 
 change from the one metal to the other, at a loss, on eafch 
 change, of the expense of coinage on the metal which fell 
 out of use. 
 
 This is the operation by which is carried into effect the law 
 of Sir Thomas Gresham (a merchant of the time of Elizabeth) 
 to the purport that " money of less value drives out money of 
 more value," where both are legal payments among individuals. 
 A celebrated instance is that where the clipped coins of Eng- 
 land were received by the state on equal terms with new and 
 perfect coin in 1695. Thev hanged men and women, but they 
 did not prevent the operation of Gresham's law and the disap- 
 pearance of the perfect coins. When the state refused the 
 clipped coins at legal value, by no longer receiving them in pay- 
 
314 EXCHANGE. 
 
 ment of taxes, the trouble ceased. 1 Jevons gives a striking 
 illustration of the same law : " At the time of the treaty of 
 1858 between Great Britain, the United States, and Japan, 
 which partially opened up the last country to European traders, 
 a very curious system of currency existed in Japan. The most 
 valuable Japanese coin was the kobang, consisting of a thin 
 oval disk of gold about two inches long, and one and a quarter 
 inch wide, weighing two hundred grains, and ornamented in a 
 very primitive manner. It was passing current in the towns of 
 Japan for four silver itzebus, but was worth in English money 
 about 18s. 5c?., whereas the silver itzebu was equal only to 
 about Is. 4d. [four itzebus being worth in English money 5s. 
 4c?.]. The earliest European traders enjoyed a rare opportunity 
 for making profit. By buying up the kobangs at the native 
 rating they trebled their money, until the natives, perceiving 
 what was being done, withdrew from circulation the remainder 
 of the gold." 3 
 
 It appears, therefore, that the value of money is liable to 
 more frequent fluctuations when both metals are a legal ten- 
 der at a fixed valuation than when the exclusive standard of 
 the currency is either gold or silver. Instead of being only 
 affected by variations in the cost of production of one metal, 
 it is subject to derangement from those of two. The par- 
 ticular kind of variation to which a currency is rendered 
 more liable by having two legal standards is a fall of value, 
 or what is commonly called a depreciation, since practically 
 that one of the two metals will always be the standard of 
 which the real has fallen below the rated value. If the tend- 
 ency of the metals be to rise in value, all payments will be 
 made in the one which has risen least ; and, if to fall, then 
 in that which has fallen most. 
 
 While liable to " more frequent fluctuations," prices do not 
 follow the extreme fluctuations of both metals, as some suppose, 
 and as is shown by the following diagram. 3 A represents the 
 line of the value of gold, and B of silver, relatively to some 
 third commodity represented by the horizontal line. Super- 
 posing these cui'ves, C would show the line of extreme varia- 
 tions, while since prices would follow the metal which falls in 
 
 1 See Macaulay, " History of England," chap. xxvi. 
 
 2 " Money and the Mechanism of Exchange," p. 84. 
 
 3 Jevons, ibid., p. 138. 
 
A DOUBLE STANDARD AND SUBSIDIARY COINS. 
 
 315 
 
 value, D would show the actual course of variations. While 
 the fluctuations are more frequent in D, they are less extreme 
 than in C. 
 
 Chart showing the line of prices under a double standard. 
 
 § 2. The plan of a double standard is still occasionally 
 brought forward by here and there a writer or orator as a 
 great improvement in currency. 
 
 It is probable that, with most of its adherents, its chief 
 merit is its tendency to a sort of depreciation, there being at 
 all times abundance of supporters for any mode, either open 
 or covert, of lowering the standard. [But] the advantage 
 without the disadvantages of a double standard seems to be 
 best obtained by those nations with whom one only of the 
 two metals is a legal tender, but the other also is coined, and 
 allowed to pass for whatever value the market assigns to it. 
 
 "When this plan is adopted, it is naturally the more costly 
 metal which is left to be bought and sold as an article of 
 commerce. But nations which, like England, adopt the 
 more costly of the two as their standard, resort, to a different 
 expedient for retaining them both in circulation, namely (1), 
 to make silver a legal tender, but only for small payments. 
 In England no one can be compelled to receive silver in pay- 
 ment for a larger amount than forty shillings. "With this 
 regulation there is necessarily combined another, namely (2), 
 that silver coin should be rated, in comparison with gold, 
 somewhat above its intrinsic value: that there should not 
 
316 EXCHANGE. 
 
 be, in twenty shillings, as much silver as is worth a sov- 
 ereign ; for, if there were, a very slight turn of the market 
 in its favor would make it worth more than a sovereign, and 
 it would be profitable to melt the silver coin. The over- 
 valuation of the silver coin creates an inducement to buy 
 silver and send it to the mint to be coined, since it is given 
 back at a higher value than properly belongs to it; this, 
 however, has been guarded against (3) by limiting the quan- 
 tity of the silver coinage, which is not left, like that of gold, 
 to the discretion of individuals, but is determined by the 
 Government, and restricted to the amount supposed to be re- 
 quired for small payments. The only precaution necessary 
 is, not to put so high a valuation upon the silver as to hold 
 out a strong temptation to private coining. 
 
 § 3. The experience of the United States with a double 
 standard, extending as it does from 1792 to 1873 without a 
 break, and from 1878 to the present time, is a most valuable 
 source of instruction in regard to the practical working of bi- 
 metallism. While we have nominally had a double standard, 
 in reality we have either had one alone, or been in a transition 
 from one to the other standard ; and the history of our coinage 
 strikingly illustrates the truth that the natural values of the 
 two metals, in spite of all legislation, so vary relatively to each 
 other that a constant ratio can not be maintained for any 
 length of time ; and that " the poor money drives out the 
 good," according to Gresham's statement. For clearness, the 
 period may be divided, in accordance with the changes of legis- 
 lation, into four divisions : 
 
 I. 1792-1834. Transition from gold to silver. 
 II. 1834-1853. Transition from silver to gold. 
 
 III. 1853-1878. Single gold currency (except 1862-1879, 
 the paper period). 
 
 IV. 1878-1884. Transition from gold to silver. 
 
 I. "With the establishment of the mint, Hamilton agreed 
 upon the use of both gold and silver in our money, at a ratio 
 of 15 to 1 : that is, that the amount of pure gold in a dollar 
 should be fifteen times the weight of silver in a dollar. So, 
 while the various Spanish dollars then in circulation in the 
 United States seemed to contain on the average about 371^ 
 grains of pure silver, and since Hamilton believed the rela- 
 tive market value of gold and silver to be about 1 to 15, he 
 put -fa of 371^ grains, or 24f grains of pure gold, into the 
 gold dollar. It was the best possible example of the bimetallic 
 
A DOUBLE STANDARD AND SUBSIDIARY COINS. 317 
 
 system to be found, and the mint ratio was intended to conform 
 to the market ratio. If this conformity could have been main- 
 tained, there would have been no disturbance. But a cause was 
 already in operation affecting the supply of one of the metals — 
 silver — wholly independent of legislation, and without corre- 
 spondingly affecting gold. 
 
 Two periods of production of silver, in which the produc- 
 tion of silver was great relatively to gold, stand out prominent- 
 ly in the history of that metal. (1.) One was the enormous 
 yield from the mines of the New "World, continuing from 1545 
 to about 1640, and (2) the only other period of great produc- 
 tion at all comparable with it (that is, as regards the produc- 
 tion of silver relatively to gold) was that lasting from 1780 to 
 1820, due to the richness of the Mexican silver-mines. The 
 first period of ninety-five years was longer than the second, 
 which was only forty years ; yet while about forty-seven times 
 as much silver as gold was produced on an average during the 
 first period, the average annual amount of silver produced 
 relatively to gold was probably a little greater from 1780 to 
 1820. The effect of the first period in lowering the relation 
 of silver to gold is well recognized in the history of the pre- 
 cious metals (see Chart X for the fall in the value of silver 
 relatively to gold) ; that the effect of the second period on the 
 value of silver has not been greater than was actually caused 
 — it has not been small — is explicable only by the laws of the 
 value of money. If you let the same amount of water into a 
 small reservoir which you let into a large one, the level of the 
 former will be raised more than the level of the latter. The 
 great production of the first period was added to a very small 
 existing stock of silver ; that of the second period was added 
 to a stock increased by the great previous production just men- 
 tioned. The smallness of the annual product relatively to the 
 total quantity existing in the world requires some time, even 
 for a production of silver forty-seven times greater than the 
 gold production, to take its effect on the value of the total 
 silver stock in existence. The effect of this process was begin- 
 ning to be felt soon after the United States decided on a double 
 standard. For this reason the value of silver was declining about 
 1800, and, although the annual silver product fell off seriously 
 after 1820, the value of silver continued to decline even after 
 that time, because the increased production, dating back to 
 1780, was just beginning to make itself felt. Thus we have 
 the phenomenon — which seems very difficult for some persons 
 to understand — of a falling off in the annual production of sil- 
 ver, accompanied by a decrease in its value relatively to gold. 
 
 This diminishing value of silver began to affect the coin- 
 age of the United States as early as 1811, and by 1820 the 
 
318 
 
 EXCHANGE. 
 
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A DOUBLE STANDARD AND SUBSIDIARY COINS. 319 
 
 disappearance of gold was everywhere commented upon. The 
 process by which this result is produced is a simple one, and 
 is adopted as soon as a margin of profit is seen arising from a 
 divergence between the mint and market ratios. In 1820 the 
 market ratio of gold to silver was 1 to 15*7 — that is, the amount 
 of gold in a dollar (24f grains) would exchange for 15*7 times 
 as many grains of silver in the market, in the form of bullion ; 
 while at the mint, in the form of coin, it would exchange for 
 only 15 times as many grains of silver. A broker having 1,000 
 gold dollars could buy with them in the market silver bullion 
 enough (1,000 X 15*7 grains) to have coined, when presented 
 at the mint, 1,000 dollars in silver pieces, and yet have left 
 over as a profit by the operation 700 grains of silver. So long 
 as this can be done, silver (the cheapest money) will be pre- 
 sented to the mint, and gold (the dearest money) will become 
 an article of merchandise too valuable to be used as money 
 when the cheaper silver is legally as good. The best money, 
 therefore, disappears from circulation, as it did in the United 
 States before 1820, owing to the fall in the value of silver. It 
 is to be said, that it has been seriously urged by some writers 
 that silver did not fall, but that gold rose, in value, owing to 
 the demand of England for resumption in 1819. 1 Chronology 
 kills this view ; for the change in the value of silver began too 
 early to have been due to English measures, even if conclusive 
 reasons have not been given above why silver should naturally 
 have fallen in value. 
 
 II. The change in the relative values of gold and silver final- 
 ly forced the United States to change their mint ratio in 1834. 
 Two courses were open to us: (1) either to increase the quan- 
 tity of silver in the dollar until the dollar of silver was intrin- 
 sically worth the gold in the gold dollar ; or (2) debase the 
 gold dollar-piece until it was reduced in value proportionate to 
 the depreciation of silver since 1792. The latter expedient, 
 without any seeming regard to the effect on contracts and the 
 integrity of our monetary standard, was adopted : 6*589 per 
 cent was taken out of the gold dollar, leaving it containing 
 23'22 grains of pure gold ; and as the silver dollar remained 
 unchanged (3714; grains) the mint ratio established was 1 to 
 15*988, or, as commonly stated, 1 to 16. Did this correspond 
 with the market ratio then existing ? No. Having seen the 
 former steady fall in silver, and believing that it would con- 
 tinue, Congress hoped to anticipate any further fall by making 
 the mint ratio of gold to silver a little larger than the market 
 ratio. This was done by establishing the mint ratio of 1 to 
 15*988, while the market ratio in 1834 was 1 to 15*73. Here, 
 
 1 See S. Dana Horton, " Gold and Silver," 1877, p. 84, ei scq. 
 
320 EXCHANGE. 
 
 again, appeared the difficulty arising from the attempt to bal- 
 ance a ratio on a movable fulcrum. It will be seen that the 
 act of 1834 set at work forces for another change in the coin- 
 age — forces of a similar kind, but working in exactly the oppo- 
 site direction to those previous to 1834. A dollar of gold coin 
 would now exchange for more grains of silver at the mint 
 (15 - 98) than it would in the form of bullion in the market 
 (15'73). Therefore it would be more profitable to put gold into 
 coin than exchange it as bullion. Gold was sent to the mint, 
 while silver began to be withdrawn from circulation, silver 
 now being more valuable as bullion than as coin. By 1840 a 
 silver dollar was worth 102 cents in gold. 1 This movement, 
 which was displacing silver with gold, received a surprising 
 and unexpected impetus by the gold discoveries of California 
 and Australia in 1849, before mentioned, and made gold less 
 valuable relatively to silver, by lowering the value of gold. 
 Here, again, was another natural cause, independent of legisla- 
 tion, and not to be foreseen, altering the value of one of the 
 precious metals, and in exactly the opposite direction from that 
 in the previous period, when silver was lowered by the increase 
 from the Mexican mines. In 1853 a silver dollar was worth 
 104 cents in gold (i. e., of a gold dollar containing 23*22 grains) ; 
 but, some years before, all silver dollars had disappeared from 
 use, and only gold was in circulation. For a large part of this 
 period we had in reality a single standard of gold, the other 
 metal not being able to stay in the currency. 
 
 III. After our previous experience, the impossibility of re- 
 taining both metals in the coinage together, on equal terms, 
 now came to be generally recognized, and was accepted by 
 Congress in the legislation of 1853. This act made no further 
 changes intended to adapt the mint to the market ratios, but 
 remained satisfied with the gold circulation. But hitherto no 
 regard had been paid to the principles on which a subsidiary 
 coinage is based, as explained by Mr. Mill in the last section 
 (§ 2). The act of 1853, while acquiescing in the single gold 
 standard, had for its purpose the readjustment of the subsidi- 
 ary coins, which, together with silver dollar-pieces, had all 
 gone out of circulation. Before this, two halves, four quar- 
 ters, or ten dimes contained the same quantity of pure silver as 
 the dollar-piece (3714/ grains) ; therefore, when it became profit- 
 able to withdraw the dollar-pieces and substitute gold, it gave 
 exactly the same profit to withdraw two halves or four quar- 
 ters in silver. For this reason all the subsidiary silver had 
 gone out of circulation, and there was no " small change " in 
 the country. The legislation of 1853 rectified this error : (1) 
 
 1 See Linderman, " Money and Legal Tender," p. 161. 
 
A DOUBLE STANDARD AND SUBSIDIARY COINS. 
 
 321 
 
 by reducing the quantity of pure silver in a dollar's worth of 
 subsidiary coin to 345*6 grains. By making so much less an 
 amount of silver equal to a dollar of small coins, it was more 
 valuable in that shape than as bullion, and there was no reason 
 for melting it, or withdrawing it (since even if gold and silver 
 changed considerably in their relative values, 345*6 grains of 
 silver could not easily rise sufficiently to become equal in 
 value to a gold dollar, when 3714; grains were worth only 104 
 cents of the gold dollar) ; (2) this over-valuation of silver in 
 subsidiary coin would cause a great flow of silver to the mint, 
 since silver would be more valuable in subsidiary coin than as 
 bullion ; but this was prevented by the provision (section 4 of 
 the act of 1853) that the amount of the small coinage should be 
 limited according to the discretion of the Secretary of the 
 Treasury ; and, (3) in order that the overvalued small coinage 
 might not be used for purposes other than for effecting change, 
 its legal-tender power was restricted to payments not exceed- 
 ing five dollars. This system, a single gold standard for large, 
 and silver for small, payments, continued without question, and 
 with great convenience, until the days of the war, when paper 
 money (1862-1879) drove out (by its cheapness, again) both 
 gold and silver. Paper was far cheaper than the cheapest of 
 the two metals. 
 
 The mere fact that the silver dollar-piece had not circu- 
 lated since even long before 1853 led the authorities to drop 
 
 •= £f o. 
 
 3 « 
 
 i-s <i ai 
 
 1G 
 
 X 
 
 17 
 
 * 
 
 13 
 
 H 
 
 19 
 
 H 
 
 20 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 / 
 
 
 
 
 
 
 
 
 
 
 
 
 / 
 
 
 
 N 
 
 
 
 / 
 
 [ 
 
 
 
 
 
 i 
 / 
 
 
 
 
 ■•"" 
 
 
 ' 
 
 1 
 1 
 
 
 
 
 / 
 
 
 
 
 
 
 
 
 \ 
 
 j 
 
 
 y 
 
 
 
 
 
 
 
 
 
 ', 
 
 I 
 
 
 
 
 
 
 
 
 
 
 
 ' 
 
 I 
 j 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Ee'attve values of gold and silver, by months, in 1S76. 
 
 out the provisions for the coinage of silver dollars and in 1873 
 remove it from the list of legal coins (at the ratio of 1 to 15 '98, 
 21 
 
322 EXCHANGE. 
 
 the obsolete ratio fixed as far back as 1834). This is what 
 is known as the " demonetization " of silver. It had no effect 
 on the circulation of silver dollars, since none were in use, and 
 had not been for more than twenty-five years. There had been 
 no desire up to this time to use silver, since it was more expen- 
 sive than gold ; indeed, it is somewhat humiliating to our sense 
 of national honor to reflect that it was not until silver fell so 
 surprisingly in value (in 1876) that the agitation for its use in 
 the coinage arose. When a silver dollar was worth 104 cents, 
 no one wanted it as a means of liquidating debts ; when it 
 came to be worth 86 cents, it was capable of serving debtors 
 even better than the then appreciating greenbacks. Thus, while 
 from 1853 (and even before) we had legally two standards, 
 of both gold and silver, but really only one, that of gold, from 
 1873 to 1878 we had both legally and really only one stand- 
 ard, that of gold. 
 
 It might be here added, that I have spoken of the silver 
 dollar as containing 3714; grains of pure silver. Of course, 
 alloy is mixed with the pure silver, sufficient, in 1792, to 
 make the original dollar weigh 416 grains in all, its " stand- 
 ard " weight. In 1837 the amount of alloy was changed from 
 rV *° To °f tne standard weight, which (as the 3714; grains of 
 pure silver were unchanged) gave the total weight of the dollar 
 as 412^ grains, whence the familiar name assigned to this piece. 
 In 1873, moreover, the mint was permitted to put its stamp and 
 devices — to what was not money at all, but a " coined ingot " — 
 on 378 grains of pure silver (420 grains, standard), known as 
 the "trade-dollar." It was intended by this means to make 
 United States silver more serviceable in the Asiatic trade. 
 Oriental nations care almost exclusively for silver in payments. 
 The Mexican silver dollar contained 3774; grains of pure silver ; 
 the Japanese yen, 374^- ; and the United States dollar, 3714;. 
 By making the " trade-dollar " slightly heavier than any coin 
 used in the Eastern world, it would give our silver a new .mar- 
 ket ; and the United States Government was simply asked to 
 certify to the fineness and weight by coining it, provided the 
 owners of silver paid the expenses of coinage. Inadvertently 
 the trade-dollar was included in the list of coins in the act of 
 1873 which were legal tender for payments of five dollars, but, 
 when this was discovered, it was repealed in 1876. So that the 
 trade-dollar was not a legal coin, in any sense (although it con- 
 tained more silver than the 412^-grains dollar). They ceased 
 to be coined in 1878, to which time there had been made $35,- 
 959,360. 
 
 IV. In February, 1878, an indiscreet and unreasonable move- 
 ment induced Congress to authorize the recoinage of the silver 
 dollar-piece at the obsolete ratio of 1834 (1 to 15*98), while the 
 
A DOUBLE STANDARD AND SUBSIDIARY COINS. 
 
 323 
 
 market ratio was 1 to 17'87. So extraordinary a reversal of all 
 sound principles and such blindness to our previous experience 
 could be explained only by a desire to force this country to 
 use a silver coinage only, and had its origin with the owners 
 of silver-mines, aided by the desires of debtors for a cheap 
 unit in which to absolve themselves from their indebtedness. 
 There was no pretense of setting up a double standard about 
 it ; for it was evident to the most ignorant that so great a dis- 
 proportion between the mint and market ratios must inevitably 
 lead to the disappearance of gold entirely. This would happen, 
 if owners could bring their silver freely, in any amounts, to 
 the mint for coinage (" Free Coinage "), and so exchange silver 
 against gold coin for the purpose of withdrawing gold, since 
 gold would exchange for less as coin than as bullion. This 
 immediate result was prevented by a provision in the law, 
 which prevented the " free coinage " of silver, and required the 
 Government itself to buy silver and coin at least $2,000,000 in 
 silver each month. This retarded, but will not ultimately pre- 
 vent, the change from the present gold to a single silver stand- 
 ard. At the rate of $24,000,000 a year, it is only a question 
 of time when the Treasury will be obliged to pay out, for 
 its regular disbursements on the public debt, silver in such 
 amounts as will drive gold out of circulation. In February, 
 1884, it was feared that this was already at hand, and was 
 practically reached in the August following. Unless a repeal 
 of the law is reached very soon, the uncomfortable spectacle 
 will be seen of a gradual disarrangement of prices, and conse- 
 quently of trade, arising from a change of the standard. 
 
 In order that the alternate movements of silver and gold to 
 the mint for coinage may be seen, there is appended a state- 
 ment of the coinage 1 during the above periods, which well 
 shows the effects of Gresham's law. 
 
 Eatio at the mint and 
 in the market. 
 
 1 : 15 (silver lower 
 
 in market) 
 
 1 : 15 -98 (gold lower 
 
 in market) 
 
 1 : 15 98 (gold lower 
 
 in market) 
 
 Single gold standard . 
 1 : 15 • 98 (silver lower, 
 
 but no free coinage) 
 
 1792-1834 
 
 1834-1853 
 
 1853-1873 
 1873-1878 
 l. 1878-1883 
 
 Gold coinage. 
 
 $11,825,890 
 
 224,965,730 
 
 544,864,921 
 166,253,816 
 354,019,865 
 
 Silver dollars coined. 
 
 $36,275,077 
 
 42,936,294 
 
 6,538,948 
 
 147,255,899 
 
 From this it will be seen that there has been an enforced 
 coinage by the Treasury, of almost twice as many silver dol- 
 
 1 Director of the Mint, Report, 1883, p. 49, and Linderman, ibid., p. 173. 
 
324 EXCHANGE. 
 
 lars since 1878 as were coined in all the history of the mint 
 before, since the establishment of the Government. 
 
 It may, perhaps, be asked why the silver dollar of 41 2£ 
 grains, being worth intrinsically only from 86 to 89 cents, does 
 not depreciate to that value. The Government buys the silver, 
 owns the coin, and holds all that it can not induce the public 
 to receive voluntarily ; so that but a part of the total coinage 
 is out of the Treasury. And most of the coins issued are re- 
 turned for deposit and silver certificates received in return. 
 There being no free coinage, and no greater amount in circu- 
 lation than satisfies the demand for change, instead of small 
 bills, the dollar-pieces will circulate at their full value, on the 
 principle of subsidiary coin, even though overvalued. And the 
 silver certificates practically go through a process of constant 
 redemption by being received for customs dues equally with 
 gold. When they become too great in quantity to be needed 
 for such purposes, then we may look for the depreciation with 
 good reason. 1 
 
 There are, then, the following kinds of legal tender in the 
 United States in 1884 : (1) Gold coins (if not below tolerance) ; 
 (2) the silver dollar of 412| grains ; (3) United States notes 
 (except for customs and interest on the public debt) ; (4) sub- 
 sidiary silver coinage, to the amount of five dollars ; and (5) 
 minor coins, to the amount of twenty-five cents. 
 
 The question of a double standard has provoked no little 
 vehement discussion and has called forth a considerable litera- 
 ture since the fall of silver in 1876. A body of opinion exists, 
 best represented in this country by F. A. Walker and S. D. 
 Horton, that the relative values of gold and silver may be kept 
 unchanged, in spite of all natural causes, by the force of law, 
 which, provided that enough countries join in the plan, shall 
 fix the ratio of exchange in the coinage for all great commer- 
 cial countries, and by this means keep the coinage ratio equiva- 
 lent to the bullion ratio. The difficulty with this scheme, even 
 if it were wholly sufficient, has thus far been in the obstacles 
 to international agreement. After several international mone- 
 tary conferences, in 1867, 1878, and 1881, the project seems 
 now to have been practically abandoned by all except the most 
 sanguine. (For a fuller list of authorities on bimetallism, see 
 Appendix I.) 
 
 1 See "Atlantic Monthly," "The Silver Danger," May, 1884. 
 
CHAPTER YIII. 
 
 OF CREDIT, AS A SUBSTITUTE FOR MONEY. 
 
 § 1. Credit has a great, but not, as many people seem to 
 suppose, a magical power ; it can not make something out of 
 nothing. How often is an extension of credit talked of as 
 equivalent to a creation of capital, or as if credit actually 
 were capital! It seems strange that there should be any 
 need to point out that, credit being only permission to use 
 the capital of another person, the means of production can 
 not be increased by it, but only transferred. If the borrow- 
 er's means of production and of employing labor are in- 
 creased by the credit given him, the lender's are as much 
 diminished. The same sum can not be used as capital both 
 by the owner and also by the person to whom it is lent ; it 
 can not supply its entire value in wages, tools, and materi- 
 als, to two sets of laborers at once. It is true that the capi- 
 tal which A has borrowed from B, and makes use of in his 
 business, still forms a part of the wealth of B for other pur- 
 poses ; he can enter into arrangements in reliance on it, and 
 can borrow, when needful, an equivalent sum on the secu- 
 rity of it ; so that to a superficial eye it might seem as if both 
 B and A had the use of it at once. But the smallest consid- 
 eration will show that, when B has parted with his capital to 
 A, the use of it as capital rests with A alone, and that B has 
 no other service from it than in so far as his ultimate claim 
 upon it serves him to obtain the use of another capital from 
 a third person, C. 
 
 § 2. But, though credit is never anything more than a 
 transfer of capital from Tiand to hand, it is generally, and 
 
326 EXCHANGE. 
 
 naturally, a transfer to hands more competent to employ the 
 capital efficiently in production. If there were no such 
 thing as credit, or if, from general insecurity and want of 
 confidence, it were scantily practiced, many persons who 
 possess more or less of capital, but who from their occupa- 
 tions, or for want of the necessary skill and knowledge, can 
 not personally superintend its employment, would derive no 
 benefit from it : their funds would either lie idle, or would 
 be, perhaps, wasted and annihilated in unskillful attempts 
 to make them yield a profit. All this capital is now lent at 
 interest, aud made available for production. Capital thus 
 circumstanced forms a large portion of the productive re- 
 sources of any commercial country, and is naturally attract- 
 ed to those producers or traders who, being in the greatest 
 business, have the means of employing it to most advantage, 
 because such are both the most desirous to obtain it and able 
 to give the best security. Although, therefore, the produc- 
 tive funds of the country are not increased by credit, they 
 are called into a more complete state of productive activ- 
 ity. As the confidence on which credit is grounded extends 
 itself, means are developed by which even the smallest por- 
 tions of capital, the sums which each person keeps by him to 
 meet contingencies, are made available for productive uses. 
 The principal instruments for this purpose are banks of de- 
 posit. Where these do not exist, a prudent person must keep 
 a sufficient sum unemployed in his own possession to meet 
 every demand which he has even a slight reason for think- 
 ing himself liable to. When the practice, however, has 
 grown up of keeping this reserve not in his own custody, 
 but with a banker, many small sums, previously lying idle, 
 become aggregated in the banker's hands ; and the banker, 
 being taught by experience what proportion of the amount 
 is likely to be wanted in a given time, and knowing that, if 
 one depositor happens to require more than the average, 
 another will require less, is able to lend the remainder, that 
 is, the far greater part, to producers and dealers : thereby 
 adding the amount, not indeed to the capital in existence, 
 
CREDIT, AS A SUBSTITUTE FOR MONEY. 327 
 
 but to that in employment, and making a corresponding ad- 
 dition to the aggregate production of the community. 
 
 While credit is thus indispensable for rendering the 
 whole capital of the country productive, it is also a means 
 by which the industrial talent of the country is turned to 
 better account for purposes of production. Many a person 
 who has either no capital of his own, or very little, but who 
 has qualifications for business which are known and appre- 
 ciated by some possessors of capital, is enabled to obtain 
 either advances in money, or, more frequently, goods on 
 credit, by which his industrial capacities are made instru- 
 mental to the increase of the public wealth. 
 
 Such are, in the most general point of view, the uses of 
 credit to the productive resources of the world. But these 
 considerations only apply to the credit given to the indus- 
 trious classes — to producers and dealers. Credit given by 
 dealers to unproductive consumers is never an addition, but 
 always a detriment, to the sources of public wealth. It 
 makes over in temporary use, not the capital of the unpro- 
 ductive classes to the productive, but that of the productive 
 to the unproductive. 
 
 § 3. But a more intricate portion of the theory of Credit 
 is its influence on prices ; the chief cause of most of the mer- 
 cantile phenomena which perplex observers. In a state of 
 commerce in which much credit is habitually given, general 
 prices at any moment depend much more upon the state of 
 credit than upon the quantity of money. For credit, though 
 it is not productive power, is purchasing power ; and a per- 
 son who, having credit, avails himself of it in the purchase 
 of goods, creates just as much demand for the goods, and 
 tends quite as much to raise their price, as if he made an 
 equal amount of purchases with ready money. 
 
 The credit which we are now called upon to consider, as 
 a distinct purchasing power, independent of money, is of 
 course not credit in its simplest form, that of money lent by 
 one person to another, and paid directly into his hands ; for, 
 when the borrower expends this in purchases, he makes the 
 
328 EXCHANGE. 
 
 purchases with money, not credit, and exerts no purchasing 
 power over and above that conferred by the money. The 
 forms of credit which create purchasing power are those in 
 which no money passes at the time, and very often none 
 passes at all, the transaction being included with a mass of 
 other transactions in an account, and nothing paid but a bal- 
 ance. This takes place in a variety of ways, which we shall 
 proceed to examine, beginning, as is our custom, with the 
 simplest. 
 
 First: Suppose A and B to be two dealers, who have 
 transactions with each other both as buyers and as sellers. 
 A buys from B on credit. B does the like with respect to 
 A. At the end of the year, the sum of A's debts to B is 
 set against the sum of B's debts to A, and it is ascertained 
 to which side a balance is due. This balance, which may be 
 less than the amount of many of the transactions singly, and 
 is necessarily less than the sum of the transactions, is all that 
 is paid in money ; and perhaps even this is not paid, but 
 carried over in an account current to the next year. A 
 single payment of a hundred pounds may in this manner 
 suffice to liquidate a long series of transactions, some of 
 them to the value of thousands. 
 
 But, secondly : The debts of A to B may be paid without 
 the intervention of money, even though there be no recipro- 
 cal debts of B to A. A may satisfy B by making over to 
 him a debt due to himself from a third person, C. This is 
 conveniently done by means of a written instrument, called 
 a bill of exchange, which is, in fact, a transferable order by 
 a creditor upon his debtor, and when accepted by the debtor, 
 that is, authenticated by his signature, becomes an acknowl- 
 edgment of debt. 
 
 § 4. Bills of exchange were first introduced to save the 
 expense and risk of transporting the precious metals from 
 place to place. 
 
 The trade between New York and Liverpool affords a con- 
 stant illustration of the uses of a bill of exchange. Suppose that 
 A in New York ships a cargo of wheat, worth $100,000, or 
 
CREDIT, AS A SUBSTITUTE FOR MONEY. 329 
 
 £20,000, to B in Liverpool ; also suppose that C in Liverpool 
 (independently of the negotiations of A and B) ships, about 
 the same time, a cargo of steel rails to D in New York, also 
 worth £20,000. Without the use of bills of exchange, B would 
 have been obliged to send £20,000 in gold across the Atlantic, 
 and so would D, at the risk of loss to both. By the device of 
 bills of exchange the goods Liyerpool New York 
 
 are really bartered against R 
 
 each other, and all trans- [~ ~] 
 
 mission of money saved. A 
 has money due to him in 
 Liverpool, and he sells his 
 claim to this money to any 
 one who wants to make a payment in Liverpool. Going to 
 his banker (the middle-man between exporters and importers 
 and the one who deals in such bills) he finds there D, inquiring 
 for some one who has a claim to money in Liverpool, since D 
 owes C in Liverpool for his cargo of steel rails. A makes out 
 a paper title to the £20,000 which B owes him (i. e., a bill of ex- 
 change) and by selling it to D gets immediately his £20,000 there 
 in New York. The form in which this is done is as follows : 
 
 New York, January 1, 1884. 
 At sight [or sixty days after date] of this first bill of ex- 
 change (second and third unpaid), pay to the order of D [the 
 importer of steel rails] £20,000, value received, and charge the 
 same to the account of 
 
 [Signed] A [exporter of wheat]. 
 
 To B [buyer of wheat], 
 Liverpool, Eng. 
 
 D has now paid $100,000, or £20,000, to A for a title to 
 money across the Atlantic in Liverpool, and with this title he 
 can pay his debt to C for the rails. D indorses the bill of ex- 
 change, as follows : 
 
 Pay to the order of C [the seller of steel rails], Liverpool, 
 value in account. D [importer of steel rails]. 
 
 To B [the buyer of wheat]. 
 
 By this means D transfers his title to the £20,000 to C, 
 sends the bill across by mail ("first" in one steamer, "second" 
 in another, to insure certain transmission) to C, who then calls 
 upon B to pay him the £20,000 instead of B sending it across 
 the Atlantic to A ; and all four persons have made their pay- 
 ments the more safely by the use of this convenient device. 
 This is the simplest form of the transaction, and it does not 
 change the principle on which it is based, when, as is the case, 
 a banker buys the bills of A, and sells the bills to D — since A 
 typifies all exporters and D all importers. 
 
330 EXCHANGE. 
 
 Bills of exchange having been found convenient as means 
 of paying debts at distant places without the expense of 
 transporting the precious metals, their use was afterward 
 greatly extended from another motive. It is usual in every 
 trade to give a certain length of credit for goods bought : 
 three months, six months, a year, even two years, according 
 to the convenience or custom of the particular trade. A 
 dealer who has sold goods, for which he is to be paid in six 
 months, but who desires to receive payment sooner, draws a 
 bill on his debtor payable in six months, and gets the bill 
 discounted by a banker or other money-lender, that is, trans- 
 fers the bill to him, receiving the amount, minus interest for 
 the time it has still to run. It has become one of the chief 
 functions of bills of exchange to serve as a means by which 
 a debt due from one person can thus be made available for 
 obtaining credit from another. 
 
 Bills of exchange are drawn between the various cities of 
 the United States. In the West, the factor who is purchasing 
 grain or wool for a New York firm draws on his New York 
 correspondents, and this bill (usually certified to by the bill of 
 lading) is presented for discount at the Western banks ; and, 
 if there are many bills, funds are possibly sent westward to 
 meet these demands. But the purchases of the West in New 
 York will serve, even if a little later in time, somewhat to offset 
 this drain ; and the funds will again move eastward, as goods 
 move westward, practically bartered against each other by the 
 use of bills. There is, however, less movement of funds of late, 
 now that Western cities have accumulated more capital of their 
 own. 
 
 The notes given in consequence of a real sale of goods 
 can not be considered as on that account certainly represent- 
 ing any actual property. Suppose that A sells £100 worth 
 of goods to B at six months' credit, and takes a bill at six 
 months for it ; and that B, within a month after, sells the 
 same goods, at a like credit, to C, taking a like bill ; and 
 again, that C, after another month, sells them to D, taking 
 a like bill, and so on. There may then, at the end of six 
 months, be six bills of £100 each existing at the same time, 
 and every one of these may possibly have been discounted. 
 
CREDIT, AS A SUBSTITUTE FOR MONEY. 33 1 
 
 Of all these bills, then, only one represents any actual prop- 
 erty. 
 
 The extent of a man's actual sales forms some limit to 
 the amount of his real notes ; and, as it is highly desirable in 
 commerce that credit should be dealt out to all persons in 
 some sort of regular and due proportion, the measure of a 
 man's actual sales, certified by the appearance of his bills 
 drawn in virtue of those sales, is some rule in the case, 
 though a very imperfect one in many respects. When a 
 bill drawn upon one person is paid to another (or even to 
 the same person) in discharge of a debt or a pecuniary claim, 
 it does something for which, if the bill did not exist, money 
 would be required : it performs the functions of currency. 
 This is a use to which bills of exchange are often applied. 
 
 Many bills, both domestic and foreign, are at last pre- 
 sented for payment quite covered with indorsements, each 
 of which represents either a fresh discounting, or a pecun- 
 iary transaction in which the bill has performed the func- 
 tions of money. 
 
 § 5. A third form in which credit is employed as a sub- 
 stitute for currency is that of promissory notes. 
 
 The difference between a bill of exchange and a promissory 
 note is, that the former is an order for the payment of money, 
 while the latter is a promise to pay money. In a note the 
 promissor is primarily liable ; in a bill the drawer becomes lia- 
 ble only after an ineffectual resort to the drawee. 
 
 In the United States a Western merchant who buys $1,000 
 worth of cotton goods, for instance, of a Boston commission- 
 house on credit, customarily gives his note for the amount, and 
 this note is put upon the market, or presented at a bank for 
 discount. This plan, however, puts all risk upon the one who 
 discounted the note. In the United States such promissory 
 notes are the forms of credit most used between merchants and 
 buyers. The custom, however, is quite different in England 
 and Germany (and generally, it is stated, on the Continent), 
 where bills of exchange are employed in cases where we use a 
 promissory note. A house in London sells $1,000 worth of cot- 
 ton goods to A, in Carlisle, on a credit of sixty days, draws a bill 
 of exchange on A, which is a demand upon A to pay in a given 
 time (e. g., sixty days), and if " accepted " by him is a legal obliga- 
 tion. The London house takes this bill (perhaps adding its own 
 
332 EXCHANGE. 
 
 firm name as indorsers to the paper), and presents it for dis- 
 count at a London bank. This now explains why it is that, 
 when a particular industry is prosperous and many goods are 
 sold, there is more " paper " offered for discount at the banks 
 (cf. p. 222), and why capital flows readily in that direction. 
 
 It is chiefly in the latter form [promissory notes] that it 
 has become, in commercial countries, an express occupation 
 to issue such substitutes for money. Dealers in money wish 
 to lend, not their capital merely, but their credit, and not 
 only such portion of their credit as consists of funds actually 
 deposited with them, but their power of obtaining credit 
 from the public generally, so far as they think they can safe- 
 ly employ it. This is done in a very convenient manner by 
 lending their own promissory notes payable to bearer on de- 
 mand — the borrower being willing to accept these as so much 
 money, because the credit of the lender makes other people 
 willingly receive them on the same footing, in purchases or 
 other payments. These notes, therefore, perform all the 
 functions of currency, and render an equivalent amount of 
 money, which was previously in circulation, unnecessary. 
 As, however, being payable on demand, they may be at any 
 time returned on the issuer, and money demanded for them, 
 he must, on pain of bankruptcy, keep by him as much money 
 as will enable him to meet any claims of that sort which can 
 be expected to occur within the time necessary for provid- 
 ing himself with more ; and prudence also requires that he 
 should not attempt to issue notes beyond the amount which 
 experience shows can remain in circulation without being 
 presented for payment. 
 
 The convenience of this mode of (as it were) coin- 
 ing credit having once been discovered, governments have 
 availed themselves of the same expedient, and have issued 
 their own promissory notes in payment of their expenses ; 
 a resource the more useful, because it is the only mode in 
 which they are able to borrow money without paying in- 
 terest. 
 
 § 6. A fourth mode of making credit answer the pur- 
 poses of money, by which, when carried far enough, money 
 
CREDIT, AS A SUBSTITUTE FOR MONEY. 333 
 
 may be very completely superseded, consists in making pay- 
 ments by checks. The custom of keeping the spare cash re- 
 served for immediate use, or against contingent demands, in 
 the hands of a banker, and making all payments, except 
 small ones, by orders on bankers, is in this country spread- 
 ing to a continually larger portion of the public. If the 
 person making the payment and the person receiving it 
 keep their money with the same banker, the payment takes 
 place without any intervention of money, by the mere trans- 
 fer of its amount in the banker's books from the credit of the 
 payer to that of the receiver. If all persons in [New York] 
 kept their cash at the same banker's, and made all their pay- 
 ments by means of checks, no money would be required or 
 used for any transactions beginning and terminating in [New 
 York]. This ideal limit is almost attained, in fact, so far 
 as regards transactions between [wholesale] dealers. It is 
 chiefly in the retail transactions between dealers and con- 
 sumers, and in the payment of wages, that money or bank- 
 notes now pass, and then only when the amounts are small. 
 As for the merchants and larger dealers, they habitually 
 make all payments in the course of their business by checks. 
 They do not, however, all deal with the same banker, and, 
 when A gives a check to B, B usually pays it not into the 
 same but into some other bank. But the convenience of 
 business has given birth to an arrangement which makes all 
 the banking-houses of [a] city, for certain purposes, virtually 
 one establishment. A banker does not send the checks which 
 are paid into his banking-house to the banks on which they 
 are drawn, and demand money for them. There is a build- 
 ing called the Clearing-House, to which every [member of 
 the association] sends, each afternoon, all the checks on other 
 bankers which he has received during the day, and they are 
 there exchanged for the checks on him which have come 
 into the hands of other bankers, the balances only being paid 
 in money ; or even these not in money, but in checks. 
 
 A clearing-house is simply a circular railing containing as 
 many openings as there are banks in the association ; a clerk 
 
334 EXCHANGE. 
 
 from each bank presents, in the form of a bundle of checks, at 
 his opening, all the claims of his bank against all others, and 
 notes the total amount ; a clerk inside takes the checks, dis- 
 tributes each check to the clerk of the bank against whom it 
 is drawn, and all that are left at his opening constitute the 
 total demands of all the other banks against itself ; and this 
 sum total is set off against the given bank's demands upon the 
 others. The difference, for or against the bank, as the case 
 may be, may then be settled by a check. 1 
 
 The total amount of exchanges made through the New 
 York Clearing-House in 1883 was $40,293,165,258 (or about 
 twenty-five times the total of our national debt in that year), 
 and the balances paid in money were only 3*9 per cent of the 
 exchanges. 2 For valuable explanations on this subject, consult 
 Jevons, " Money and the Mechanism of Exchange," Chapters 
 XIX-XXIII. The explanation of the functions of a bank, 
 Chapter XX, is very good. 
 
 1 See " International Review," September, 1876 ; and for some further ex- 
 planation of banks, see "Atlantic Monthly," 1882, pp. 196, 695, 696. 
 
 2 " Keport of the Comptroller of the Currency," 1883, p. 34. 
 
CHAPTER IX. 
 
 INFLUENCE OF CREDIT ON PRICES. 
 
 § 1. Haying now formed a general idea of the modes in 
 which credit is made available as a substitute for money, we 
 have to consider in what manner the use of these substitutes, 
 affects the value of money, or, what is equivalent, the prices 
 of commodities. It is hardly necessary to say that the per- 
 manent value of money — the natural and average prices of 
 commodities — are not in question here. These are deter- 
 mined by the cost of producing or of obtaining the precious 
 metals. An ounce of gold or silver will in the long run ex- 
 change for as much of every other commodity as can be pro- 
 duced or imported at the same cost with itself. And an 
 order, or note of hand, or bill payable at sight, for an ounce 
 of gold, while the credit of the giver is unimpaired, is worth 
 neither more nor less than the gold itself. 
 
 It is not, however, with ultimate or average, but with 
 immediate and temporary prices that we are now concerned. 
 These, as we have seen, may deviate very widely from the 
 standard of cost of production. Among other causes of 
 fluctuation, one we have found to be the quantity of money 
 in circulation. Other things being the same, an increase of 
 the money in circulation raises prices ; a diminution lowers 
 them. If more money is thrown into circulation than the 
 quantity which can circulate at a value conformable to its 
 cost of production, the value of money, so long as the excess 
 lasts, will remain below the standard of cost of production, 
 and general prices will be sustained above the natural rate. 
 
 But we have now found that there are other things, such 
 
336 EXCHANGE. 
 
 as bank-notes, bills of exchange, and checks, which circulate 
 as money, and perform all the functions of it, and the ques- 
 tion arises, Do these various substitutes operate on prices in 
 the same manner as money itself ? I apprehend that bank- 
 notes, bills, or checks, as such, do not act on prices at all. 
 What does act on prices is Credit, in whatever shape given, 
 and whether it gives rise to any transferable instruments 
 capable of passing into circulation or not. 
 
 § 2. Money acts upon prices in no other way than by 
 being tendered in exchange for commodities. The demand 
 which influences the prices of commodities consists of the 
 money offered for them. Money not in circulation has no 
 effect on prices. 
 
 In the case, however, of payment by checks, the pur- 
 chases are, at any rate, made, though not with the money in 
 the buyer's possession, yet with money to which he has a 
 right. But he may make purchases with money which he 
 only expects to have, or even only pretends to expect. He 
 may obtain goods in return for his acceptances payable at a 
 future time, or on his note of hand, or on a simple book- 
 credit — that is, on a mere promise to pay. All these pur- 
 chases have exactly the same effect on price as if they were 
 made with ready money. The amount of purchasing power 
 which a person can exercise is composed of all the money 
 in his possession or due to him, and of all his credit. For 
 exercising the whole of this power he finds a sufficient mo- 
 tive only under peculiar circumstances, but he always pos- 
 sesses it ; and the portion of it which he at any time does 
 exercise is the measure of the effect which he produces on 
 price. 
 
 Suppose that, in the expectation that some commodity 
 will rise in price, he determines not only to invest in it all 
 his ready money, but to take up on credit, from the pro- 
 ducers or importers, as much of it as their opinion of his 
 resources will enable him to obtain. Every one must see 
 that by thus acting he produces a greater effect on price 
 than if he limited his purchases to the money he has actually 
 
INFLUENCE OF CREDIT ON PRICES. 337 
 
 in hand. He creates a demand for the article to the full 
 amount of his money and credit taken together, and raises 
 the price proportionally to both. And this effect is pro- 
 duced, though none of the written instruments called substi- 
 tutes for currency may be called into existence ; though the 
 transaction may give rise to no bill of exchange, nor to the 
 issue of a single bank-note. The buyer, instead of taking a 
 mere book-credit, might have given a bill for the amount, 
 or might have paid for the goods with bank-notes borrowed 
 for that purpose from a banker, thus making the purchase 
 not on his own credit with the seller, but on the banker's 
 credit with the seller, and his own with the banker. Had he 
 done so, he would have produced as great an effect on price 
 as by a simple purchase to the same amount on a book-credit, 
 but no greater effect. The credit itself, not the form and 
 mode in which it is given, is the operating cause. 
 
 § 3. The inclination of the mercantile public to increase 
 their demand for commodities by making use of all or much 
 of their credit as a purchasing power depends on their ex- 
 pectation of profit. "When there is a general impression 
 that the price of some commodity is likely to rise from an 
 extra demand, a short crop, obstructions to importation, or 
 any other cause, there is a disposition among dealers to in- 
 crease their stocks in order to profit by the expected rise. 
 This disposition tends in itself to produce the effect which 
 it looks forward to — a rise of price ; and, if the rise is con- 
 considerable and progressive, other speculators are attracted, 
 who, so long as the price has not begun to fall, are willing 
 to believe that it will continue rising. These, by further 
 purchases, produce a further advance, and thus a rise of 
 price, for which there were originally some rational grounds, 
 is often heightened by merely speculative purchases, until it 
 greatly exceeds what the original grounds will justify. After 
 a time this begins to be perceived, the price ceases to rise, 
 and the holders, thinking it time to realize their gains, are 
 anxious to sell. Then the price begins to decline, the hold- 
 ers rush into the market to avoid a still greater loss, and, 
 22 
 
338 
 
 EXCHANGE. 
 
 few being willing to buy in a falling market, the price falls 
 much more suddenly than it rose. Those who have bought 
 at a higher price than reasonable calculation justified, and 
 who have been overtaken by the revulsion before they had 
 realized, are losers in proportion to the greatness of the fall 
 and to the quantity of the commodity which they hold, or 
 have bound themselves to pay for. 
 
 This is the ideal extreme case of what is called a com- 
 mercial crisis. There is said to be a commercial crisis when 
 a great number of merchants and traders at once either have, 
 or apprehend that they shall have, a difficulty in meeting 
 their engagements. The most usual cause of this general 
 embarrassment is the recoil of prices after they have been 
 raised by a spirit of speculation, intense in degree, and ex- 
 tending to many commodities. "When, after such a rise, the 
 reaction comes and prices begin to fall, though at first per- 
 haps only through the desire of the holders to realize, specu- 
 lative purchases cease ; but, were this all, prices would only 
 fall to the level from which they rose, or to that which is 
 justified by the state of the consumption and of the supply. 
 They fall, however, much lower ; for as, when prices were 
 rising, and everybody apparently making a fortune, it was 
 easy to obtain almost any amount of credit, so now, when 
 everybody seems to be losing, and many fail entirely, it is 
 with difficulty that firms of known solidity can obtain even 
 the credit to which they are accustomed, and which it is the 
 greatest inconvenience to them to be without, because all 
 dealers have engagements to fulfill, and, nobody feeling sure 
 that the portion of his means which he has intrusted to 
 others will be available in time, no one likes to part with 
 ready money, or to postpone his claim to it. To these ra- 
 tional considerations there is superadded, in extreme cases, 
 a panic as unreasoning as the previous over-confidence ; 
 money is borrowed for short periods at almost any rate of 
 interest, and sales of goods for immediate payment are made 
 at almost any sacrifice. Thus general prices, during a com- 
 mercial revulsion, fall as much below the usual level as 
 
INFLUENCE OF CREDIT ON PRICES. 339 
 
 during the previous period of speculation they have risen 
 above it ; the fall, as well as the rise, originating not in any- 
 thing affecting money, but in the state of credit. 
 
 Professor Jevons seriously advanced a theory that, inas- 
 much as the harvests of the world were the causes of good or 
 bad trade, and that their deficiency would regularly be fol- 
 lowed by commercial distress, then a periodic cause of bad 
 harvests, if found, would explain the constant recurrence of 
 commercial crises. This cause he claimed to have found in 
 the sun-spots, which periodically deprive the crops of that 
 source of growth which is usually furnished by the sun when 
 no spots appear. 1 It has not received general acceptance. 
 
 In the United States financial disasters have occurred in 
 1814, 1819, 1825, 1837-1839, 1857, and 1873. Those of 1837 
 and 1873 seem to have been the most serious in their effects ; 
 but this field, so far as scientific study is concerned, has not 
 been fully worked, and much remains to be learned about these 
 crises in the United States. The crisis of 1873 was due to 
 excessive railway -building. It was testified 2 concerning the 
 New York banks in 1873 that "their capital needed for le- 
 gitimate purposes was practically lent out on certain iron rails, 
 railroad-ties, bridges, and rolling-stock, called railroads, many 
 of them laid down in places where these materials were prac- 
 tically useless." 
 
 Under the effects due to swift communication by steam, 
 but especially to the electric telegraph, modern credit is a very 
 different thing from what it was fifty years ago. Now, a 
 shock on the Bourse at Vienna is felt the same day at Paris, 
 London, and New York. A commercial crisis in one great 
 money-center is felt at every other point in the world which 
 has business connections with it. Moreover, as Cherbuliez 3 
 says : " A country is more subject to crises the more advanced 
 is its economical development. There are certain maladies 
 which attack only grown-up persons who have reached a cer- 
 tain degree of vigor and maturity." 
 
 § 4. It does not, indeed, follow that credit will be more 
 used because it can be. When the state of trade holds out 
 no particular temptation to make large purchases on credit, 
 dealers will use only a small portion of the credit-power, 
 and it will depend only on convenience whether the portion 
 
 1 See " Nature," xix, 33, 588. 
 8 See Walker's " Money," p. 473. 
 
 3 Vol. i, p. 302. See Sumner's " Ilistory of American Currency " and Walk- 
 er's " Money " for much valuable material. 
 
340 EXCHANGE. 
 
 which they use will be taken in one form or in another. 
 One single exertion of the credit-power in the form of (1) 
 book-credit, is only the foundation of a single purchase ; but, 
 if (2) a bill is drawn, that same portion of credit may serve 
 for as many purchases as the number of times the bill 
 changes hands; while (3) every bank-note issued renders 
 the credit of the banker a purchasing power to that amount 
 in the hands of all the successive holders, without impairing 
 any power they may possess of effecting purchases on their 
 own credit. Credit, in short, has exactly the same purchas- 
 ing power with money; and as money tells upon prices 
 not simply in proportion to its amount, but to its amount 
 multiplied by the number of times it changes hands, so also 
 does credit ; and credit transferable from hand to hand is in 
 that proportion more potent than credit which only performs 
 one purchase. 
 
 There is a form of credit transactions (4) by checks on 
 bankers, and transfers in a banker's books, which is exactly 
 parallel in every respect to bank-notes, giving equal facilities 
 to an extension of credit, and capable of acting on prices quite 
 as powerfully. A bank, instead of lending its notes to a mer- 
 chant or dealer, might open an account with him, and credit 
 the account with the sum it had agreed to advance, on an 
 understanding that he should not draw out that sum in any 
 other mode than by drawing checks against it in favor of 
 those to whom he had occasion to make payments. These 
 checks might possibly even pass from hand to hand like 
 bank-notes; more commonly, however, the receiver would 
 pay them into the hands of his own banker, and when he 
 wanted the money would draw a fresh check against it ; and 
 hence an objector may urge that as the original check would 
 very soon be presented for payment, when it must be paid 
 either in notes or in coin, notes or coin to an equal amount 
 must be provided as the ultimate means of liquidation. It 
 is not so, however. The person to whom the check is trans- 
 ferred may perhaps deal with the same banker, and the 
 check may return to the very bank on which it was drawn. 
 
INFLUENCE OF CREDIT ON PRICES. 341 
 
 This is very often the case in country districts ; if so, no 
 payment will be called for, but a simple transfer in the 
 banker's books will settle the transaction. If the check is 
 paid into a different bank, it will not be presented for pay- 
 ment, but liquidated by set-off against other checks ; and, 
 in a state of circumstances favorable to a general extension 
 of banking credits, a banker who has granted more credit, 
 and has therefore more checks drawn on him, will also have 
 more checks on other bankers paid to him, and will only 
 have to provide notes or cash for the payment of balances ; 
 for which purpose the ordinary reserve of prudent bankers, 
 one third of their liabilities, will abundantly suffice. 
 
 § 5. The credit given to any one by those with whom he 
 deals does not depend on the quantity of bank-notes or coin 
 in circulation at the time, but on their opinion of his sol- 
 vency. If any consideration of a more general character 
 enters into their calculation, it is only in a time of pressure 
 on the loan market, when they are not certain of being them- 
 selves able to obtain the credit on which they have been ac- 
 customed to rely ; and even then, what they look to is the 
 general state of the loan market, and not (preconceived the- 
 ory apart) the amount of bank-notes. So far, as to the will- 
 ingness to give credit. And the willingness of a dealer to 
 use his credit depends on his expectations of gain, that is, on 
 his opinion of the probable future price of his commodity ; 
 an opinion grounded either on the rise or fall already going 
 on, or on his prospective judgment respecting the supply 
 and the rate of consumption. When a dealer extends his 
 purchases beyond his immediate means of payment, engag- 
 ing to pay at a specified time, he does so in the expectation 
 either that the transaction will have terminated favorably 
 before that time arrives, or that he shall then be in posses- 
 sion of sufficient funds from the proceeds of his other trans- 
 actions. The fulfillment of these expectations depends upon 
 prices, but not specially upon the amount of bank-notes. 
 It is obvious, however, that prices do not depend on money, 
 but on purchases. Money left with a banker, and not drawn 
 
342 EXCHANGE. 
 
 against, or drawn against for other purposes than buying 
 commodities, has no effect on prices, any more than credit 
 which is not used. Credit which is used to purchase com- 
 modities affects prices in the same manner as money. Money 
 and credit are thus exactly on a par in their effect on prices. 
 
 It is often seen, in our large cities, that money is very plen- 
 tiful, but no one seems to wish its use (that is, no one with safe 
 securities). Inability to find investments and to find indus- 
 tries in which the rate of profit is satisfactory — all of which 
 depends on the business character and activity of the people — 
 will prevent credit from being used, no matter how many 
 bank-notes, or greenbacks, or how much gold there is in the 
 country. It is impossible to make people invest, simply by in- 
 creasing the number of counters by which commodities are 
 exchanged against each other; that is, by increasing the money. 
 The reason why more credit is wanted is because men see that 
 increased production is possible of a kind that will find other 
 commodities ready to be offered (i. e., demand) in exchange for 
 that production. Normal credit, therefore, on a healthy basis, 
 increases and slackens with the activity or dullness of trade. 
 Speculation, or the wild extension of credit, on the other hand, 
 is apt to be begotten by a plethora of money, which has in- 
 duced low rates for loans, and moves with the uncertain waves 
 of popular impression. By normal credit we mean that the 
 wealth represented by the credit is really at the disposal of the 
 borrowers ; in a crisis, the quantity of wealth supposed to be 
 represented by credit is very much greater than that at the 
 disposal of the lenders. 1 
 
 § 6. There has been a great amount of discussion and 
 argument on the question whether several of these forms of 
 credit, and in particular whether bank-notes, ought to be 
 considered as money. It seems to be an essential part of 
 the idea of money that it be legal tender. An inconvertible 
 paper which is legal tender is universally admitted to be 
 money ; in the French language the phrase papier-rnonnaie 
 actually means inconvertibility, convertible notes being mere- 
 ly billets d jporteur. An instrument which would be de- 
 prived of all value by the insolvency of a corporation can 
 not be money in any sense in which money is opposed to 
 credit. It either is not money, or it is money and credit too. 
 
 1 See Cherbuliez, vol. i, p. 299. 
 
INFLUENCE OF CREDIT ON PRICES. 343 
 
 It would seem, from all study of the essentials of money 
 (Book III, Chapter IV), that the necessary part of the idea of 
 money is that it should have value in itself. No one parts with 
 valuable commodities for a medium of exchange which does not 
 possess value ; and we have seen that Legislatures can not con- 
 trol the natural value of even the precious metals by giving 
 them legal-tender power. Much less could it be done for paper 
 money. Paper, therefore, may, as an instrument of credit, be 
 a substitute for money ; but, in accordance with the above test, 
 it can not properly be considered as money in the full sense. 
 Of course, paper money, checks, etc., perform some of the func- 
 tions of money equally well with the precious metals. F. A. 
 Walker holds that anything is money which performs money- 
 work ; but he excludes checks from his catalogue of things 
 which may serve as money. It is practically of little impor- 
 tance, however, what we include under money, so long as its 
 functions are well understood ; it is merely a question of no- 
 menclature, and need not disturb us. 
 
CHAPTER X. 
 
 OF AN INCONVERTIBLE PAPER CURRENCY. 
 
 § 1. After experience had shown that pieces of paper, of 
 no intrinsic value, bj merely bearing upon them the written 
 profession of being equivalent to a certain number of francs, 
 dollars, or pounds, could be made to circulate as such, and 
 to produce all the benefit to the issuers which could have 
 been produced by the coins which they purported to repre- 
 sent, governments began to think that it would be a happy 
 device if they could appropriate to themselves this benefit, 
 free from the condition to which individuals issuing such 
 paper substitutes for money were subject, of giving, when 
 required, for the sign, the thing signified. They de- 
 termined to try whether they could not emancipate them- 
 selves from this unpleasant obligation, and make a piece of 
 paper issued by them pass for a pound, by merely calling 
 it a pound, and consenting to receive it in payment of the 
 taxes. 
 
 In the case supposed, the functions of money are per- 
 formed by a thing which derives its power of performing 
 them solely from convention ; but convention is quite suffi- 
 cient to confer the power ; since nothing more is needful to 
 make a person accept anything as money, and even at any 
 arbitrary value, than the persuasion that it will be taken 
 from him on the same terms by others. The only question 
 is, what determines the value of such a currency, since it can 
 not be, as in the case of gold and silver (or paper exchange- 
 able for them at pleasure), the cost of production. 
 
AN INCONVERTIBLE PAPER CURRENCY. 345 
 
 We have seen, however, that even in the case of metal- 
 lic currency, the immediate agency in determining its value 
 is its quantity. If the quantity, instead of depending on 
 the ordinary mercantile motives of profit and loss, could be 
 arbitrarily fixed by authority, the value would depend on 
 the fiat of that authority, not on cost of production. The 
 quantity of a paper currency not convertible into the met- 
 als at the option of the holder can be arbitrarily fixed, 
 especially if the issuer is the sovereign power of the 
 state. The value, therefore, of such a currency is entirely 
 arbitrary. 
 
 The essential idea of money is that it should have value ; 
 and paper money continues equal in exchange-power to the 
 coin it represents so long as there is associated with it the idea 
 of value equal to the coin for which it is a substitute. For 
 example, a paper dollar remains at par so long as the idea of 
 value belonging to a specie dollar is necessarily associated with 
 it. That is the force of " convention." Whatever it is which 
 separates the idea of real value from the paper dollar lowers 
 its value. Fiat money — that is, a piece of paper, not contain- 
 ing a promise to pay a dollar, but a simple declaration that this 
 is a dollar — therefore, separates the paper from any connection 
 with value. And yet we see t\x&t fiat money has some, although 
 a fluctuating, value at certain times : if the State receives it 
 for taxes, if it is a legal acquittal of obligations, then, to that 
 extent, a certain quantity of it is given a value equal to the 
 wealth represented by the taxes, or the debts. Jevons remarks 
 on this point ' that, if " the quantity of notes issued was kept 
 within such moderate limits that any one wishing to realize the 
 metallic value of the notes could find some one wanting to pay 
 taxes, and therefore willing to give coin for notes," stability of 
 value might be secured. If there is more in circulation than 
 performs these functions, it will depreciate in the proportion of 
 the quantity to the extent of the uses assigned to it. The value 
 of the coin, or real wealth, inevitably pertaining to the paper, 
 and from which it can not be separated by being passed from 
 person to person, is the test of the value of paper money. 
 Although the paper is not even a promise to pay value, the 
 form of expression on its face, or the term used as its designa- 
 tion, generally tends, under the force of convention and habit, 
 to give a popular value to paper. Although the State may not 
 
 1 " Money and the Mechanism of Exchange," p. 232. 
 
346 EXCHANGE. 
 
 promise to pay a dollar, yet, wherever such paper money carries 
 any purchasing power with it (which has very seldom happened, 
 and then only for short periods), it will be found that there is 
 a vague popular understanding that the State intends, at some 
 time or other, to redeem the notes with value in coin to some 
 amount. In all the early cases of irredeemable money in our 
 colonies, the income of taxes, or similar resources, were prom- 
 ised as a means of redemption. To some — although a slight — 
 extent, the idea of value was associated with such paper. The 
 actual quantity issued did not measure the depreciation. The 
 paper did depreciate with increased issues. But only in so far 
 as the increased issues proved to the community that there was 
 less and less possibility of ever receiving value for them did they 
 depreciate. In other words, we come to the familiar experience, 
 known to many, of a paper money depending for its value on 
 the opinions of men in the country. How true this is, even of 
 our own greenbacks, which were not ^^ money, but promises to 
 pay (although not then redeemable), we have but to study the 
 movement of the line in Chart XII (p. 359), which represents 
 the fluctuations of our paper money during the civil war. The 
 upward movement of the line, which indicates the premium on 
 gold during our late war, of course represents correspondingly 
 the depreciation of the paper. Every victory or defeat of the 
 Union arms raised or lowered the premium on gold ; it was the 
 register of the opinion of the people as to the value to be asso- 
 ciated with the paper. The second and third resorts to issues of 
 greenbacks were regarded as confessions of financial distress ; it 
 was this which produced the effect on their value. It was not so 
 much the quantity, as that which caused the issue of the quan- 
 tity. It is, of course, clear that a paper money like the green- 
 backs, which were the promises to pay of a rich country, would 
 bear some relation to the actual quantity issued ; and this is to 
 be seen by the generally higher level of the line on the chart, 
 showing a steadily diminishing purchasing power as the issues 
 increased. But the thing which weighed most in people's 
 minds was the possibility of ultimate redemption ; and the 
 premium on gold was practically a register of the " betting " 
 on this possibility. In 1878, when Secretary Sherman's re- 
 serve was seen to be increasing to an effective amount, and 
 when it became evident that he would have the means (i. e., 
 the value represented by all the paper that was likely to be pre- 
 sented) to resume on the day set, January 1, 1879, the pre- 
 mium gradually faded away. The general shifting of the level 
 to a lower stage in this later period was not due to any decrease 
 in the quantity outstanding, because the contraction had been 
 stopped in 1868, and that consequent on the resumption act in 
 May, 1878. 
 
AN INCONVERTIBLE PAPER CURRENCY. 347 
 
 Suppose that, in a country of which the currency is 
 wholly metallic, a paper currency is suddenly issued, to the 
 amount of half the metallic circulation ; not by a banking 
 establishment, or in the form of loans, but by the Govern- 
 ment, in payment of salaries and purchase of commodities. 
 The currency being suddenly increased by one half, all prices 
 will rise, and, among the rest, the prices of all things made 
 of gold and silver. An ounce of manufactured gold will be- 
 come more valuable than an ounce of gold coin, by more 
 than that customary difference which compensates for the 
 value of the workmanship ; and it will be profitable to melt 
 the coin for the purpose of being manufactured, until as 
 much has been taken from the currency by the subtraction 
 of gold as had been added to it by the issue of paper. Then 
 prices will relapse to what they were at first, and there will 
 be nothing changed, except *that a paper currency has been 
 substituted for half of the metallic currency which existed 
 before. Suppose, now, a second emission of paper; the 
 same series of effects will be renewed ; and so on, until the 
 whole of the metallic money has disappeared [see Chart 
 No. XIV, Chap. XV, for the exportation of gold from the 
 United States after the issue of our paper money in 1862] : 
 that is, if paper be issued of as low a denomination as 
 the lowest coin ; if not, as much will remain as conven- 
 ience requires for the smaller payments. The addition 
 made to the quantity of gold and silver disposable for 
 ornamental purposes will somewhat reduce, for a time, the 
 value of the article; and as long as this is the case, even 
 though paper has been issued to the original amount of 
 the metallic circulation, as much coin will remain in cir- 
 culation along with it as will keep the value of the cur- 
 rency down to the reduced value of the metallic material ; 
 but the value having fallen below the cost of production, a 
 stoppage or diminution of the supply from the mines will 
 enable the surplus to be carried off by the ordinary agents of 
 destruction, after which the metals and the currency will 
 recover their natural value. We are here supposing, as we 
 
348 EXCHANGE. 
 
 have supposed throughout, that the country has mines of its 
 own, and no commercial intercourse with other countries ; 
 for, in a country having foreign trade, the coin which is ren- 
 dered superfluous by an issue of paper is carried off by a 
 much prompter method. 
 
 Mr. Mill's statement, that, if paper be not issued of as low 
 a denomination as the lowest coin, " as much will remain as 
 convenience requires for the smaller payments," will not hold 
 true. During our recent experiment of depreciated paper, the 
 depreciation was such as to drive out the subsidiary silver coins, 
 by July, 1862, and we were forced to supply their place by a 
 fractional paper currency. By an amendment inserted June 17, 
 1862, into the act authorizing a second issue of $150,000,000 of 
 greenbacks, it was ordered " that no note shall be issued for 
 the fractional part of a dollar, and not more than $35,000,000 
 shall be of lower denominations than five dollars " (act, finally 
 passed July 11, 1862). Although there were no fractional 
 notes, yet one-dollar notes drove out subsidiary silver, simply 
 because the paper had depreciated to a value below that of the 
 345*6 grains of silver in two halves or four quarters of a dollar. 
 By July 2d the disappearance of small coin was distinctly noted. 
 Let the value of gold be represented by 100 ; and a dollar of 
 small silver coin (345*6 grains), relatively to a gold dollar, 
 by 96. Now, if paper depreciates to 90, relatively to gold, it 
 will drive out the subsidiary silver at 96, in accordance with 
 Gresham's law. 
 
 Up to this point the effects of a paper currency are sub- 
 stantially the same, whether it is convertible into specie or 
 not. It is when the metals have been completely super- 
 seded and driven from circulation that the difference be- 
 tween convertible and inconvertible paper begins to be op- 
 erative. When the gold or silver has all gone from circu- 
 lation, and an equal amount of paper has taken its place, 
 suppose that a still further issue is superadded. The same 
 series of phenomena recommences : prices rise, among the 
 rest the prices of gold and silver articles, and it becomes an 
 object, as before, to procure coin, in order to convert it into 
 bullion. There is no longer any coin in circulation ; but, if 
 the paper currency is convertible, coin may still be obtained 
 from the issuers in exchange for notes. All additional notes, 
 therefore, which are attempted to be forced into circulation 
 
AN INCONVERTIBLE PAPER CURRENCY. 349 
 
 after the metals have been completely superseded, will return 
 upon the issuers in exchange for coin ; and they will not be 
 able to maintain in circulation such a quantity of convertible 
 paper as to sink its value below the metal which it repre- 
 sents. It is not so, however, with an inconvertible currency. 
 To the increase of that (if permitted by law) there is no 
 check. The issuers may add to it indefinitely, lowering its 
 value and raising prices in proportion ; they may, in other 
 words, depreciate the currency without limit. 
 
 Such a power, in whomsoever vested, is an intolerable 
 evil. All variations in the value of the circulating medium 
 are mischievous : they disturb existing contracts and expec- 
 tations, and the liability to such changes renders every pecun- 
 iary engagement of long date entirely precarious. The per- 
 son who buys for himself, or gives to another, an annuity 
 of one [hundred dollars], does not know whether it will be 
 equivalent to [two hundred or to fifty dollars] a few years 
 hence. Great as this evil would be if it depended only on 
 accident, it is still greater when placed at the arbitrary dis- 
 posal of an individual or a body of individuals, who may 
 have any kind or degree of interest to be served by an. artifi- 
 cial fluctuation in fortunes, and who have at any rate a 
 strong interest in issuing as much as possible, each issue 
 being in itself a source of profit — not to add, that the is- 
 suers may have, and, in the case of a government paper, al- 
 ways have, a direct interest in lowering the value of the 
 currency, because it is the medium in which their own debts 
 are computed. 
 
 The United States Supreme Court had decided in Decem- 
 ber, 1870, by the second legal-tender decision, that the issue of 
 greenbacks (inconvertible from 1862 to 1879) was constitutional 
 during a time of war ; but it was thought that the reissue of 
 these notes since the war, when no war emergency could be 
 pleaded, was unconstitutional. This view, however, was met by 
 the unfortunate decision of the Supreme Court, delivered by 
 Justice Gray, March, 1884, which announced the doctrine that 
 the expediency of an issue of legal-tender paper money was to 
 be determined solely by Congress ; and that, if Congress judged 
 the issue expedient, it was within the limits of those provisions 
 
350 EXCHANGE. 
 
 of the Constitution (section 8), which gave Congress the means 
 to do whatever was " necessary and proper " to carry out the 
 powers expressly granted to it. Nothing now can prevent 
 Congress, should it choose to do so, from issuing paper money 
 of any description whatever, even if of absolutely no value. 
 The disaster that might be brought upon the country by a 
 rising tide of repudiation among debtors, taking its effect 
 through a facile and plastic Congress (as in the case of the 
 silver coinage in 1878), is appalling to reflect upon. 
 
 § 2. In order that the value of the currency may be 
 secure from being altered by design, and may be as little as 
 possible liable to fluctuation from accident, the articles least 
 liable of all known commodities to vary in their value, the 
 precious metals, have been made in all civilized countries 
 the standard of value for the circulating medium ; and no 
 paper currency ought to exist of which the value can not be 
 made to conform to theirs. Nor has this fundamental maxim 
 ever been entirely lost sight of, even by the governments 
 which have most abused the power of creating inconvertible 
 paper. If they have not (as they generally have) professed 
 an intention of paying in specie at some indefinite future 
 time, they have at least, by giving to their paper issues the 
 names of their coins, made a virtual, though generally a false, 
 profession of intending to keep them at a value correspond- 
 ing to that of the coins. This is not impracticable, even 
 with an inconvertible paper. There is not, indeed, the self- 
 acting check which convertibility brings with it. But there 
 is a clear and unequivocal indication by which to judge 
 whether the currency is depreciated, and to what extent. 
 That indication is the price of the precious metals. When 
 holders of paper can not demand coin to be converted into 
 bullion, and when there is none left in circulation, bullion 
 rises and falls in price like other things ; and if it is above 
 the mint price — if an ounce of gold, which would be coined 
 into the equivalent of [$18.60], is sold for [$20 or $25] in 
 paper — the value of the currency has sunk just that much 
 below what the value of a metallic currency would be. If, 
 therefore, the issue of inconvertible paper were subjected to 
 
AN INCONVERTIBLE PAPER CURRENCY. 35 1 
 
 strict rules, one rule being that, whenever bullion rose above 
 the mint price, the issues should be contracted until the 
 market price of bullion and the mint price were again in 
 accordance, such a currency would not be subject to any 
 of the evils usually deemed inherent in an inconvertible 
 paper. 
 
 But, also, such a system of currency would have no ad- 
 vantages sufficient to recommend it to adoption. An incon- 
 vertible currency, regulated by the price of bullion, would 
 conform exactly, in all its variations, to a convertible one ; 
 and the only advantage gained would be that of exemption 
 from the necessity of keeping any reserve of the precious 
 metals, which is not a very important consideration, espe- 
 cially as a government, so long as its good faith is not sus- 
 pected, need not keep so large a reserve as private issuers, 
 being not so liable to great and sudden demands, since there 
 never can be any real doubt of its solvency. 
 
 The United States since 1879 finds that a reserve of from 
 $130,000,000 to 8140,000,000 is a sufficient reserve for out- 
 standing notes to the amount of $346,000,000, and greenbacks 
 are now at a par with gold. 
 
 Against this small advantage is to be set, in the first place, 
 the possibility of fraudulent tampering with the price of 
 bullion for the sake of acting on the currency, in the man- 
 ner of the fictitious sales of corn, to influence the averages, 
 so much and so justly complained of while the corn laws 
 were in force. But a still stronger consideration is the im- 
 portance of adhering to a simple principle, intelligible to 
 the most untaught capacity. Everybody can understand 
 convertibility ; every one sees that what can be at any mo- 
 ment exchanged for five [dollars] is worth five [dollars]. 
 Regulation by the price of bullion is a more complex idea, 
 and does not recommend itself through the same familiar 
 associations. There would be nothing like the same confi- 
 dence, by the public generally, in an inconvertible currency 
 so regulated, as in a convertible one : and the most instructed 
 person might reasonably doubt whether such a rule would be 
 
352 EXCHANGE. 
 
 as likely to be inflexibly adhered to. The grounds of the 
 rule not being so well understood by the public, opinion 
 would probably not enforce it with as much rigidity, and, 
 in any circumstances of difficulty, would be likely to turn 
 against it ; while to the Government itself a suspension of 
 convertibility would appear a much stronger and more ex- 
 treme measure than a relaxation of what might possibly 
 be considered a somewhat artificial rule. There is there- 
 fore a great preponderance of reasons in favor of a con- 
 vertible, in preference to even the best regulated incon- 
 vertible, currency. The temptation to over- issue, in certain 
 financial emergencies, is so strong, that nothing is admissible 
 which can tend, in however slight a degree, to weaken the 
 barriers that restrain it. 
 
 The French Government, in the Franco-Prussian War 
 (1870), issued inconvertible paper on this plan, as explained 
 by Mr. Mill ; but, acting through the Bank of France, they con- 
 ducted their issues so successfully that the notes never de- 
 preciated more than about one half of one per cent. But this 
 was a very rare management of inconvertible paper, since the 
 issues were actually limited as the price of gold in paper rose 
 above par. 
 
 § 3. Projectors every now and then start up, with plans 
 for curing all the economical evils of society by means of an 
 unlimited issue of inconvertible paper. There is, in truth, a 
 great charm in the idea.* To be able to pay off the national 
 debt, defray the expenses of government without taxation, 
 and, in fine, to make the fortunes of the whole community, 
 is a brilliant prospect, when once a man is capable of believ- 
 ing that printing a few characters on bits of paper will do it. 
 The philosopher's stone could not be expected to do more. 1 
 
 As these projects, however often slain, always resuscitate, 
 it is not superfluous to examine one or two of the fallacies 
 
 1 For John Law's famous scheme (1718-1720) in France, called the " Missis- 
 sippi Bubble," the best authority is Levasseur's "Systeme de Law "(1854). 
 Also consult M. Thiers's " The Mississippi Bubble " (translated by F. F. Fiske, 
 1859); Steuart's "Political Economy" (1767); and McLeod's " Dictionary of 
 Political Economy," article on " Banking in France." 
 
AN INCONVERTIBLE PAPER CURRENCY. 353 
 
 by which the schemers impose upon themselves. One of the 
 commonest is, that a paper currency can not be issued in ex- 
 cess so long as every note issued represents property, or has 
 a foundation of actual property to rest on. These phrases, 
 of representing and resting, seldom convey any distinct or 
 well-defined idea ; when they do, their meaning is no more 
 than this — that the issuers of the paper must have property, 
 either of their own, or intrusted to them, to the value of all 
 the notes they issue, though for what purpose does not very 
 clearly appear; for, if the property can not be claimed 
 in exchange for the notes, it is difficult to divine in what 
 manner its mere existence can serve to uphold their value. 
 I presume, however, it is intended as a guarantee that 
 the holders would be finally reimbursed, in case any un- 
 toward event should cause the whole concern to be wound 
 up. On this theory there have been many schemes for 
 " coining the whole land of the country into money " and 
 the like. 
 
 In so far as this notion has any connection at all with 
 reason, it seems to originate in confounding two entirely dis- 
 tinct evils, to which a paper currency is liable. One is, the 
 insolvency of the issuers ; which, if the paper is grounded 
 on their credit — if it makes any promise of payment in cash, 
 either on demand or at any future time — of course deprives 
 the paper of any value which it derives from the promise. 
 To this evil paper credit is equally liable, however moder- 
 ately used; and against it, a proviso that all issues should 
 be "founded on property," as for instance that notes should 
 only be issued on the security of some valuable thing ex- 
 pressly pledged for their redemption, would really be effica- 
 cious as a precaution. But the theory takes no account of 
 another evil, which is incident to the notes of the most sol- 
 vent firm, company, or government; that of being depre- 
 ciated in value from being issued in excessive quantity. The 
 assignats, during the French Revolution, were an example of 
 a currency grounded on these principles. The assignats 
 " represented " an immense amount of highly valuable prop- 
 
 23 
 
354 EXCHANGE. 
 
 erty, namely, the lands of the crown, the church, the monas- 
 teries, and the emigrants; amounting possibly to half the 
 territory of France. They were, in fact, orders or assign- 
 ments on this mass of land. The revolutionary government 
 had the idea of "coining" these lands into money; but, to 
 do them justice, they did not originally contemplate the im- 
 mense multiplication of issues to which they were eventually 
 driven by the failure of all other financial resources. They 
 imagined that the assignats would come rapidly back to the 
 issuers in exchange for land, and that they should be able to 
 reissue them continually until the lands were all disposed 
 of, without having at any time more than a very moderate 
 quantity in circulation. Their hope was frustrated : the land 
 did not sell so quickly as they expected ; buyers were not 
 inclined to invest their money in possessions which were 
 likely to be resumed without compensation if the revolution 
 succumbed ; the bits of paper which represented land, be- 
 coming prodigiously multiplied, could no more keep up their 
 value than the land itself would have done if it had all been 
 brought to market at once ; and the result was that it at last 
 required an assignat of five hundred francs to pay for a cup 
 of coffee. 
 
 The example of the assignats has been said not to be con- 
 clusive, because an assignat only represented land in general, 
 but not a definite quantity of land. To have prevented their 
 depreciation, the proper course, it is affirmed, would have 
 been to have made a valuation of all the confiscated property 
 at its metallic value, and to have issued assignats up to, but 
 not beyond, that limit ; giving to the holders a right to de- 
 mand any piece of land, at its registered valuation, in ex- 
 change for assignats to the same amount. There can be no 
 question about the superiority of this plan over the one actu- 
 ally adopted. Had this course been followed, the assignats 
 could never have been depreciated to the inordinate degree 
 they were ; for — as they would have retained all their pur- 
 chasing power in relation to land, however much they might 
 have fallen in respect to other things — before they had lost 
 
AN INCONVERTIBLE PAPER CURRENCY. 355 
 
 very much of their market value, they would probably 
 have been brought in to be exchanged for land. It must 
 be remembered, however, that their not being depreci- 
 ated would presuppose that no greater number of them 
 continued in circulation than would have circulated if they 
 had been convertible into cash. However convenient, there- 
 fore, in a time of revolution, this currency convertible into 
 land on demand might have been, as a contrivance for 
 selling rapidly a great quantity of land with the least pos- 
 sible sacrifice, it is difficult to see what advantage it would 
 have, as the permanent system of a country, over a cur- 
 rency convertible into coin ; while it is not at all difficult to 
 see what would be its disadvantages, since land is far more 
 variable in value than gold and silver ; and besides, land, to 
 most persons, being rather an incumbrance than a desirable 
 possession, except to be converted into money, people would 
 submit to a much greater depreciation before demanding 
 land, than they will before demanding gold or silver. 1 
 
 It has been said that the assignats circulated without legal- 
 tender power. They were received by the French treasury, 
 and a law was passed condemning a man to six years in irons 
 for exchanging gold or silver for assignats at a greater than 
 the nominal or face value of the latter. The subsequent issues, 
 called mandats, did not represent land, but were directly ex- 
 changeable for the land. Even that kind of money is no more 
 valuable than a proportional amount of tax receipts for land. 
 In a very short time mandats were worth i-J^ of their face 
 value, and assignats very much less. The assignats, moreover, 
 were not limited in quantity to the money value of the lands 
 they represented. By 1796, 45,000,000,000 francs of assignats 
 had been issued. 
 
 § 4. The experience of the colonies before our Revolution 
 is rich in warning examples of the over -issue of inconvert- 
 ible paper money. Those of Rhode Island* and the Prov- 
 
 1 For the best brief account of the issues of assignats, see President A. D. 
 White's " Paper Money Inflation in France." See also F. A. Walker, " Money," 
 pp. 336-347 ; Bazot's " Assignats " ; and Alison's " History of the French 
 Revolution," vol. ii, p. 606. 
 
 s See " Some Account of the Bills of Credit or Paper Money of Rhode Island, 
 1710-1786." "Rhode Island Historical Tracts," No. 8 (1880), by E. S. Potter 
 and S. S. Rider. 
 
356 
 
 EXCHANGE. 
 
 ince of Massachusetts l are the most conspicuous, perhaps, he- 
 cause we have better knowledge of them, but other colonies 
 suffered in as great a degree. The experience of the latter 
 illustrates as well as any, perhaps, not only the general theory 
 of inconvertible paper, but the device of supporting the pa- 
 per by paying interest upon the notes. Although the issues 
 since 1690 had depreciated, in 1702 £10,000 more notes were 
 issued, because, as it was said, there was a scarcity of money. 
 It is always noticeable that the more issues of paper money 
 there are made, the more there is a cry of scarcity, much like 
 the thirst of a hard drinker after the first exhilaration has 
 passed off. On the new issues five per cent interest was paid, 
 and even excises and imposts were set aside as security for their 
 payment. The year 1709 saw a new expedition to Canada, and 
 saw also the broken promises of the province, when £20,000 
 more notes were put out ; the collection of the taxes with which 
 to pay the notes was deferred in 1707 for two years ; in 1709 
 deferred for four years ; in 1710 for five years ; in 1711 for six 
 years. By 1712 they had depreciated thirty per cent, when the 
 charm of legal tender was thrown around them, but to no pur- 
 pose. The idea of value was not associated with them in peo- 
 ple's minds, and they put no faith in promises. The usual result 
 took place. People divided politically on the money question, 
 and parties began to agitate for banks which should issue notes 
 based on real estate, or for loans from the state to private per- 
 sons at interest to be paid annually. Such facts show the train 
 of evils following the first innocent departure from the main- 
 tenance of a currency equivalent to coin. The people forgot, or 
 did not know, the nature of money, or the offices it performed. 
 They did not understand that creating paper money did not 
 create wealth. This experiment closed only in 1750 (March 
 31st), when the province had courage enough to resume specie 
 payments. The effect was to transfer the West India trade 
 from paper-issuing colonies to Massachusetts, and to produce 
 a steady prosperity in her business interests. 
 
 The issue of paper money as a means of making a forced 
 loan from the people, when there seem to be no other means of 
 getting funds, has been fully illustrated in our country by the 
 Continental currency issued during our Revolution. It is not, 
 however, considered that this is also accompanied by a process 
 by which every debtor takes " a forced contribution from his 
 creditor." Congress had no power to tax, and the separate 
 
 1 See Felt's " History of Massachusetts Currency." Consult also Minot, 
 Hutchinson, and Gouge. Walker, " Money," and Sumner, " History of American 
 Currency," have given considerable accounts of paper experiments in the 
 United States, and should be well studied. 
 
AN INCONVERTIBLE PAPER CURRENCY. 
 
 357 
 
 CHART XI. 
 Continental Currency, Issue and Depreciation. 
 
 200 
 
 190 
 
 180 
 
 170 
 
 160 
 
 150 
 
 140 
 
 130 
 
 120 
 
 110 
 
 100 
 
 90 
 
 80 
 
 70 
 
 60 
 
 50 
 
 40 
 
 30 
 
 20 
 
 10 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 J 
 
 
 
 
 
 
 
 
 / 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 \ 
 
 
 
 
 
 
 
 
 \ 
 
 
 
 
 
 
 
 
 1 
 
 I 
 
 
 
 
 
 
 
 
 \ 
 
 
 
 
 
 
 
 
 \ 
 
 
 
 
 
 
 
 
 \ 
 
 > 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 \ 
 
 
 
 
 
 
 
 
 \>- 
 
 \ 
 
 
 
 
 
 
 
 
 V 
 
 — ___ 
 
 
 
 1775 
 
 1776 1777 
 
 1778 1779 
 
 1780 1781 
 
 1782 
 
358 EXCHANGE. 
 
 State would not do it ; and this has been considered as the ex- 
 cuse for making issues of that well-known paper money, which 
 has given rise to the familiar by-word for absence of value, 
 " not worth a Continental." Without going into details, 1 in one 
 year, 1779, Congress issued $140,000,000, worth in coin only 
 $7,000,000. They, however, bravely declared that paper had 
 not depreciated, but that the price of coin had gone up ! 
 Legal attempts were made to repress the premium on silver ; 
 but resolutions do not create wealth as fast as money can be 
 printed. The depreciation went on more rapidly than the is- 
 sues (see Chart No. XI, in which the black line represents the 
 amounts of issues, and the broken line the depreciation of pa- 
 per, starting at 100) ; and, finally, March 18, 1780, Congress de- 
 cided to admit a depreciation, and resumed in silver at the 
 rate of one dollar in silver for forty in paper. 
 
 The question of government issues a of paper money again 
 came up in the United States in 1862, during the civil war, 
 and part of our present currency is the result of the policy 
 then adopted. The first step — the one that generally costs — 
 however, was taken July 17, 1861, when the Treasury issued 
 150,000,000 of " demand notes," not bearing interest. These 
 notes, however, were not made legal tender. They could be used 
 in payment of salaries and other dues from the United States. 
 It may be well to state that the Treasury balanced the arguments 
 for and against the issues of paper at the beginning of the ex- 
 periment, and we can see how these views were realized as we 
 go along. In favor of paper issues it was urged that we couJd 
 borrow such an amount without interest, as in the case of 
 the Continental currency ; that there would be no expense be- 
 yond the coin necessary for keeping the paper at par ; and 
 that the country would gain a uniform currency. On the other 
 hand, it was seen that there might be temptations to issue with- 
 out provisions for redemption ; that even if a fund were kept, 
 a disturbance of the money market would precipitate a demand 
 for coin, and all upon this single fund ; and, lastly, that there 
 were all the dangers of over-issue. Secretary Chase s then de- 
 
 1 See Walker, "Money," p. 329. 
 
 2 See J. J. Knox's " United States Notes " (1884); the Finance Reports dur- 
 ing and since the war to 18*79; Spaulding's "Financial History of the War" 
 (1 869) ; Bowen's " American Political Economy," chap, xv ; " Chapters of Erie," 
 by H. Adams and F. A. Walker ; and the voluminous pages of the " Congres- 
 sional Globe." For the decisions in the legal-tender cases, see " Banker's Maga- 
 zine," 1869-1870, p. 712, and 1871-1872, pp. 752, 780. A collection of stat- 
 utes affecting United States finance, especially since 1860, has been made in 
 a small pamphlet, by Professor C. F. Dunbar (published by Sever, Cambridge, 
 Massachusetts). 8 Report of 1861. 
 
CHAI 
 
 FLUCTUATIONS tn the PRICJEofGOLI 
 
 January. 
 
 800 
 290 
 280 
 270 
 260 
 250 
 
 240 
 230 
 220 
 
 February. 
 
 March. 
 
 ApriL 
 
 May- 
 
 June. 
 
 -[-£ 
 
 S. CUEKENCY AND Na 
 
 -Bank Notes in Circulation : National Debt and Revenue. 
 
 /t /flfi3 
 
 United States Currency. 
 
 1862. 
 
 186S. 
 
 1864. 
 
 1865. 
 
 18*0. 
 
 June 30. 
 
 June 30. 
 
 June 30. 
 
 June 30. 
 
 January 1. 
 
 
 
 3,361,020 
 387,646,589 
 20,192,456 
 
 795,643 
 
 425,777,397 
 
 21,817,158 
 
 162,001,660 
 
 2,500,000 
 
 472,663 
 
 432,687,966 
 
 24,667,403 
 
 9,856,380 
 
 175,143,620 
 
 113,098 
 
 366,000,000 
 
 39,762,664 
 
 288,392 
 
 2,453,820 
 
 Treasury notes (greenbacks;.. 
 Five per cent Treasury notes. . 
 
 96,620,000 
 
 Total 
 
 149,660,000 
 
 411,190,065 
 
 612,982,148 
 25,82f,666 
 
 683,828,032 
 135,607,060 
 3 per cent cer- 
 tificates 
 
 398,617,974 
 300,000,000 
 
 
 45,545,000 
 
 
 614,211,311 
 
 49,056,397 
 None. 
 931,787 
 
 1,098,793,181 
 
 69,059,642 
 37.640,788 
 4,344,140 
 
 1,740,690,489' 
 
 102,316,153 
 109,741,134 
 51,605,602 
 
 2,682,593,026 
 
 84,928,260 
 209,464,215 
 37,126,002 
 
 2,448,746,953 
 June, 1869. 
 180,048,426 
 158,336,460 
 
 
 
 
 
 
 
 s to to i 
 June, 
 
om JANUARY 1?? 1862. to DECEMBER, 1865. 
 
AN INCONVERTIBLE PAPER CURRENCY. 359 
 
 cided against paper issues. Government bonds, however, did 
 not sell, and the attempt of the banks toward the end of 1861 
 to carry $150,000,000 of bonds brought on a suspension of spe- 
 cie payments, December 31, 1861. Without any taxation pol- 
 icy, the country drifted along, until in a spasm of dread at 
 seeing an empty Treasury, Congress passed the legal-tender 
 act (February 25, 1862), issuing $150,000,000 of paper in the 
 form of promises to pay. A committee of bankers showed that 
 the issue could have been avoided by selling bonds at their 
 market price ; but Congress would not sell them below par. 
 No necessity for the issues of paper need have arrived. In 
 four months another issue of $150,000,000 was authorized 
 (July 11, 1862) ; and a third issue of a like amount (March 3, 
 1862), in all $450,000,000. The depreciation took place (see 
 Chart No. XII), for, as Secretary Chase anticipated, no provis- 
 ion was made for redemption. They were made legal tender, 
 but this " essential idea" did not preserve their value ; nor 
 did the provision that they be received for taxes (except cus- 
 toms), avail for this purpose. 
 
 The effects of the depreciation were as evil as can well be 
 imagined. (1) The expenses of the Government were increased 
 by the rise in prices, so that (2) our national debt became 
 hundreds of millions larger than it need have been ; (3) a 
 vicious speculation in gold began, leading to the unsettling of 
 legitimate trade and to greater variations in prices ; (4) the ex- 
 istence of depreciated paper later gave rise to all the dishonest 
 schemes for paying the coin obligations of the United States 
 in cheap issues, to the ruin of its credit and honor ; and (5) it 
 has practically become a settled part of our circulation, and a 
 possible source of danger. 
 
 Of the whole $450,000,000, $50,000,000 were set aside as a 
 reserve for temporary deposits ; but in July, 1864, $431,000,000 
 were in circulation. At this time (June 30, 1864) Congress, 
 retaining distinctly the feeling that the issue of paper was but 
 a temporary measure, forbade any further issues. Secretary 
 McCulloch, immediately on the close of the war, began to con- 
 tract, and, by a resolution of the lower branch in Congress 
 (December 18, 1865), a cordial concurrence in the measures for 
 contraction was manifested. Of course, the return from the 
 path of inflated credit and high prices was painful, and Con- 
 gress began to feel the pressure of its constituents. Had they 
 not yielded, much of the severity of the crisis of 1873 might 
 have been avoided ; but (April 12, 1866) they forbade any 
 greater contraction than $4,000,000 a month. Here was a lack 
 of courage not foreseen by Secretary Chase. This was again 
 shown (February 4, 1868) by a law which absolutely forbade 
 the Secretary to further reduce the currency, which now stood 
 
360 EXCHANGE. 
 
 at $356,000,000. This marks an important change in the atti- 
 tude of the Government, as compared with 1862. After the 
 panic of 1873, the paper evil produced its usual effect in the 
 cry for more money, and, as in the Province of Massachusetts 
 in 1712, parties divided on the question of inflation or contrac- 
 tion. A bill to expand the Government issues to $400,000,000 
 (and the national-bank notes also to $400,000,000) actually 
 passed both Houses of Congress, and we were fortunately saved 
 from it only by the veto of President Grant (April 22, 1874). 
 This was another landmark in the history of our paper money. 
 Secretary Richardson, however, had already, without authori- 
 ty, reissued $26,000,000 of the $44,000,000 withdrawn by Sec- 
 retary McCulloch, and the amount outstanding was thus 
 $382,000,000. A compromise measure was passed (June 20, 
 1874), which retained this amount in the circulation. 
 
 When the resumption act was passed (January 14, 1875), 
 the provision that, for every $100 of new national-bank notes 
 issued, $80 of United States notes should be retired, resulted in 
 a contraction of the latter from $382,000,000 to $346,000,000. 
 The reason of this was, that there was no provision for the in- 
 crease of United States notes when national banks withdrew 
 their own issues ; and after the crisis many banks naturally did 
 so. The culmination of the policy of Congress came in a law 
 (May 31, 1878) which absolutely forbade all further retirement 
 of United States notes, and we are now left at the present 
 time with an inelastic limit of $346,000,000. Finally, in 1877. 
 and 1878, Secretary Sherman, aided by a most fortunate state 
 of foreign trade, began to accumulate gold in order to carry 
 out the provisions of the resumption act, which required him 
 to resume specie payments on January 1, 1879. He success- 
 fully collected $133,000,000 of gold, and on December 17, 1878, 
 the premium on gold disappeared, and resumption was accom- 
 plished quietly on the day appointed, without a jar to business. 
 
 But it is a significant fact that even after all the evils in- 
 flicted on our country by over-issues, in spite of the temptation 
 to misuse paper money if it is in any way permitted, in spite of 
 all the warnings of history, there seems to be a dangerous ac- 
 quiescence in the presence of government paper money in our 
 currency. It is an open pitfall, tempting to evils whenever 
 sudden emergencies arise. It ought not to be allowed to re- 
 main any longer. 
 
 § 5. Another of the fallacies from which the advocates 
 of an inconvertible currency derive support is the notion 
 that an increase of the currency quickens industry. Mr. 
 Attwood maintained that a rise of prices produced by an in- 
 
AN INCONVERTIBLE PAPER CURRENCY. %Ql 
 
 crease of paper currency stimulates every producer to his 
 utmost exertions, and brings all the capital and labor of the 
 country into complete employment ; and that this has invari- 
 ably happened in all periods of rising prices, when the rise 
 was on a sufficiently great scale. I presume, however, that 
 the inducement which, according to Mr. Attwood, excited 
 this unusual ardor in all persons engaged in production 
 must have been the expectation of getting more of commodi- 
 ties generally, more real wealth, in exchange for the produce 
 of their labor, and not merely more pieces of paper. This 
 expectation, however, must have been, by the very terms of 
 the supposition, disappointed, since, all prices being supposed 
 to rise equally, no one was really better paid for his goods 
 than before. It calculates on finding the whole world per- 
 sisting forever in the belief that more pieces of paper are 
 more riches, and never discovering that, with all their paper, 
 they can not buy more of anything than they could before. 
 At the periods which Mr. Attwood mistook for times of 
 prosperity, and which were simply (as all periods of high 
 prices, under a convertible currency, must be) times of specu- 
 lation, the speculators did not think they were growing rich 
 because the high prices would last, but because they would 
 not last, and because whoever contrived to realize while they 
 did last would find himself, after the recoil, in possession of 
 a greater number of [dollars], without their having become 
 of less value. 
 
 Hume's version of the doctrine differed in a slight degree 
 from Mr. Attwood's. He thought that all commodities would 
 not rise in price simultaneously, and that some persons there- 
 fore would obtain a real gain, by getting more money for 
 what they had to sell, while the things which they wished to 
 buy might not yet have risen. And those who would reap 
 this gain would always be (he seems to think) the first com- 
 ers. It seems obvious, however, that, for every person who 
 thus gains more than usual, there is necessarily some other 
 person who gains less. The loser, if things took place as 
 Hume supposes, would be the seller of the commodities 
 
362 EXCHANGE. 
 
 which are slowest to rise; who, by the supposition, parts 
 with his goods at the old prices, to purchasers who have 
 already benefited by the new. This seller has obtained for 
 his commodity only the accustomed quantity of money, while 
 there are already some things of which that money will no 
 longer purchase as much as before. If, therefore, he knows 
 what is going on, he will raise his price, and then the buyer 
 will not have the gain, which is supposed to stimulate his 
 industry. But if, on the contrary, the seller does not know 
 the state of the case, and only discovers it when he finds, in 
 laying his money out, that it does not go so far, he then ob- 
 tains less than the ordinary remuneration for his labor and 
 capital ; and, if the other dealer's industry is encouraged, it 
 should seem that his must, from the opposite cause, be im- 
 paired. 
 
 An issue of notes is a manifest gain to the issuers, who, 
 until the notes are returned for payment, obtain the use of 
 them as if they were a real capital ; and, so long as the notes 
 are no permanent addition to the currency, but merely su- 
 persede gold or silver to the same amount, the gain of the 
 issuer is a loss to no one ; it is obtained by saving to the 
 community the expense of the more costly material. But, if 
 there is no gold or silver to be superseded — if the notes are 
 added to the currency, instead of being substituted for the 
 metallic part of it — all holders of currency lose, by the depre- 
 ciation of its value, the exact equivalent of what the issuer 
 gains. A tax is virtually levied on them for his benefit. 
 
 But besides the benefit reaped by the issuers, or by others 
 through them, at the expense of the public generally, there 
 is another unjust gain obtained by a larger class — namely, by 
 those who are under fixed pecuniary obligations. All such 
 persons are freed, by a depreciation of the currency, from a 
 portion of the burden of their debts or other engagements ; 
 in other words, part of the property of their creditors is 
 gratuitously transferred to them. On a superficial view it 
 may be imagined that this is an advantage to industry ; since 
 the productive classes are great borrowers, and generally owe 
 
AN INCONVERTIBLE PAPER CURRENCY. 363 
 
 larger debts to the unproductive (if we include among the 
 latter all persons not actually in business) than the unpro- 
 ductive classes owe to them, especially if the national debt 
 be included. It is only thus that a general rise of prices can 
 be a source of benefit to producers and dealers, by diminish- 
 ing the pressure of their fixed burdens. And this might be 
 accounted an advantage, if integrity and good faith were of 
 no importance to the world, and to industry and commerce 
 in particular. 
 
 § 6. Before passing on to another branch of our subject, it 
 may be a gain to clearer ideas to collect in the form of the fol- 
 lowing classification the main points discussed (in Chaps. IV 
 to X) under money and credit, in continuance of a similar 
 classification of value : 
 
364 
 
 EXCHANGE. 
 
 a 
 
 OS 
 
 ta 
 
 oo 
 
 
 I— 1 
 
 
 
 b£ 
 
 8 
 
 
 a 
 
 03 
 
 CO 
 
 1 
 
 to 
 
 1 
 
 0) 
 
 S CM 
 
 
 
 06 § w fl _ 
 
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 US 
 
 O 
 
 t> t~ cy -5 exi 
 
 St-*; Oh 
 
 sh a b i 
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 ■S "g a> 
 
 O TO Q} -*H> 
 Oh3 P « 
 
 <-< <n r 9 
 
 +3 *0 >> 
 
 
 
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 <* 73 
 
 
 O 
 
 
 
 
 ction 
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 exac 
 
 
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 O 
 
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 1 
 
 3 2 m 
 
 
 G 
 
 
 
 
 o cu cp 
 
 
 
 
 
 
 
 
 ki 
 
 
 
 
 the cost of 
 ractically on 
 its value ch 
 
 
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 Pi 
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 CO 
 03 
 
 +^ 
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 ook credits, 
 ills of ex- 
 change. 
 
 
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 en 
 
 O 
 
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 -a 
 
 g^l 
 
 
 e3 
 
 
 
 
 03 
 
 MM 
 
 *H .15 
 
 1 
 
 3 
 
 03 
 
 oa 
 P. 
 
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 rH CM 
 
 £ « 
 
 03 03 
 
 ©a 
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 S -2 
 
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 CO © O* 03 
 
 03 ^ 
 
 T3 —i 
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 •* 2^ 
 
 5. S a, 
 
 •~ a § 
 
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 to £ ^> 
 
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 t-» 
 
 
 
 
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 ^ 
 
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 H0 
 
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 71 
 
 
 
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 13 — < 
 T3 
 
 3 03 
 
 8: 
 
 n«4h V 03 .£ 
 
 t-* 
 ■m ™ 
 cS 
 
 S ~ oS 
 
 g a ? 
 
CHAPTER XL 
 
 OF EXCESS OF SUPPLY. 
 
 § 1. After the elementary exposition of the theory of 
 money contained in the last few chapters, we shall return to 
 a question in the general theory of Yalue which could not 
 be satisfactorily discussed until the nature and operations of 
 Money were in some measure understood, because the errors 
 against which we have to contend mainly originate in a mis- 
 understanding of those operations. 
 
 Because the phenomenon of over-supply and consequent 
 inconvenience or loss to the producer or dealer may exist in 
 the case of any one commodity whatever, many persons, in- 
 cluding some distinguished political economists, 1 have thought 
 that it may exist with regard to all commodities ; that there 
 may be a general over-production of wealth ; a supply of 
 commodities in the aggregate surpassing the demand ; and a 
 consequent depressed condition of all classes of producers. 
 
 The doctrine appears to me to involve so much inconsist- 
 ency in its very conception that I feel considerable difficulty 
 in giving any statement of it which shall be at once clear and 
 satisfactory to its supporters. They agree in maintaining 
 that there may be, and sometimes is, an excess of produc- 
 tions in general beyond the demand for them ; that when 
 this happens, purchasers can not be found at prices which 
 will repay the cost of production with a profit ; that there 
 ensues a general depression of prices or values (they are sel- 
 
 1 Mr. Malthus, Dr. Chalmers, M. dc Sismondi, and various minor writers. 
 It is especially likely that, in times of commercial depression, the journals of 
 the day will contain arguments to show a general over-production. 
 
366 EXCHANGE. 
 
 dom accurate in discriminating between the two), so that 
 producers, the more thej produce, find themselves the poorer 
 instead of richer ; and Dr. Chalmers accordingly inculcates 
 on capitalists the practice of a moral restraint in reference 
 to the pursuit of gain, while Sismondi deprecates machinery 
 and the various inventions which increase productive power. 
 They both maintain that accumulation of capital may pro- 
 ceed too fast, not merely for the moral but for the material 
 interest of those who produce and accumulate; and they 
 enjoin the rich to guard against this evil by an ample un- 
 productive consumption. 
 
 § 2. When these writers speak of the supply of com- 
 modities as outrunning the demand, it is not clear which of 
 the two elements of demand they have in view — the desire 
 to possess, or the means of purchase ; whether their meaning 
 is that there are, in such cases, more consumable products in 
 existence than the public desires to consume, or merely more 
 than it is able to pay for. In this uncertainty, it is necessary 
 to examine both suppositions. 
 
 It will be here noticed that Mr. Mill uses demand in the 
 sense for which we contended it should be used (Book III, 
 Chap. I, § 3), and not as "quantity demanded." The present 
 discussion of over-production should also be connected by the 
 student with the former reference to it, Book I, Chap. IY, § 2. 
 
 First, let us suppose that the quantity of commodities 
 produced is not greater than the community would be glad 
 to consume ; is it, in that case, possible that there should be 
 a deficiency of demand for all commodities for want of the 
 means of payment ? Those who think so can not have con- 
 sidered what it is which constitutes the means of payment 
 for commodities. It is simply commodities. Each person's 
 means of paying for the productions of other people con- 
 sists of those which he himself possesses. All sellers are 
 inevitably and ex vi termini buyers. Could we suddenly 
 double the productive powers of the country, we should 
 double the supply of commodities in every market ; but we 
 should, by the same stroke, double the purchasing power. 
 
EXCESS OF SUPPLY. 
 
 367 
 
 Everybody would bring a double demand as well as sup- 
 ply ; everybody would be able to buy twice as much, because 
 every one would have twice as much to offer in exchange. 
 It is probable, indeed, that there would now be a superfluity 
 of certain things. Although the community would willingly 
 double its aggregate consumption, it may already have as 
 much as it desires of some commodities, and it may prefer 
 to do more than double its consumption of others, or to ex- 
 ercise its increased purchasing power on some new thing. 
 If so, the supply will adapt itself accordingly, and the values 
 of things will continue to conform to their cost of produc- 
 tion. At any rate, it is a sheer absurdity that all things 
 should fall in value, and that all producers should, in conse- 
 quence, be insufficiently remunerated. If values remain the 
 6ame, what becomes of prices is immaterial, since the remu- 
 neration of producers does not depend on how much money, 
 but on how much of consumable articles, they obtain for 
 their goods. Besides, money is a commodity ; and, if all 
 commodities are supposed to be doubled in quantity, we 
 must suppose money to be doubled too, and then prices 
 would no more fall than values would. 
 
 § 3. A general over-supply, or excess of all commodities 
 above the demand, so far as demand consists in means of 
 payment, is thus shown to be an impossibility. But it may, 
 perhaps, be supposed that it is not the ability to purchase, 
 but the desire to possess, that falls short, and that the gen- 
 eral produce of industry may be greater than the commu- 
 nity desires to consume — the part, at least, of the community 
 which has an equivalent to give. 
 
 This is much the most plausible form of the doctrine, 
 and does not, like that which we first examined, involve a 
 contradiction. There may easily be a greater quantity of 
 any particular commodity than is desired by those who have 
 the ability to purchase, and it is abstractedly conceivable 
 that this might be the case with all commodities. The error 
 is in not perceiving that, though all who have an equivalent 
 to give might be fully provided with every consumable 
 
368 EXCHANGE. 
 
 article which they desire, the fact that they go on adding to 
 the production proves that this is not actually the case. As- 
 sume the most favorable hypothesis for the purpose, that of 
 a limited community, every member of which possesses as 
 much of necessaries and of all known luxuries as he desires, 
 and, since it is not conceivable that persons whose wants 
 were completely satisfied would labor and economize to ob- 
 tain what they did not desire, suppose that a foreigner 
 arrives and produces an additional quantity of something 
 of which there was already enough. Here, it will be said, is 
 over-production. True, I reply; over-production of that 
 particular article. The community wanted no more of that, 
 but it wanted something. The old inhabitants, indeed, 
 wanted nothing; but did not the foreigner himself want 
 something \ When he produced the superfluous article, was 
 he laboring without a motive? He has produced — but the 
 wrong thing instead of the right. He wanted, perhaps, 
 food, and has produced watches, with which everybody was 
 sufficiently supplied. The new-comer brought with him into 
 the country a demand for commodities equal to all that he 
 could produce by his industry, and it was his business to see 
 that the supply he brought should be suitable to that de- 
 mand. If he could not produce something capable of ex- 
 citing a new want or desire in the community, for the satis- 
 faction of which some one would grow more food and give 
 it to him in exchange, he had the alternative of growing 
 food for himself, either on fresh land, if there was any unoc- 
 cupied, or as a tenant, or partner, or servant of some former 
 occupier, willing to be partially relieved from labor. He 
 has produced a thing not wanted, instead of what was 
 wanted, and he himself, perhaps, is not the kind of producer 
 who is wanted — but there is no over-production ; production 
 is not excessive, but merely ill-assorted. We saw before 
 that whoever brings additional commodities to the market 
 brings an additional power of purchase ; we now see that he 
 brings also an additional desire to consume, since if he had 
 not that desire he would not have troubled himself to pro- 
 
EXCESS OF SUPPLY. 369 
 
 duce. Neither of the elements of demand, therefore, can 
 be wanting when there is an additional supply, though it is 
 perfectly possible that the demand may be for one thing, and 
 the supply may, unfortunately, consist of another. 
 
 It is not sufficiently borne in mind, also, that the whole 
 progress of civilization results in a differentiation of new wants 
 and desires. To take but a single instance, with the growth of 
 the artistic sense the articles of common use change their en- 
 tire character ; and the advances in the arts disclose new com- 
 modities which satisfy the world's desires, and for these new 
 satisfactions people are willing to work and produce in order 
 to attain them. With education also comes a wider horizon 
 and a more refined perception of taste, which creates wants for 
 new things for which the mind before had no desires. A little 
 reflection, therefore, must inevitably lead us to see that no per- 
 son, no community, ever had, or probably ever will have, all its 
 wants satisfied. So far as we know man, it does not seem pos- 
 sible that there will ever be a falling off in demand, because of 
 a satiety of all material satisfactions. 
 
 § 4. I have already described the state of the markets for 
 commodities which accompanies what is termed a commer- 
 cial crisis. At such times there is really an excess of all 
 commodities above the money demand : in other words, 
 there is an under-supply of money. From the sudden anni- 
 hilation of a great mass of credit, every one dislikes to part 
 with ready money, and many are anxious to procure it at 
 any sacrifice. Almost everybody, therefore, is a seller, and 
 there are scarcely any buyers : so that there may really be, 
 though only while the crisis lasts, an extreme depression of 
 general prices, from what may be indiscriminately called a 
 glut of commodities or a dearth of money. But it is a great 
 error to suppose, with Sismondi, that a commercial crisis is 
 the effect of a general excess of production. It is simply 
 the consequence of an excess of speculative purchases. It is 
 not a gradual advent of low prices, but a sudden recoil from 
 prices extravagantly high : its immediate cause is a contrac- 
 tion of credit, and the remedy is, not a diminution of sup- 
 ply, but the restoration of confidence. It is also evident 
 that this temporary derangement of markets is an evil only 
 
 24 
 
370 EXCHANGE. 
 
 because it is temporary. The fall being solely of money 
 prices, if prices did not rise again no dealer would lose, 
 since the smaller price would be worth as much to him as 
 the larger price was before. In no matter does this phe- 
 nomenon answer to the description which these celebrated 
 economists have given of the evil of over-production. That 
 permanent decline in the circumstances of producers, for 
 want of markets, which those writers contemplate, is a con- 
 ception to which the nature of a commercial crisis gives no 
 support. 
 
 The other phenomenon from which the notion of a gen- 
 eral excess of wealth and superfluity of accumulation seems 
 to derive countenance is one of a more permanent nature, 
 namely, the fall of profits and interest which naturally takes 
 place with the progress of population and production. The 
 cause of this decline of profit is the increased cost of main- 
 taining labor, which results from an increase of population 
 and of the demand for food, outstripping the advance of 
 agricultural improvement. This important feature in the 
 economical progress of nations will receive full considera- 
 tion and discussion in the succeeding book. 1 It is obvious- 
 ly a totally different thing from a want of market for com- 
 modities, though often confounded with it in the complaints 
 of the producing and trading classes. The true interpreta- 
 tion of the modern or present state of industrial economy is, 
 that there is hardly any amount of business which may not 
 be done, if people will be content to do it on small profits ; 
 and this all active and intelligent persons in business per- 
 fectly well know : but even those who comply with the ne- 
 cessities of their time grumble at what they comply with, 
 and wish that there were less capital, or, as they express it, 
 less competition, in order that there might be greater profits. 
 Low profits, 3 however, are a different thing from deficiency 
 
 1 Book IV, Chap. II. 
 
 s This is practically the argument of a little book, " Excessive Saving a Cause 
 of Commercial Distress " (1884), by Uriel H. Crocker. 
 
EXCESS OF SUPPLY. 37 1 
 
 of demand, and the production and accumulation which 
 merely reduce profits can not be called excess of supply or 
 of production. What the phenomenon really is, and its 
 effects and necessary limits, will be seen when we treat of 
 that express subject. 
 
CHAPTEK XII. 
 
 OF SOME PECULIAR CASES OF VALUE. 
 
 § 1. The general laws of value, in all the more impor- 
 tant cases of the interchange of commodities in the same 
 country, have now been investigated. We examined, first, 
 the case of monopoly, in which the value is determined by 
 either a natural or an artificial limitation of quantity, that 
 is, by demand and supply : secondly, the case of free compe- 
 tition, when the article can be produced in indefinite quan- 
 tity at the same cost ; in which case the permanent value is 
 determined by the cost of production, and only the fluctua- 
 tions by supply and demand : thirdly, a mixed case, that of 
 the articles which can be produced in indefinite quantity, 
 but not at the same cost ; in which case the permanent value 
 is determined by the greatest cost which it is necessary to 
 incur in order to obtain the required supply : and, lastly, 
 we have found that money itself is a commodity of the third 
 class ; that its value, in a state of freedom, is governed by 
 the same laws as the values of other commodities of its 
 class; and that prices, therefore, follow the same laws as 
 values. 
 
 From this it appears that demand and supply govern the 
 fluctuations of values and prices in all cases, and the perma- 
 nent values and prices of all things of which the supply is 
 determined by any agency other than that of free competi- 
 tion : but that, under the regime of competition, things are, 
 on the average, exchanged for each other at such values, and 
 sold at such prices, as afford equal expectation of advantage 
 to all classes of producers ; which can only be when things 
 
SOME PECULIAR CASES OF VALUE. 373 
 
 exchange for one another in the ratio of their cost of pro- 
 duction. 
 
 Here, again, is a distinct recognition of the true meaning of 
 cost of production, and its ruling influence within a competing 
 group, which has been seen in its full significance by Mr. 
 Cairnes. 
 
 It sometimes happens [however] that two different com- 
 modities have what may be termed a joint cost of produc- 
 tion. They are both products of the same operation, or set 
 of operations, and the outlay is incurred for the sake of both 
 together, not part for one and part for the other. The same 
 outlay would have to be incurred for either of the two, if the 
 other were not wanted or used at all. There are not a few 
 instances of commodities thus associated in their production. 
 For example, coke and coal-gas are both produced from the 
 same material, and by the same operation. In a more partial 
 sense, mutton and wool are an example ; beef, hides, and tal- 
 low; calves and dairy produce ; chickens and eggs. Cost of 
 production can have nothing to do with deciding the value 
 of the associated commodities relatively to each other. It 
 only decides their joint value. Cost of production does not 
 determine their prices, but the sum of their prices. A prin- 
 ciple is wanting to apportion the expenses of production be- 
 tween the two. 
 
 Since cost of production here fails us, we must revert to 
 a law of value anterior to cost of production, and more 
 fundamental, the law of demand and supply. The law is, 
 that the demand for a commodity varies with its value, and 
 that the value adjusts itself so that the demand shall be 
 equal to the supply. This supplies the principle of reparti-— 
 /tion which we are in quest of. 
 
 Suppose that a certain quantity of gas is produced and 
 sold at a certain price, and that the residuum of coke is 
 offered at a price which, together with that of the gas, re- 
 pays the expenses with the ordinary rate of profit. Sup- 
 pose, too, that, at the price put upon the gas and coke re- 
 spectively, the whole of the gas finds an easy market, with- 
 
374 EXCHANGE. 
 
 out either surplus or deficiency, but that purchasers can not 
 be found for all the coke corresponding to it. The coke will 
 be offered at a lower price in order to force a market. But 
 this lower price, together with the price of the gas, will not 
 be remunerating ; the manufacture, as a whole, will not pay 
 its expenses with the ordinary profit, and will not, on these 
 terms, continue to be carried on. The gas, therefore, must 
 be sold at a higher price, to make up for the deficiency on 
 the coke. The demand consequently contracting, the pro- 
 duction will be somewhat reduced ; and prices will become 
 stationary when, by the joint effect of the rise of gas and 
 the fall of coke, so much less of the first is sold, and so much 
 more of the second, that there is now a market for all the 
 coke which results from the existing extent of the gas-manu- 
 facture. 
 
 Or suppose the reverse case ; that more coke is wanted 
 at the present prices than can be supplied by the operations 
 required by the existing demand for gas. Coke, being now 
 in deficiency, will rise in price. The whole operation will 
 yield more than the usual rate of profit, and additional capi- 
 tal will be attracted to the manufacture. The unsatisfied 
 demand for coke will be supplied ; but this can not be done 
 without increasing the supply of gas too ; and, as the existing 
 demand was fully supplied already, an increased quantity can 
 only find a market by lowering the price. Equilibrium will 
 be attained when the demand for each article fits so well 
 with the demand for the other, that the quantity required of 
 each is exactly as much as is generated in producing the 
 quantity required of the other. 
 
 When, therefore, two or more commodities have a joint 
 cost of production, their natural values relatively to each 
 other are those which will create a demand for each, in the 
 ratio of the quantities in which they are sent forth by the 
 productive process. 
 
 § 2. Another case of value which merits attention is 
 that of the different kinds of agricultural produce. The case 
 would present nothing peculiar,, if different agricultural prod- 
 
SOME PECULIAR CASES OF VALUE. 375 
 
 nets were either grown indiscriminately and with equal ad- 
 vantage on the same soils, or wholly on different soils. The 
 difficulty arises from two things : first, that most soils are 
 fitter for one kind of produce than another, without being 
 absolutely unfit for any ; and, secondly, the rotation of crops. 
 
 For simplicity, we will confine our supposition to two 
 kinds of agricultural produce ; for instance, wheat and oats. 
 If all soils were equally adapted for wheat and for oats, both 
 would be grown indiscriminately on all soils, and their rela- 
 tive cost of production, being the same everywhere, would 
 govern their relative value. If the same labor which grows 
 three quarters of wheat on any given soil would always 
 grow on that soil five quarters of oats, the three and the five 
 quarters would be of the same value. The fact, however, is 
 that both wheat and oats can be grown on almost any soil 
 which is capable of producing either. 
 
 It is evident that each grain will be cultivated in prefer- 
 ence on the 6oils which are better adapted for it than for 
 the other ; and, if the demand is supplied from these alone, 
 the values of the two grains will have no reference to one 
 another. But when the demand for both is such as to re- 
 quire that each should be grown not only on the soils pecul- 
 iarly fitted for it, but on the medium soils which, without 
 being specifically adapted to either, are about equally suited 
 for both, the cost of production on those medium soils will 
 determine the relative value of the two grains; while the 
 rent of the soils specifically adapted to each will be regu- 
 lated by their productive power, consid- 
 ered with reference to that one [grain] 
 alone to which they are peculiarly appli- 
 cable. Thus far the question presents 
 no difficulty, to any one to whom the 
 general principles of value are familiar. 
 
 This may be easily shown by a dia- 
 gram, in which A represents the grade of 
 land best adapted for oats ; B, C, D, re- 
 spectively, lands of diminishing productiveness for oats, until 
 
376 EXCHANGE. 
 
 E is reached, which is, perhaps, equally good for oats or wheat ; 
 a, b, c, d, and E likewise represent the wheat-lands, the best 
 beginning with a. The rent of A, or B, is determined by a 
 comparison with whatever grade of land planted in oats is cul- 
 tivated at the least return, as E, for example. So, if all the 
 wheat-lands are cultivated, land a, or b, is compared with E, 
 but in regard to the capacity of E to produce wheat. 
 
 It may happen, however, that the demand for one of the 
 two, as for example wheat, may so outstrip the demand for 
 the other, as not only to occupy the soils specially suited for 
 wheat, but to engross entirely those equally suitable to both, 
 and even encroach upon those which are better adapted to 
 oats. To create an inducement for this unequal apportion- 
 ment of the cultivation, wheat must be relatively dearer, and 
 oats cheaper, than according to the cost of their production 
 on the medium land. Their relative value must be in pro- 
 portion to the cost on that quality of land, whatever it may 
 be, on which the comparative demand for the two grains 
 requires that both of them should be grown. If, from the 
 state of the demand, the two cultivations meet on land more 
 favorable to one than to the other, that one will be cheaper 
 and the other dearer, in relation to each other and to things 
 in general, than if the proportional demand were as we at 
 first supposed. 
 
 As in the diagram just mentioned, if the demand for wheat 
 forces its cultivation downward not only on to land E, suited 
 to either indifferently, but, still farther on, to lands still less 
 adapted for wheat (although good land for oats), wheat may 
 be pushed down one stem of the V and up the other to D, or 
 even to C. Then the value of wheat will be regulated by the 
 cost of production on C, and the rent will be determined by a 
 comparison between the productiveness of a, b, etc. (running 
 downward through E), with C. The price of wheat will be 
 high relatively to oats, which are now cultivated only on lands, 
 A, B, better suited to growing oats, and whose cost of produc- 
 tion on C is much less than on D or E. 
 
 Here, then, we obtain a fresh illustration, in a somewhat 
 different manner, of the operation of demand, not as an oc- 
 casional disturber of value, but as a permanent regulator of 
 it, conjoined with, or supplementary to, cost of production. 
 
CHAPTER XIII. 
 
 OF INTERNATIONAL TRADE. 
 
 § 1. Some things it is physically impossible to produce, 
 except in particular circumstances of heat, soil, water, or at- 
 mosphere. But there are many things which, though they 
 could be produced at home without difficulty, and in any 
 quantity, are yet imported from a distance. The explanation 
 which would be popularly given of this would be, that it is 
 cheaper to import than to produce them : and this is the true 
 reason. But this reason itself requires that a reason be given 
 for it. Of two things produced in the same place, if one is 
 cheaper than the other, the reason is that it can be produced 
 with less labor and capital, or, in a word, at less cost. Is this 
 also the reason as between things produced in different 
 places ? Are things never imported but from places where 
 they can be produced with less labor (or less of the other 
 element of cost, time) than in the place to which they are 
 brought? Does the law, that permanent value is propor- 
 tioned to cost of production, hold good between commodi- 
 ties produced in distant places, as it does between those pro- 
 duced in adjacent places ? 
 
 "We shall find that it does not. A thing may sometimes 
 be sold cheapest, by being produced in some other place 
 than that at which it can be produced with the smallest 
 amount of labor and abstinence. 
 
 This could not happen between adjacent places. If the 
 north bank of the Thames possessed an advantage over the 
 south bank in the production of shoes, no shoes would be 
 produced on the south side ; the shoemakers would remove 
 themselves and their capitals to the north bank, or would 
 have established themselves there originally ; for, being com- 
 
378 EXCHANGE. 
 
 petitors in the same market with those on the north side, 
 they could not compensate themselves for their disadvantage 
 at the expense of the consumer ; the amount of it would fall 
 entirely on their profits ; and they would not long content 
 themselves with a smaller profit, when, by simply crossing a 
 river, they could increase it. But between distant places, 
 and especially between different countries, profits may con- 
 tinue different ; because persons do not usually remove them- 
 selves or their capitals to a distant place without a very 
 strong motive. If capital removed to remote parts of the 
 world as readily, and for as small an inducement, as it moves 
 to another quarter of the same town — if people would trans- 
 port their manufactories to America or China whenever they 
 could save a small percentage in their expenses by it — profits 
 would be alike (or equivalent) all over the world, and all 
 things would be produced in the places where the same labor 
 and capital would produce them in greatest quantity and of 
 best quality. A tendency may, even now, be observed to- 
 ward such a state of things : capital is becoming more and 
 more cosmopolitan; there is so much greater similarity of 
 manners and institutions than formerly, and so much less 
 alienation of feeling, among the more civilized countries, 
 that both population and capital now move from one of 
 those countries to another on much less temptation than 
 heretofore. But there are still extraordinary differences, 
 both of wages and of profits, between different parts of the 
 world. 
 
 Between all distant places, therefore, in some degree, but 
 especially between different countries (whether under the 
 same supreme government or not), there may exist great in- 
 equalities in the return to labor and capital, without causing 
 them to move from one place to the other in such quantity as 
 to level those inequalities. The capital belonging to a coun- 
 try will, to a great extent, remain in the country, even if 
 there be no mode of employing it in which it would not be 
 more productive elsewhere. Yet even a country thus cir- 
 cumstanced might, and probably would, carry on trade with 
 
INTERNATIONAL TRADE. 379 
 
 other countries. It would export articles of some sort, even 
 to places which could make them with less labor than itself; 
 because those countries, supposing them to have an advan- 
 tage over it in all productions, would have a greater advan- 
 tage in some things than in others, and would find it their 
 interest to import the articles in which their advantage was 
 smallest, that they might employ more of their labor and 
 capital on those in which it was greatest. 
 
 It might seem that a special theory of value is required 
 for international trade, as compared with domestic trade, for 
 the particular reason that in the former there exists no free 
 movement of labor and capital from one trading country to 
 another. But we shall see that no new theory is necessary. 
 As before pointed out, 1 commodities exchange for each other 
 at their relative costs wherever there is that free competition 
 which insures perfect facility of movement for labor and capi- 
 tal. It has been usually assumed that capital and labor move 
 freely as between different parts of the same country, but 
 not between different countries. This, however, is not con- 
 sistent with the facts. "We saw that there were non-compet- 
 ing industrial groups within the same nation. Mr. Mill here, 
 in a pointed way, suggests this, when he speaks of "distant 
 places." The addition, therefore, made to Mr. Mill's expo- 
 sition by Mr. Cairnes 8 is, that the word "international" (in 
 default of a better term) should be applied to those condi- 
 tions either within a country, or between two countries, which, 
 because of the actual immobility of labor and capital from one 
 occupation to another, furnishes a substantial interference with 
 industrial competition. The obstacles to the free movement of 
 labor and capital which produce the conditions called "inter- 
 national" are: 1. "Geographical distance; 2. Difference in 
 political institutions ; 3. Difference in language, religion, and 
 social customs — in a word, in forms of civilization." These 
 differences exist between Maine and Montana ; or even be- 
 tween two adjoining States, Ohio and Kentucky, one a free 
 and the other an old slave State. Labor and capital have not 
 in the past moved freely even across Mason and Dixon's line. 
 There is, therefore, no treatment of international trade and 
 values separate from the laws of value already laid down con- 
 cerning non-competing groups, since there is also no free com- 
 petition between all the industrial groups within a country. 
 
 1 Book III, Chap. II, § 4. 
 
 8 " Leading Principles," pp. 302-307. 
 
380 
 
 EXCHANGE. 
 
 § 2. As I have said elsewhere ' after Ricardo (the thinker 
 who has done most toward clearing up this subject), 9 " it is 
 not a difference in the absolute cost of production which 
 determines the interchange, but a difference in the compara- 
 tive cost. It may be to our advantage to procure iron from 
 Sweden in exchange for cottons, even although the mines of 
 England as well as her manufactories should be more produc- 
 tive than those of Sweden ; for if we have an advantage of 
 one half in cottons, and only an advantage of a quarter in 
 iron, and could sell our cottons to Sweden at the price which 
 Sweden must pay for them if she produced them herself, we 
 should obtain our iron with an advantage [over Sweden] of 
 one half, as well as our cottons. "We may often, by trading 
 with foreigners, obtain their commodities at a smaller ex- 
 pense of labor and capital than they cost to the foreigners 
 themselves. The bargain is still advantageous to the for- 
 eigner, because the commodity which he receives in ex- 
 change, though it has cost us less, would have cost him 
 
 more. 
 
 This may be illustrated as follows 
 
 : 
 
 Articles inter- 
 changed. 
 
 ENGLAND. 
 
 SWEDEN. 
 
 
 10 days' labor produces x yds. 
 12 " " " ycwts. 
 
 15 days' labor produces x yds. 
 15 " '« " ycwts. 
 
 
 Here England has the advantage over Sweden in both cot- 
 ton and iron, since she can produce x yards of cotton in ten 
 days' labor to fifteen days in Sweden, and y cwts. of iron in 
 twelve days' labor to fifteen days in Sweden. The ship which 
 takes x yards of cotton to Sweden, and there exchanges it, as 
 may be done, for y cwts. of iron, brings back to England that 
 which cost Sweden fifteen days' labor, while the cotton with 
 
 1 " Essays on some Unsettled Questions of Political Economy," Essay I. 
 
 s I at one time believed Mr. Ricardo to have been the sole author of the doc- 
 trine now universally received by political economists, on the nature and measure 
 of the benefit which a country derives from foreign trade. But Colonel Torrens, 
 by the republication of one of his early writings, " The Economists refuted," 
 has established at least a joint claim with Mr. Ricardo to the origination of the 
 doctrine, and an exclusive one to its earliest publication. — Mill. 
 
INTERNATIONAL TRADE. 3 SI 
 
 which the iron was bought cost England only ten days' labor. 
 So that England also got her iron at an advantage over Sweden 
 of one half of ten days' labor ; and yet England had an abso- 
 lute advantage over Sweden in iron of a less amount (i. e., of 
 one fourth of twelve days' labor). It is to be distinctly under- 
 stood that by difference in comparative cost we mean a differ- 
 ence in the comparative cost of producing two or more articles 
 in the same country, and not the difference of cost of the same 
 article in the different trading countries. In this example, for 
 instance, it is the difference in the comparative costs in Eng- 
 land of both cotton and iron (not the different costs of cotton 
 in England and Sweden) which gives the reason for the exist- 
 ence of the foreign trade. 
 
 To illustrate the cases in which interchange of commodi- 
 ties will not, and those in which it will, take place between 
 two countries, the supposition may be made that the United 
 States has an advantage over England in the production both 
 of iron and of corn. It may first be supposed that the ad- 
 vantage is of equal amount in both commodities ; the iron 
 and the corn, each of which required 100 days' labor in the 
 United States, requiring each 150 days' labor in England. 
 It would follow that the iron of 150 days' labor in England, 
 if sent to the United States, would be equal to the cloth of 
 100 days' labor in the United States ; if exchanged for corn, 
 therefore, it would exchage for the corn of only 100 days' 
 labor. But the corn of 100 days' labor in the United States 
 was supposed to be the same quantity with that of 150 days' 
 labor in England. With 150 days' labor in iron, therefore, 
 England would only get as much corn in the United States 
 as she could raise with 150 days' labor at home ; and she 
 would, in importing it, have the cost of carriage besides. In 
 these circumstances no exchange would take place. In this 
 case the comparative costs of the two articles in England and 
 in the United States were supposed to be the same, though 
 the absolute costs were different ; on which supposition we 
 see that there would be no labor saved to either country by 
 confining its industry to one of the two productions and im- 
 porting the other. 
 
 It is otherwise when the comparative and not merely 
 
382 EXCHANGE. 
 
 the absolute costs of the two articles are different in the two 
 countries. If, while the iron produced with 100 days' labor 
 in the United States was produced with 150 days' labor in 
 England, the corn which was produced in the United States 
 with 100 days' labor could not be produced in EDgland with 
 less than 200 days' labor, an adequate motive to exchange 
 would immediately arise. With a quantity of iron which 
 England produced with 150 days' labor, she would be able to 
 purchase as much corn in the United States as was there pro- 
 duced with 100 days' labor ; but the quantity which was there 
 produced with 100 days' labor would be as great as the quan- 
 tity produced in England with 200 days' labor. By import- 
 ing corn, therefore, from the United States, and paying for 
 it with iron, England would obtain for 150 days' labor what 
 wonld otherwise cost her 200, being a saving of 50 days' 
 labor on each repetition of the transaction ; and not merely a 
 saving to England, but a saving absolutely ; for it is not ob- 
 tained at the expense of the United States, who, with corn 
 that cost her 100 days' labor, has purchased iron which, if 
 produced at home, would have cost her the same. The 
 United States, therefore, on this supposition, loses nothing ; 
 but also she derives no advantage from the trade, the im- 
 ported iron costing her as much as if it were made at home. 
 To enable the United States to gain anything by the inter- 
 change, something must be abated from the gain of England : 
 the corn produced in the United States by 100 days' labor 
 must be able to purchase from England more iron than the 
 United States could produce by that amount of labor ; more, 
 therefore, than England could produce by 150 days' labor, 
 England thus obtaining the corn which would have cost her 
 200 days at a cost exceeding 150, though short of 200. 
 England, therefore, no longer gains the whole of the labor 
 which is saved to the two jointly by trading with one another. 1 
 
 1 I have in this illustration retained almost the exact words quoted by Mr. 
 Mill from his father's book, James Mill's " Elements of Political Economy," but 
 altered it by changing the trade from Poland to the United States, and by speak- 
 ing of iron instead of cloth. 
 
INTERNATIONAL TRADE. 
 
 383 
 
 The case in which both England and the United States 
 would gain from the trade may be thus briefly shown : 
 
 Articles inter- 
 changed. 
 
 UNITED STATES. 
 
 ENGLAND. 
 
 Iron 
 
 100 days' labor produces x bus. 
 125 " " " y tons. 
 
 200 days' labor produces x bus. 
 150 " " " y tons. 
 
 
 The ship which carries x bushels of corn from the United 
 States to England can there exchange it for at least y tons of 
 iron (costing England 150 days' labor, since x bushels in England 
 would cost 200 days' labor), and bring it home, gaining for the 
 United States the difference between the 100 days' labor in 
 corn, paid for the y tons of iron, and the 125 days which the 
 iron would have cost here if produced at home. In this case 
 the United States has an advantage over England in both corn 
 and iron, but still an international trade will spring up, because 
 the United States will derive a gain owing to the less cost of 
 corn as compared with the cost of iron. Our comparative ad- 
 vantage is in corn. England, also, by sending to the United 
 States y tons of iron, gets in return for it x bushels of corn. 
 To produce the corn herself would have cost her 200 days' la- 
 bor, but she bought that corn by only 150 days' labor spent on 
 iron. England's comparative advantage was in iron. Then 
 both countries would gain. 
 
 Mr. Bowen ' gives an instance of international trade where 
 one country has the advantage in both of the commodities 
 entering into the exchange : " The inhabitants of Barbadoes, 
 favored by their tropical climate and fertile soil, can raise 
 provisions cheaper than we can in the United States. And 
 yet Barbadoes buys nearly all her provisions from this coun- 
 try. Why is this so? Because, though Barbadoes has the 
 advantage over us in the ability to raise provisions cheaply, 
 she has a still greater advantage over us in her power to pro- 
 duce sugar and molasses. If she has an advantage of one 
 fourth in raising provisions, she has an advantage of one half 
 in regard to products exclusively tropical ; and it is better 
 for her to employ all her labor and capital in that branch 
 of production in which her advantage is greatest. She can 
 thus, by trading with us, obtain our breadstuffs and meat at a 
 smaller expense of labor and capital than they cost ourselves. 
 If, for instance, a barrel of flour costs ten days' labor in the 
 United States and only eight days' labor in Barbadoes, the 
 people of Barbadoes can still profitably buy the flour from this 
 
 1 American "Political Economy," p. 481. 
 
384 EXCHANGE. 
 
 country, if they can pay for it with sugar which cost them only 
 six days' labor ; and the people of this country can profitably 
 sell them the flour, or buy from them the sugar, provided the 
 sugar, if raised in the United States, would cost eleven days' 
 labor. . . . The United States receive sugar, which would have 
 cost them eleven days' labor, by paying for it with flour which 
 costs them but ten days. Barbadoes receives flour, which would 
 have cost her eight days' labor, by paying for it with sugar 
 which costs her but six days. If Barbadoes produced both 
 commodities with greater facility, but greater in precisely the 
 same degree, there would be no motive for interchange." 
 
 It may be said, however, that in practice no business-man 
 considers the question of " comparative cost " in making ship- 
 ments of goods abroad ; that all he thinks of is whether the 
 price here, for example, is less than it is in London. And yet 
 the very fact that the prices are less here implies that gold is 
 of high value relatively to the given commodity ; while in 
 London, if money is to be sent back in payment, and if prices 
 are high there, that implies that gold is there of less compara- 
 tive value than commodities, and consequently that gold is the 
 cheapest article to send to the United States. The doctrine, 
 then, is as true of gold, or the precious metals, as it is of other 
 commodities. 1 It may be stated in the following language of 
 Mr. Cairnes : " The proximate condition determining interna- 
 tional exchange is the state of comparative prices in the ex- 
 changing countries as regards the commodities which form 
 the subject of the trade. But comparative prices within 
 the limits of each country are determined by two distinct 
 principles— within the range of effective industrial compe- 
 tition, by cost of production ; outside that range, by reciprocal 
 demand." 2 
 
 § 3. From this exposition we perceive in what consists 
 the benefit of international exchange, or, in other words, 
 foreign commerce. Setting aside its enabling countries to 
 obtain commodities which they could not themselves produce 
 at all, its advantage consists in a more efficient employment 
 of the productive forces of the world. If two countries 
 which traded together attempted, as far as was physically 
 possible, to produce for themselves what they now import 
 from one another, the labor and capital of the two countries 
 
 1 For a fuller discussion of this question see Cairnes, " Leading Principles," 
 p. 319, ff. 
 
 ! " Leading Principles," p. 323. 
 
INTERNATIONAL TRADE. 335 
 
 would not be so productive, the two together would not ob- 
 tain from their industry so great a quantity of commodities, 
 as when each employs itself in producing, both for itself and 
 for the other, the things in which its' labor is relatively most 
 efficient. The addition thus made to the produce of the two 
 combined constitutes the advantage of the trade. It is pos- 
 sible that one of the two countries may be altogether inferior 
 to the other in productive capacities, and that its labor and 
 capital could be employed to greatest advantage by being re- 
 moved bodily to the other. The labor and capital which 
 have been sunk in rendering Holland habitable would have 
 produced a much greater return if transported to America or 
 Ireland. The produce of the whole w r orld would be greater, 
 or the labor less, than it is, if everything "were produced 
 where there is the greatest absolute facility for its produc- 
 tion. But nations do not, at least in modern times, emigrate 
 en masse / and, while the labor and capital of a country re- 
 main in the country, they are most beneficially employed in 
 producing, for foreign markets as well as for its own, the 
 things in which it lies under the least disadvantage, if there 
 be none in w r hich it possesses an advantage. 
 
 The fundamental ground on which all trade, or all exchange 
 of commodities, rests, is division of labor, or separation of em- 
 ployments. Beyond the ordinary gain from division of labor, 
 arising from increased dexterity, there exist gains arising from 
 the development of " the special capacities or resources pos- 
 sessed by particular individuals or localities." International 
 exchanges call out chiefly the special advantages offered by 
 particular localities for the prosecution of particular industries. 
 
 " The only case, indeed, in which personal aptitudes go for 
 much in the commerce of nations is where the nations con- 
 cerned occupy different grades in the scale of civilization. . . . 
 The most striking example which the world has ever seen of a 
 foreign trade determined by the peculiar personal qualities of 
 those engaged in ministering to it is that which was furnished 
 by the Southern States of the American Union previous to the 
 abolition of slavery. The effect of that institution was to give 
 a very distinct industrial character to the laboring population 
 of those States which unfitted them for all but a very limited 
 number of occupations, but gave them a certain special fitness 
 for these. Almost the entire industry of the country was con- 
 25 
 
386 EXCHANGE. 
 
 sequently turned to the production of two or three crude com- 
 modities, in raising which the industry of slaves was found to 
 be effective ; and these were used, through an exchange with 
 foreign countries, as the means of supplying the inhabitants 
 with all other requisites. ... In the main, however, it would 
 seem that this cause [personal aptitudes] does not go for very 
 much in international commerce." ' 
 
 In brief, then, international trade is but an extension of the 
 principle of division of labor ; and the gains to increased pro- 
 ductiveness, arising from the latter, are exactly the same as 
 those from the former. 
 
 § 4. According to the doctrine now stated, the only direct 
 advantage of foreign commerce consists in the imports. A 
 country obtains things which it either could not have pro- 
 duced at all, or which it must have produced at a greater 
 expense of capital and labor than the cost of the things 
 which it exports to pay for them. It thus obtains a more 
 ample supply of the commodities it wants, for the same labor 
 and capital ; or the same supply, for less labor and capital, 
 leaving the surplus disposable to produce other things. The 
 vulgar theory disregards this benefit and deems the advantage 
 of commerce to reside in the exports : as if not what a coun- 
 try obtains, but what it parts with, by its foreign trade, was 
 supposed to constitute the gain to it. An extended market 
 for its produce — an abundant consumption for its goods — a 
 vent for its surplus — are the phrases by which it has been 
 customary to designate the uses and recommendations of 
 commerce with foreign countries. This notion is intelligible, 
 when we consider that the authors and leaders of opinion on 
 mercantile questions have always hitherto been the selling 
 class. It is in truth a surviving relic of the Mercantile 
 Theory, according to which, money being the only wealth, 
 selling, or, in other words, exchanging goods for money, 
 was (to countries without mines of their own) the only 
 way of growing rich — and importation of goods, that is to 
 say, parting with money, was so much subtracted from the 
 benefit. 
 
 1 Cairnes, " Leading Principles," p. 301. 
 
INTERNATIONAL TRADE. 387 
 
 The notion that money alone is wealth has been long 
 defunct, bnt it has left many of its progeny behind it. Adam 
 Smith's theory of the benefit of foreign trade was, that it 
 afforded an outlet for the surplus produce of a country, and 
 enabled a portion of the capital of the country to replace it- 
 self with a profit. The expression, surplus produce, seems 
 to imply that a country is under some kind of necessity of 
 producing the corn or cloth which it exports ; so that the 
 portion which it does not itself consume, if not wanted and 
 consumed elsewhere, would either be produced in sheer 
 waste, or, if it were not produced, the corresponding portion 
 of capital would remain idle, and the mass of productions in 
 the country would be diminished by so much. Either of 
 these suppositions would be entirely erroneous. The coun- 
 try produces an exportable article in excess of its own wants 
 from no inherent necessity, but as the cheapest mode of sup- 
 plying itself with other things. If prevented from exporting 
 this surplus, it would cease to produce it, and would no 
 longer import anything, being unable to give an equivalent ; 
 but the labor and capital which had been employed in pro- 
 ducing with a view to exportation would find employment 
 in producing those desirable objects which were previously 
 brought from abroad ; or, if some of them could not be pro- 
 duced, in producing substitutes for them. These articles 
 would, of course, be produced at a greater cost than that of 
 the things with which they had previously been purchased 
 from foreign countries. But the value and price of the 
 articles would rise in proportion; and the capital would 
 just as much be replaced, with the ordinary profit, from 
 the returns, as it was when employed in producing for the 
 foreign market. The only losers (after the temporary in- 
 convenience of the change) would be the consumers of the 
 heretofore imported articles, who would be obliged either 
 to do without them, consuming in lieu of them something 
 which they did not like as well, or to pay a higher price 
 for them than before. 
 
 If it be said that the capital now employed in foreign 
 
388 EXCHANGE. 
 
 trade could not find employment in supplying the home 
 market, I might reply that this is the fallacy of general 
 over-production, discussed in a former chapter ; but the thing 
 is in this particular case too evident to require an appeal to 
 any general theory. We not only see that the capital of the 
 merchant would find employment, but we see what employ- 
 ment. There would be employment created, equal to that 
 which would be taken away. Exportation ceasing, importa- 
 tion to an equal value would cease also, and all that part 
 of the income of the country which had been expended in 
 imported commodities would be ready to expend itself on 
 the same things produced at home, or on others instead of 
 them. Commerce is virtually a mode of cheapening pro- 
 duction ; and in all such cases the consumer is the person 
 ultimately benefited ; the dealer, in the end, is sure to get 
 his profit, whether the buyer obtains much or little for his 
 money. 
 
 JS converso, if for any reason, such as a removal of duties, 
 capital should be withdrawn from the production of articles 
 consumed at home, and imported commodities should entirely 
 take their place, the very importation of the foreign commodi- 
 ties would imply that an increased corresponding production 
 was going on in this country with which to pay for the import- 
 ed goods. The capital thus thrown out of employment in an 
 industry in which we had no comparative advantage (when 
 competition became free) would necessarily be employed in 
 the industries in which we had an advantage, and would supply 
 — and the transferred capital would be the only means of sup- 
 plying — the commodities which would be sent abroad to pay 
 for those, which by the supposition are now imported, but were 
 formerly produced at home. The result is a greater produc- 
 tiveness of industry, and so a greater sum from which both labor 
 and capital may be rewarded. Whenever capital, unrestrained 
 by artificial support, leaves one employment as unprofitable, it 
 means that that employment is naturally, and in itself, less 
 productive than the usual run of other industries in the coun- 
 try, and so less profitable to both labor and capital than the 
 majority of other occupations. 
 
 § 5. Such, then, is the direct economical advantage of 
 foreign trade. But there are, besides, indirect effects, which 
 must be counted as benefits of a high order. (1) One is, the 
 
INTERNATIONAL TRADE. 389 
 
 tendency of every extension of the market to improve the 
 processes of production. A country which produces for a 
 larger market than its own can introduce a more extended 
 division of labor, can make greater use of machinery, and 
 is more likely to make inventions and improvements in the 
 processes of production. Whatever causes a greater quantity 
 of anything to be produced in the same place tends to the 
 general increase of the productive powers of the world. 1 
 There is (2) another consideration, principally applicable to 
 an early stage of industrial advancement. The opening of 
 a foreign trade, by making them acquainted with new ob- 
 jects, or tempting them by the easier acquisition of things 
 which they had not previously thought attainable, sometimes 
 works a sort of industrial revolution in a country whose re- 
 sources were previously undeveloped for want of energy and 
 ambition in the people ; inducing those who were satisfied 
 with scanty comforts and little work to work harder for the 
 gratification of their new tastes, and even to save, and ac- 
 cumulate capital, for the still more complete satisfaction of 
 those tastes at a future time. 
 
 But (3) the economical advantages of commerce are sur- 
 passed in importance by those of its effects which are in- 
 tellectual and moral. It is hardly possible to overrate the 
 value, in the present low state of human improvement, of 
 placing human beings in contact with persons dissimilar to 
 themselves, and with modes of thought and action unlike 
 those with which they are familiar. Commerce is now, 
 what war once was, the principal source of this contact. 
 Such communication has always been, and is peculiarly in 
 the present age, one of the primary sources of progress. 
 Finally, (4) commerce firsff taught nations to see with good- 
 will the wealth and prosperity of one another. Before, the 
 patriot, unless sufficiently advanced in culture to feel the 
 world his country, wished all countries weak, poor, and ill- 
 governed but his own : he now sees in their wealth and 
 
 1 Book I, chap. VI, § 4. 
 
390 EXCHANGE. 
 
 progress a direct source of wealth and progress to his own 
 country. It is commerce which is rapidly rendering war 
 obsolete, by strengthening and multiplying the personal in- 
 terests which are in natural opposition to it. And it may 
 be said without exaggeration that the great extent and rapid 
 increase of international trade, in being the principal guar- 
 antee of the peace of the world, is the great permanent secu- 
 rity for the uninterrupted progress of the ideas, the institu- 
 tions, and the character of the human race. 
 
CHAPTER XIV. 
 
 OF mTEKNATIONAL VALUES. 
 
 § 1. The values of commodities produced at the same 
 place, or in places sufficiently adjacent for capital to move 
 freely between them — let us say, for simplicity, of commodi- 
 ties produced in the same country — depend (temporary fluc- 
 tuations apart) upon their cost of production. But the value 
 of a commodity brought from a distant place, especially from 
 a foreign country, does not depend on its cost of production 
 in the place from whence it comes. On what, then, does it 
 depend ? The value of a thing in any place depends on the 
 cost of its acquisition in that place ; which, in the case of an 
 imported article, means the cost of production of the thing 
 which is exported to pay for it. 
 
 If, then, the United States imports wine from Spain, 
 giving for every pipe of wine a bale of cloth, the exchange 
 value of a pipe of wine in the United States will not depend 
 upon what the production of the wine may have cost in 
 Spain, but upon what the production of the cloth has cost in 
 the United States. Though the wine may have cost in Spain 
 the equivalent of only ten days' labor, yet, if the cloth costs 
 in the United States twenty days' labor, the wine, when 
 brought to the United States, will exchange for the produce 
 of twenty days' American labor, plus the cost of carriage, 
 including the usual profit on the importer's capital during 
 the time it is locked up and withheld from other employ- 
 ment. 1 
 
 The value, then, in any country, of a foreign commodity, 
 
 1 I have changed the illustration from England to the United States in this 
 example. 
 
392 EXCHANGE. 
 
 depends on the quantity of home produce which must be 
 given to the foreign country in exchange for it. In other 
 words, the values of foreign commodities depend on the 
 terms of international exchange. What, then, do these de- 
 pend upon % What is it which, in the case supposed, causes 
 a pipe of wine from Spain to be exchanged with the United 
 States for exactly that quantity of cloth ? We have seen 
 that it is not their cost of production. If the cloth and the 
 wine were both made in Spain, they would exchange at their 
 cost of production in Spain ; if they were both made in the 
 United States, they would [possibly] exchange at their cost 
 of production in the United States : but all the cloth being 
 made in the United States, and all the wine in Spain, they 
 are in circumstances to which we have already determined 
 that the law of cost of production is not applicable. We 
 must accordingly, as we have done before in a similar em- 
 barrassment, fall back upon an antecedent law, that of supply 
 and demand ; and in this we shall again find the solution of 
 our difficulty. 
 
 § 2. It has been previously explained that the conditions 
 called " international " are those, either within a nation, or those 
 existing between two separate nations, which are such as to 
 prevent the free movement of labor and capital from one group 
 of industries to another, or from one locality to another distant 
 one. Even if woolen cloth could be made cheaper in England 
 than in the United States, we know that neither capital nor 
 labor would easily leave the United States for England, al- 
 though it might go from Rhode Island to Massachusetts under 
 similar inducements. If shoes can be made with less advan- 
 tage in Providence than in Lynn, the shoe industry will come 
 to Lynn ; but it does not follow that the English shoe industry 
 would come to Lynn, even if the advantages of the latter were 
 greater than those in England. If there be no obstacle to the 
 free movement of labor and capital between places or occupa- 
 tions, in which some place or occupation can produce at a less 
 cost than another place or occupation, then there will be a 
 migration of the instruments of production. Since there is 
 no free movement of labor and capital between one country 
 and another, then two countries stand in the same relation as 
 that of two " non-competing groups " within the same country, 
 as before explained. When this fact is once fully grasped, the 
 
INTERNATIONAL VALUES. 393 
 
 subject of international values becomes very simple. It does 
 not differ from the question of those domestic values for which 
 we found ' that the dependence on cost of production would 
 not hold, but that their values were governed by reciprocal de- 
 mand and supply. 
 
 Attention should be drawn to the real nature of the present 
 inquiry. It is not here a question as to what causes interna- 
 tional trade between two countries : that has been treated in 
 the preceding chapter, and has been found to be a difference 
 in the comparative cost. The question now is one of exchange 
 value, that is, for how much of other commodities a given 
 commodity will exchange. The reasons for the trade are sup- 
 posed to exist ; but we now want to know what the law is which 
 determines the proportions of the exchange. Why does one 
 article exchange for more or less of another ? Not, as we have 
 seen, because one costs more or less to produce than the other. 
 
 In the trade between the United States and England in 
 iron and corn, formerly referred to (p. 383), it was seen that a 
 100 days' labor of corn buys from England iron which would 
 have cost the United States 125 days' labor. England sends 
 150 days' labor of iron and buys from the United States corn 
 which would have cost her 200 days' labor. But what rule 
 fixes the proportions between 100 and 125 for the United 
 States, and between 150 and 200 for England, at which the 
 exchanges will take place? The trade increases the produc- 
 tiveness of both countries, but in what ratio will the two coun- 
 tries share this gain? The answer is, briefly, in the ratio set 
 by reciprocal demand and supply, that is, the relative strength, 
 as compared with each other, of the demands of the two coun- 
 tries respectively for iron and corn. This, however, may be 
 capable of explanation in a simple form. 
 
 A has spades, and B has oats, to dispose of ; and each wishes 
 to get the article belonging to the other. Will A give one spade 
 for one bushel of oats, or for two ? Will B give two bushels of 
 oats for one spade ? That depends upon how strong a desire A 
 has for oats ; the intensity of his demand may induce him to 
 give two spades for one bushel. But the exchange also depends 
 upon B. If he has no great need for spades, and A has a strong 
 desire for oats, B will get more spades for oats than otherwise, 
 possibly two spades for one bushel of oats ; that is, oats will 
 have a larger exchange value. If, on the other hand, A cares 
 less for oats than B does for spades, then the exchange will re- 
 sult in an increased value of spades relatively to oats. When 
 two commodities exchange against each other, their exchange 
 values will depend entirely upon the relative intensity of the de- 
 
 1 Book III, Chap. II, § 4. 
 
394 EXCHANGE. 
 
 mand on each side for the other commodity. And this simple 
 form of the statement of reciprocal demand and supply is also 
 the law of international values. 
 
 If instead of spades and oats we substitute iron and corn, 
 and let the trade be between England and the United States, 
 the quantity of corn required to buy a given quantity of iron 
 will depend upon the relative demands of England for corn 
 and of the United States for iron. Something may cut off 
 England's demand for our breadstuffs, and they will then 
 have a less exchange value relatively to iron (if we keep up our 
 demand), and their prices will fall. But if, on the other hand, 
 England has poor harvests, and consequently a great demand 
 for corn, and if our demand for iron is not excessive at the 
 same time, then our breadstuffs will rise in value. And this 
 was precisely what happened from 1877 to 1879. Now, in the 
 above illustration of corn and iron, how can we know whether 
 or not x bushels of corn (the produce of 100 days' labor in the 
 United States) will exchange for exactly y tons of English 
 iron? That, again, will depend upon the reciprocal demands 
 of the two countries for corn and iron respectively. More- 
 over, it will have been already observed that the ratio of ex- 
 change is not capable of being ascertained exactly, since it va- 
 ries with changing conditions, namely, the desires of the people 
 of the two countries, together with their means of purchase. 
 
 But yet these variations are capable of ascertainment as 
 regards their extreme limits. The reciprocal demand can not 
 carry the exchange value in either country beyond the line set 
 by the cost of production of the article. For instance, an ur- 
 gent need in England for corn (if the United States has a light 
 demand for English iron) can not carry the ratio of exchange 
 to a point such that England will offer so much more than 150 
 days' labor in iron for x bushels of American corn that it will 
 go beyond 200 days' labor in iron. It will be seen at once, then, 
 if that were the case, that England would produce the corn 
 herself ; and that she would then have no gain whatever from 
 the trade. The ratio of exchange will thus be limited by the 
 reciprocal demand on one side to the cost of production (200 
 days' labor) of English corn. On the other hand, if the sup- 
 position were reversed, and the United States had a great de- 
 mand for iron, but England had little need for our corn, then 
 we would not offer more than 125 days' labor of corn for y tons 
 of iron, because for that expenditure of labor we could pro- 
 duce the iron ourselves. 
 
 In the above examples we have considered the case of a 
 trade in corn and iron only. If corn were to typify all our 
 goods wanted by England, and iron all English goods wanted 
 by the United States, the conclusions would be exactly the 
 
INTERNATIONAL VALUES. 395 
 
 same. The ratios of a myriad of things, each governed by its 
 particular reciprocal demand, exchanging against each other, 
 give a general result by which the goods sent out exchange 
 against the goods brought back at such rates as are fixed by 
 the reciprocal demands acting on all the goods. Goods are pay- 
 ments for goods ; the ratio of exchange depends on reciprocal 
 demand and supply. If we now add more countries to the ex- 
 ample, we simply increase the number of persons (although in 
 different countries) wanting onr goods, as set off against our 
 demands for the goods of this greater number of persons. If 
 France, Germany, and England all want our corn, we must 
 have some demand for the goods of France, Germany, and Eng- 
 land also ; and the same law of reciprocal demand gives the 
 ratio of interchange. That this explanation is consistent with 
 the facts is to be seen when we notice how eagerly the export- 
 ers of United States staples watch the conditions which in- 
 crease or diminish the foreign demand for these commodities, 
 looking at them as the causes which directly affect their ex- 
 change value, or price. 
 
 When cost of carriage is added, it will increase the price 
 of corn to England and of iron to the United States. But, as 
 every one knows, an increase of price affects the demand ; and, 
 as the demand on each side is affected, a new ratio of exchange 
 will finally be reached consistent with the strength of desires 
 on each side. Who, therefore, will pay the most of the cost 
 of carriage England or the United States ? That will, again, 
 depend on whether England has the greatest relative demand 
 for American goods, as compared with the demand of the 
 United States for English goods. 
 
 No absolute rule, therefore, can be laid down for the 
 division of the cost, no more than for the division of the ad- 
 vantage ; and it does not follow that, in whatever ratio the 
 one is divided, the other will be divided in the same. It is 
 impossible to say, if the cost of carriage could be annihilated, 
 whether the producing or the importing country would be 
 most benefited. This would depend on the play of interna- 
 tional demand. 
 
 Cost of carriage has one effect more. But for it, every 
 commodity would (if trade be supposed free) be either regu- 
 larly imported or regularly exported. A country would 
 make nothing for itself which it did not also make for other 
 countries. But in consequence of cost of carriage there are 
 many things, especially bulky articles, which every, or almost 
 
396 EXCHANGE. 
 
 every, country produces within itself. After exporting the 
 things in which it can employ itself most advantageously, 
 and importing those in which it is under the greatest disad- 
 vantage, there are many lying between, of which the relative 
 cost of production in that and in other countries differs so 
 little that the cost of carriage would absorb more than the 
 whole saving in cost of production which would be obtained 
 by importing one and exporting another. This is the case 
 with numerous commodities of common consumption, in- 
 cluding the coarser qualities of many articles of food and 
 manufacture, of which the finer kinds are the subject of 
 extensive international traffic. 
 
 § 3. Mr. Mill still further illustrates the operation of the law 
 of reciprocal demand by the case of a trade between England 
 and Germany in cloth and linen, as follows : 
 
 " Suppose that ten yards of broadcloth cost in England as 
 much labor as fifteen yards of linen, and in Germany as 
 much as twenty." This supposition then being made, it 
 would be the interest of England to import linen from Ger- 
 many, and of Germany to import cloth from England. 
 " When each country produced both commodities for itself, 
 ten yards of cloth exchanged for fifteen yards of linen in 
 England, and for twenty in Germany. They will now ex- 
 change for the same number of yards of linen in both. For 
 what number ? If for fifteen yards, England will be just as 
 she was, and Germany will gain all. If for twenty yards, 
 Germany will be as before, and England will derive the 
 whole of the benefit. If for any number intermediate be- 
 tween fifteen and twenty, the advantage will be shared be- 
 tween the two countries. If, for example, ten yards of cloth 
 exchange for eighteen of linen, England will gain an advan- 
 tage of three yards on every fifteen, Germany will save two 
 out of every twenty. The problem is, what are the causes 
 which determine the proportion in which the cloth of Eng- 
 land and the linen of Germany will exchange for each other % 
 Let us suppose, then, that by the effect of what Adam Smith 
 
INTERNATIONAL VALUES. 397 
 
 calls the higgling of the market, ten yards of cloth, in both 
 countries, exchange for seventeen yards of linen. 
 
 " The demand for a commodity, that is, the quantity of 
 it which can find a purchaser, varies, as we have before re- 
 marked, according to the price. In Germany the price of 
 ten yards of cloth is now seventeen yards of linen, or what- 
 ever quantity of money is equivalent in Germany to seven- 
 teen yards of linen. Now, that being the price, there is 
 some particular number of yards of cloth, which will be in 
 demand, or will find purchasers, at that price. There is 
 some given quantity of cloth, more than which could not be 
 disposed of at that price ; less than which, at that price, 
 would not fully satisfy the demand. Let us suppose this 
 quantity to be 1,000 times ten yards. 
 
 " Let us now turn our attention to England. There the 
 price of seventeen yards of linen is ten yards of cloth, or 
 whatever quantity of money is equivalent in England to ten 
 yards of cloth. There is some particular number of yards of 
 linen which, at that price, will exactly satisfy the demand, 
 and no more. Let us suppose that this number is 1,000 
 times seventeen yards. 
 
 " As seventeen yards of linen are to ten yards of cloth, so 
 are 1,000 times seventeen yards to 1,000 times ten yards. 
 At the existing exchange value, the linen which England 
 requires will exactly pay for the quantity of cloth which, on 
 the same terms of interchange, Germany requires. The de- 
 mand on each side is precisely sufficient to carry off the sup- 
 ply on the other. The conditions required by the principle 
 of demand and supply are fulfilled, and the two commodities 
 will continue to be interchanged, as we supposed them to be, 
 in the ratio of seventeen yards of linen for ten yards of 
 cloth. 
 
 " But our suppositions might have been different. Sup- 
 pose that, at the assumed rate of interchange, England had 
 been disposed to consume no greater quantity of linen than 
 800 times seventeen yards ; it is evident that, at the rate sup- 
 posed, this would not have sufficed to pay for the 1,000 times 
 
398 EXCHANGE. 
 
 ten yards of cloth which we have supposed Germany to re- 
 quire at the assumed value. Germany would be able to pro- 
 cure no more than 800 times ten yards at that price. To 
 procure the remaining 200, which she would have no means 
 of doing but by bidding higher for them, she would offer 
 more than seventeen yards of linen in exchange for ten yards 
 of cloth ; let us suppose her to offer eighteen. At this price? 
 perhaps, England would be inclined to purchase a greater 
 quantity of linen. She would consume, possibly, at that 
 price, 900 times eighteen yards. On the other hand, cloth 
 having risen in price, the demand of Germany for it would 
 probably have diminished. If, instead of 1,000 times ten 
 yards, she is now contented with 900 times ten yards, these 
 will exactly pay for the 900 times eighteen yards of linen 
 which England is willing to take at the altered price ; the 
 demand on each side will again exactly suffice to take off the 
 corresponding supply ; and ten yards for eighteen will be the 
 rate at which, in both countries, cloth will exchange for linen. 
 
 " The converse of all this would have happened if, in- 
 stead of 800 times seventeen yards, we had supposed that 
 England, at the rate of ten for seventeen, would have taken 
 1,200 times seventeen yards of linen. In this case, it is Eng- 
 land whose demand is not fully supplied ; it is England who, 
 by bidding for more linen, will alter the rate of interchange 
 to her own disadvantage ; and ten yards of cloth will fall, in 
 both countries, below the value of seventeen yards of linen. 
 By this fall of cloth, or, what is the same thing, this rise of 
 linen, the demand of Germany for cloth will increase, and 
 the demand of England for linen will diminish, till the rate 
 of interchange has so adjusted itself that the cloth and the 
 linen will exactly pay for one another; and, when once this 
 point is attained, values will remain without further alteration. 
 
 § 4. " It may be considered, therefore, as established, that 
 when two countries trade together in two commodities, the 
 exchange value of these commodities relatively to each other 
 will adjust itself to the inclinations and circumstances of the 
 consumers on both sides, in such manner that the quantities 
 
INTERNATIONAL VALUES. 39<J 
 
 required by each country, of the articles which it imports 
 from its neighbor, shall be exactly sufficient to pay for one 
 another. As the inclinations and circumstances of consumers 
 can not be reduced to any rule, so neither can the proportions 
 in which the two commodities will be interchanged. We 
 know that the limits within which the variation is confined 
 are the ratio between their costs of production in the one 
 country and the ratio between their costs of production in 
 the other. Ten yards of cloth can not exchange for more 
 than twenty yards of linen, nor for less than fifteen. But 
 they may exchange for any intermediate number. The ratios, 
 therefore, in which the advantage of the trade may be divided 
 between the two nations are various. The circumstances on 
 which the proportionate share of each country more remotely 
 depends admit only of a very general indication." 
 
 If, therefore, it be asked what country draws to itself the 
 greatest share of the advantage of any trade it carries on, the 
 answer is, the country for whose productions there is in other 
 countries the greatest demand, and a demand the most sus- 
 ceptible of increase from additional cheapness. In so far as 
 the productions of any country possess this property, the 
 country obtains all foreign commodities at less cost. It gets 
 its imports cheaper, the greater the intensity of the de- 
 mand in foreign countries for its exports. It also gets its 
 imports cheaper, the less the extent and intensity of its own 
 demand for them. The market is cheapest to those whose 
 demand is small. A country which desires few foreign pro- 
 ductions, and only a limited quantity of them, while its own 
 commodities are in great request in foreign countries, will 
 obtain its limited imports at extremely small cost, that is, in 
 exchange for the produce of a very small quantity of its labor 
 and capital. 
 
 The law which we have now illustrated may be appro- 
 priately named the Equation of International Demand. It 
 may be concisely stated as follows : The produce of a country 
 exchanges for the produce of other countries at such values 
 as are required in order that the whole of her exports may 
 
400 EXCHANGE. 
 
 exactly pay for the whole of her imports. This law of Inter- 
 national Yalues is but an extension of the more general law 
 of Yalue, which we called the Equation of Supply and De- 
 mand. 1 We have seen that the value cff a commodity always 
 so adjusts itself as to bring the demand to the exact level of 
 the supply. But all trade, either between nations or indi- 
 viduals, is an interchange of commodities, in which the things 
 that they respectively have to sell constitute also their means 
 of purchase : the supply brought by the one constitutes his 
 demand for what is brought by the other. So that supply 
 and demand are but another expression for reciprocal de- 
 mand ; and to say that value will adjust itself so as to equal- 
 ize demand with supply, is, in fact, to say that it will adjust 
 itself so as to equalize the demand on one side with the de- 
 mand on the other. 
 
 The tendency of imports to balance exports may be seen 
 from Chart No. XIII, on the next page, which shows the re- 
 lation between the exports and imports solely of merchandise, 
 and exclusive of specie, to and from the United States. From 
 1850 to 1860, after the discoveries of the precious metals in 
 this country, we sent great quantities of gold and silver out of 
 the country, purely as merchandise, so that, if we should in- 
 clude the precious metals among the exports in those years, 
 the total exports would more nearly exceed the total imports. 
 The transmission of gold at that time was effected exactly as 
 that of other merchandise ; so that to the date of the civil 
 war there was a very evident equilibrium between exports and 
 imports. Then came the war, with the period of extravagance 
 and speculation following, which led to great purchases abroad, 
 and which was closed only by the panic of 1873. Since then 
 more exports than imports were needed to pay for the great 
 purchases of the former period ; and the epoch of great ex- 
 ports, from 1875 to 1883, balanced the opposite conditions in 
 the period preceding. It would seem, therefore, that we had 
 reached a normal period about the year 1882. a A fuller state- 
 ment as to the fluctuations of exports and imports about the 
 equilibrium will be given when the introduction of money in 
 international trade is made. The full statement must also in- 
 clude the financial account. 
 
 1 Book III, Chap. I, § 3. 
 
 3 See "Statistical Abstract," 1883, pp. 32, 33. 
 
INTERNATIONAL VALUES. 
 
 401 
 
 1 
 
 3 
 
 
 v 1 
 
 
 
 
 
 
 
 
 © 
 
 
 
 
 
 
 
 
 
 
 1 
 
 s 
 
 
 
 
 
 \ 
 t 
 1 
 1 
 
 
 
 
 
 8 
 
 
 
 
 ^£* 
 
 
 
 
 
 
 1 
 
 
 
 
 
 1 
 
 
 
 
 
 1 
 
 
 
 
 
 L. 
 
 y 
 
 
 
 
 3 
 
 
 
 
 
 
 
 ^>^ 
 
 
 
 CHART XIII 
 
 and exported from 
 
 (specie values.) 
 
 
 
 
 
 
 +* 
 
 
 
 
 
 
 
 
 
 
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 <J / 
 
 
 
 ^ 
 
 •« 
 » 
 
 
 
 
 
 
 
 S 
 
 
 
 1 
 
 
 
 
 
 
 
 
 H 
 
 
 © 
 
 
 
 
 
 
 
 
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 p- 
 
 1 
 
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 §.§.< 
 
 - ',- - 
 
 26 
 
402 EXCHANGE. 
 
 § 5. We now pass to another essential part of the theory 
 of the subject. There are two senses in which a country ob- 
 tains commodities cheaper by foreign trade : in the sense of 
 value and in the sense of cost : (1.) It gets them cheaper in 
 the first sense, by their falling in value relatively to other 
 things ; the same quantity of them exchanging, in the country, 
 for a smaller quantity than before of the other produce of 
 the country. To revert to our original figures [of the trade 
 with Germany in cloth and linen] : in England, all con- 
 sumers of linen obtained, after the trade was opened, sev- 
 enteen or some greater number of yards for the same quan- 
 tity of all other things for which they before obtained only 
 fifteen. The degree of cheapness, in this sense of the term, 
 depends on the laws of International Demand, so copiously 
 illustrated in the preceding sections. (2.) But, in the other 
 sense, that of cost, a country gets a commodity cheaper 
 when it obtains a greater quantity of the commodity with 
 the same expenditure of labor and capital. In this sense 
 of the term, cheapness in a great measure depends upon a 
 cause of a different nature : a country gets its imports cheaper, 
 in proportion to the general productiveness of its domestic 
 industry ; to the general efficiency of its labor. The labor 
 of one country may be, as a whole, much more efficient than 
 that of another : all or most of the commodities capable of 
 being produced in both may be produced in one at less 
 absolute cost than in the other ; which, as we have seen, will 
 not necessarily prevent the two countries from exchanging 
 commodities. The things which the more favored country 
 will import from others are, of course, those in which it is 
 least superior ; but, by importing them, it acquires, even in 
 those commodities, the same advantage' which it possesses 
 in the articles it gives in exchange for them. What her 
 imports cost to her is a function of two variables : (1) the 
 quantity of her own commodities which she gives for them, 
 and (2) the cost of those commodities. Of these, the 
 last alone depends on the efficiency of her labor ; the first 
 depends on the law of international values ; that is, on the 
 
INTERNATIONAL VALUES. 403 
 
 intensity and extensibility of the foreign demand for her 
 commodities, compared with her demand for foreign com- 
 modities. 
 
 The great productiveness of any industry in our country 
 has thus two results : (1) it gives a larger total out of which 
 labor and capital at home can receive greater rewards ; and 
 (2) the commodities being cheaper in comparison than other 
 commodities not so easily produced, furnish the very arti- 
 cles which are most likely to be sent abroad, in accordance 
 with the doctrine of comparative cost. In the United States, 
 those things in the production of which labor and capital are 
 most efficient, and so earn the largest rewards, are precisely the 
 articles entering most largely into our foreign trade. That is, 
 we get foreign articles cheaper precisely because these exports 
 cost us less in labor and capital. These, of course, since we 
 are yet a country whose natural resources are not yet fully 
 worked, are largely the products of the extractive industries, 
 as may be seen by the following table of the value of goods 
 entering to the greatest extent into our foreign export trade in 
 1883: 
 
 Raw cotton $247,328,721 
 
 Breadstuffs 208,040,850 
 
 Provisions and animals 118,177,555 
 
 Mineral oils 40,556,492 
 
 Wood 26,793,708 
 
 Tobacco 22,095,229 
 
 These six classes of commodities are arranged in the order 
 in which they enter into our export trade, and are the six which 
 come first and highest in the list. 
 
CHAPTER XV. 
 
 OF MONEY CONSIDERED AS AN IMPORTED COMMODITY. 
 
 § 1. The degree of progress which we have now made 
 in the theory of foreign trade puts it in our power to sup- 
 ply what was previously deficient in our view of the theory 
 of money ; and this, when completed, will in its turn enable 
 us to conclude the subject of foreign trade. 
 
 Money, or the material of which it is composed, is, in 
 Great Britain, and in most other countries, a foreign com- 
 modity. Its value and distribution must therefore be regu- 
 lated, not by the law of value which obtains in adjacent 
 places, but by that which is applicable to imported commodi- 
 ties — the law of international values. 
 
 In the discussion into which we are now about to enter, 
 I shall use the terms money and the precious metals indis- 
 criminately. This may be done without leading to any er- 
 ror ; it having been shown that the value of money, when it 
 consists of the precious metals, or of a paper currency con- 
 vertible into them on demand, is entirely governed by the 
 value of the metals themselves : from which it never per- 
 manently differs, except by the expense of coinage, when 
 this is paid by the individual and not by the state. 
 
 Money is brought into a country in two different ways. 
 It is imported (chiefly in the form of bullion) like any other 
 merchandise, as being an advantageous article of commerce. 
 It is also imported in its other character of a medium of 
 exchange, to pay some debt due to the country, either for 
 goods exported or on any other account. The existence of 
 these two distinct modes in which money flows into a coun- 
 
MONEY CONSIDERED AS AN IMPORTED COMMODITY. 405 
 
 try, while other commodities are habitually introduced only 
 in the first of these modes, occasions somewhat more of com- 
 plexity and obscurity than exists in the case of other com- 
 modities, and for this reason only is any special and minute 
 exposition necessary. 
 
 § 2. In so far as the precious metals are imported in the 
 ordinary way of commerce, their value must depend on the 
 same causes, and conform to the same laws, as the value of 
 any other foreign production. It is in this mode chiefly that 
 gold and silver diffuse themselves from the mining countries 
 into all other parts of the commercial world. They are the 
 staple commodities of those countries, or at least are among 
 their great articles of regular export; and are shipped on 
 speculation, in the same manner as other exportable com- 
 modities. The quantity, therefore, which a country (say 
 England) will give of its own produce, for a certain quantity 
 of bullion, will depend, if we suppose only two countries and 
 two commodities, upon the demand in England for bullion, 
 compared with the demand in the mining country (which we 
 will call the United States l ) for what England has to give. 
 
 The bullion required by England must exactly pay for 
 the cottons or other English commodities required by the 
 United States. If, however, we substitute for this simplicity 
 the degree of complication which really exists, the equation 
 of international demand must be established not between the 
 bullion wanted in England and the cottons or broadcloth 
 wanted in the United States, but between the whole of the 
 imports of England and the whole of her exports. The de- 
 mand in foreign countries for English products must be 
 brought into equilibrium with the demand in England for 
 the products of foreign countries ; and all foreign commodi- 
 ties, bullion among the rest, must be exchanged against 
 English products in such proportions as will, by the effect 
 they produce on the demand, establish this equilibrium. 
 
 There is nothing in the peculiar nature or uses of the 
 
 1 This substitution has been made for Brazil. 
 
406 EXCHANGE. 
 
 precious metals which should make them an exception to the 
 general principles of demand. So far as they are wanted for 
 purposes of luxury or the arts, the demand increases with 
 the cheapness, in the same irregular way as the demand for 
 any other commodity. So far as they are required for 
 money, the demand increases with the cheapness in a per- 
 fectly regular way, the quantity needed being always in in- 
 verse proportion to the value. This is the only real differ- 
 ence, in respect to demand, between money and other things. 
 
 Money, then, if imported solely as a merchandise, will, 
 like other imported commodities, be of lowest value in the 
 countries for whose exports there is the greatest foreign 
 demand, and which have themselves the least demand for 
 foreign commodities. To these two circumstances it is, how- 
 ever, necessary to add two others, which produce their effect 
 through cost of carriage. The cost of obtaining bullion is 
 compounded of two elements ; the goods given to purchase 
 it and the expense of transport ; of which last, the bullion 
 countries will bear a part (though an uncertain part) in the 
 adjustment of international values. The expense of transport 
 is partly that of carrying the goods to the bullion countries, 
 and partly that of bringing back the bullion; both these 
 items are influenced by the distance from the mines; and 
 the former is also much affected by the bulkiness of the 
 goods. Countries whose exportable produce consists of the 
 finer manufactures obtain bullion, as well as all other foreign 
 articles, cozteris paribus, at less expense than countries which 
 export nothing but bulky raw produce. 
 
 To be quite accurate, therefore, we must say : The coun- 
 tries whose exportable productions (1) are most in demand 
 abroad, and (2) contain greatest value in smallest bulk, (3) 
 which are nearest to the mines, and (4) which have least de- 
 mand for foreign productions, are those in which money 
 will be of lowest value, or, in other words, in which prices 
 will habitually range the highest. If we are speaking not 
 of the value of money, but of its cost (that is, the quantity 
 of the country's labor which must be expended to obtain it), 
 
MONEY CONSIDERED AS AN IMPORTED COMMODITY. 407 
 
 we must add (5) to these four conditions of cheapness a fifth 
 condition, namely, " whose productive industry is the most 
 efficient." This last, however, does not at al] affect the value 
 of money, estimated in commodities ; it affects the general 
 abundance and facility with which all things, money and 
 commodities together, can be obtained. 1 
 
 The accompanying Chart, No. XIV, on the next page, gives 
 the excess of exports from the United States of gold and silver 
 coin and bullion over imports, and the excess of imports over 
 exports. The movement of the line above the horizontal base- 
 line shows distinctly how largely we have been sending the 
 precious metals abroad from our mines, simply as a regular 
 article of export, like merchandise. From 1850 to 1879 the 
 exports are clearly not in the nature of payments for trade 
 balances ; since it indicates a steady movement out of the 
 country (with the exception of the first year of the war, when 
 gold came to this country). The phenomenal increase of specie 
 exports during the war, and until 1879, was due to the fact 
 that we had a depreciated paper currency, which sent the 
 metals out of the country as merchandise. This chart should 
 be studied in connection with Chart No. XIII. 
 
 From the preceding considerations, it appears that those 
 are greatly in error who contend that the value of money, 
 in countries where it is an imported commodity, must be 
 entirely regulated by its value in the countries which pro- 
 duce it ; and can not be raised or lowered in any permanent 
 manner unless some change has taken place in the cost of 
 production at the mines. On the contrary, any circumstance 
 which disturbs the equation of international demand with 
 respect to a particular country not only may, but must, 
 affect the value of money in that country — its value at the 
 mines remaining the same. The opening of a new branch 
 of export trade from England ; an increase in the foreign 
 demand for English products, either by the natural course 
 of events or by the abrogation of duties ; a check to the 
 demand in England for foreign commodities, by the laying 
 on of import duties in England or of export duties else- 
 where ; these and all other events of similar tendency would 
 
 1 See close of last chapter. 
 
408 
 
 EXCHANGE. 
 
MONEY CONSIDERED AS AN IMPORTED COMMODITY. 409 
 
 make the imports of England (bullion and other things taken 
 together) no longer an equivalent for the exports ; and the 
 countries which take her exports would be obliged to offer 
 their commodities, and bullion among the rest, on cheaper 
 terms, in order to re-establish the equation of demand ; and 
 thus England would obtain money cheaper, and would ac- 
 quire a generally higher range of prices. A country which, 
 from any of the causes mentioned, gets money cheaper, ob- 
 tains all its other imports cheaper likewise. 
 
 It is by no means necessary that the increased demand 
 for English commodities, which enables England to supply 
 herself with bullion at a cheaper rate, should be a demand 
 in the mining countries. England might export nothing 
 whatever to those countries, and yet might be the country 
 which obtained bullion from them on the lowest terms, pro- 
 vided there were a sufficient intensity of demand in other 
 foreign countries for English goods, which would be paid 
 for circuitously, with gold and silver from the mining coun- 
 tries. The whole of its exports are what a country ex- 
 changes against the whole of its imports, and not its exports 
 and imports to and from any one country. 
 
CHAPTEE XYI. 
 
 OF THE FOREIGN EXCHANGES. 
 
 § 1. We have thus far considered the precious metals as 
 a commodity, imported like other commodities in the com- 
 mon course of trade, and have examined what are the cir- 
 cumstances which would in that case determine their value. 
 But those metals are also imported in another character, that 
 which belongs to them as a medium of exchange ; not as an 
 article of commerce, to be sold for money, but as themselves 
 money, to pay a debt, or effect a transfer of property. 
 
 Money is sent from one country to another for various 
 purposes : the most usual purpose, however, is that of pay- 
 ment for goods. To show in what circumstances money 
 actually passes from country to country for this or any of 
 the other purposes mentioned, it is necessary briefly to state 
 the nature of the mechanism by which international trade is 
 carried on, when it takes place not by barter but through the 
 medium of money. 
 
 In practice, the exports and imports of a country not 
 only are not exchanged directly against each other, but often 
 do not even pass through the same hands. Each is separately 
 bought and paid for with money. "We have seen, however, 
 that, even in the same country, money does not actually pass 
 from hand to hand each time that purchases are made with 
 it, and still less does this happen between different countries. 
 The habitual mode of paying and receiving payment for 
 commodities, between country and country, is by bills of 
 exchange. 
 
 A merchant in the United States, A, has exported Ameri- 
 
THE FOREIGN EXCHANGES. 411 
 
 can commodities, consigning them to his correspondent, B, in 
 England. Another merchant in England, C, has exported 
 English commodities, suppose of equivalent value, to a mer- 
 chant, D, in the United States. It is evidently unnecessary 
 that B in England should send money to A in the United 
 States, and that D in the United States should send an equal 
 sum of money to C in England. The one debt may be ap- 
 plied to the payment of Uvetpool New York. 
 
 the other, and the double g / A 
 
 cost and risk of carriage 
 
 be thus saved. A draws 
 
 a bill on B for the amount 
 
 which B owes to him : D, 
 
 having an equal amount to pay in England, buys this bill from 
 
 A, and sends it to C, who, at the expiration of the number of 
 
 days which the bill has to run, presents it to B for payment. 
 
 Thus the debt due from England to the United States, and 
 
 the debt due from the United States to England, are both 
 
 paid without sending an ounce of gold or silver from one 
 
 country to the other. 1 
 
 This implies (if we exclude for the present any other 
 international payments than those occurring in the course 
 of commerce) that the exports and imports exactly pay for 
 one another, or, in other words, that the equation of inter- 
 national demand is established. When such is the fact, the 
 international transactions are liquidated without the passage 
 of any money from one country to the other. But, if there 
 is a greater sum due from the United States to England 
 than is due from England to the United States, or vice versa, 
 the debts can not be simply written off against one another. 
 After the one has been applied, as far as it will go, toward 
 covering the other, the balance must be transmitted in the 
 precious metals. In point of fact, the merchant who has the 
 amount to pay will even then pay for it by a bill. "When a 
 person has a remittance to make to a foreign country, he does 
 
 1 I have also changed the illustrations in this chapter so as to apply to the 
 United States. 
 
412 EXCHANGE. 
 
 not himself search for some one who has money to receive 
 from that country, and ask him for a bill of exchange. In 
 this, as in other branches of business, there is a class of mid- 
 dle-men or brokers, who bring buyers and sellers together, 
 or stand between them, buying bills from those who have 
 money to receive, and selling bills to those who have money 
 to pay. When a customer comes to a broker for a bill on 
 Paris or Amsterdam, the broker sells to him perhaps the 
 bill he may himself have bought that morning from a mer- 
 chant, perhaps a bill on his own correspondent in the foreign 
 city ; and, to enable his correspondent to pay, when due, all 
 the bills he has granted, he remits to him all those which he 
 has bought and has not resold. In this manner these brokers 
 take upon themselves the whole settlement of the pecuniary 
 transactions between distant places, being remunerated by a 
 small commission or percentage on the amount of each bill 
 which they either sell or buy. Now, if the brokers find that 
 they are asked for bills, on the one part, to a greater amount 
 than bills are offered to them on the other, they do not on 
 this account refuse to give them ; but since, in that case, 
 they have no means of enabling the correspondents on whom 
 their bills are drawn to pay them when due, except by trans- 
 mitting part of the amount in gold or silver, they require 
 from those to whom they sell bills an additional price, suffi- 
 cient to cover the freight and insurance of the gold and 
 silver, with a profit sufficient to compensate them for their 
 trouble and for the temporary occupation of a portion of 
 their capital. This premium (as it is called) the buyers are 
 willing to pay, because they must otherwise go to the ex- 
 pense of remitting the precious metals themselves, and it is 
 done cheaper by those who make doing it a part of their 
 especial business. But, though only some of those who have 
 a debt to pay would have actually to remit money, all will 
 be obliged, by each other's competition, to pay the premium ; 
 and the brokers are for the same reason obliged to pay it to 
 those whose bills they buy. The reverse of all this happens, 
 if, on the comparison of exports and imports, the country, 
 
THE FOREIGN EXCHANGES. 413 
 
 instead of having a balance to pay, has a balance to receive. 
 The brokers find more bills offered to them than are suffi- 
 cient to cover those which they are required to grant. Bills 
 on foreign countries consequently fall to a discount ; and the 
 competition .among the brokers, which is exceedingly active, 
 prevents them from retaining this discount as a profit for 
 themselves, and obliges them to give the benefit of it to 
 those who buy the bills for purposes of remittance. 
 
 When the United States had the same number of dollars 
 to pay to England which England had to pay to her, one set 
 of merchants in the United States would want bills, and 
 another set would have bills to dispose of, for the very same 
 number of dollars ; and consequently a bill on England for 
 $1,000 would sell for exactly $1,000, or, in the phraseology 
 of merchants, the exchange would be at par. As England 
 also, on this supposition, would have an equal number of 
 dollars to pay and to receive, bills on the United States would 
 be at par in England, whenever bills on England were at par 
 in the United States. 
 
 If, however, the United States had a larger sum to pay to 
 England than to receive from her, there would be persons 
 requiring bills on England for a greater number of dollars 
 than there were bills drawn by persons to whom money was 
 due. A bill on England for $1,000 would then sell for more 
 than $1,000, and bills would be said to be at a premium. 
 The premium, however, could not exceed the cost and risk 
 of making the remittance in gold, together with a trifling 
 profit ; because, if it did, the debtor would send the gold 
 itself, in preference to buying the bill. 
 
 If, on the contrary, the United States had more money 
 to receive from England than to pay, there would be bills 
 offered for a greater number of dollars than were wanted for 
 remittance, and the price of bills would fall below par : a 
 bill for $1,000 might be bought for somewhat less than 
 $1,000, and bills would be said to be at a discount. 
 
 When the United States has more to pay than to receive, 
 England has more to receive than to pay, and vice versa. 
 
414 EXCHANGE. 
 
 When, therefore, in the United States, bills on England bear 
 a premium, then, in England, bills on the United States are 
 at a discount ; and, when bills on England are at a discount 
 in the United States, bills on the United States are at a pre- 
 mium in England. If they are at par in either country, they 
 are so, as we have already seen, in both. 1 
 
 Thus do matters stand between countries, or places which 
 have the same currency. So much of barbarism, however, 
 still remains in the transactions of the most civilized nations, 
 that almost all independent countries choose to assert their 
 nationality by having, to their own inconvenience and that 
 of their neighbors, a peculiar currency of their own. To our 
 present purpose this makes no other difference than that, 
 instead of speaking of equal sums of money, we have to 
 speak of equivalent sums. By equivalent sums, when both 
 currencies are composed of the same metal, are meant sums 
 which contain exactly the same quantity of the metal, in 
 weight and fineness. 
 
 The quantity of gold in the English pound is equivalent to 
 $4-8666+ of our gold coins. If the bills offered are about equal 
 to those wanted, a claim to a pound in England will sell for $4.86. 
 If many are wanted, and but few to be had, their price will go 
 up, of course ; but it can not go more than a small fraction be- 
 yond $4.90, since about 3|* cents is sufficient to cover the bro- 
 kerage, insurance, and freight perpound sterling in a shipment 
 of gold to London. Therefore, in order to get money to a 
 creditor in London, no one will pay more for a pound in the 
 form of a bill than he will be obliged to pay for sending it across 
 in the form of bullion. Bills of exchange, then, can not rise in 
 price beyond the point ($4.90 -j-) since, rather than pay a higher 
 sum for a bill, gold will be sent. This point is called the " ship- 
 ping-point " of gold. When the exchanges are at $4.90, it will 
 be found that gold is going abroad. On the other hand, when 
 the supply of bills is greater than the demand, their price will 
 fall. A man having a bill on London to sell — i. e., a claim to a 
 pound in London — will not sell it at a price here lower than 
 $4.86, by more than the expense of bringing the gold itself 
 across. Since this expense is about 2>\ cents, bills can not fall 
 below about $4.83. When exchange is at that price, it will be 
 
 1 The examples in this and the next section have been altered so as to apply 
 to the United States. 
 
THE FOREIGN EXCHANGES. 4^5 
 
 found that gold is coming to the United States from England. 
 This price is the " shipping-point " for imports of gold. This, 
 of course, applies to sight-bills only. 
 
 Formerly, we computed exchange on a scale of percentages, 
 the real par being about 109. This was given up after the war. 
 
 "When bills on foreign countries are at a premium, it is 
 customary to say that the exchanges are against the country, 
 or unfavorable to it. In order to understand these phrases, 
 we must take notice of what " the exchange," in the language 
 of merchants, really means. It means the power which the 
 money of the country has of purchasing the money of other 
 countries. Supposing $4.86 to be the exact par of exchange, 
 then when it requires more than $1,000 to buy a bill of £205, 
 $1,000 of American money are worth less than their real 
 equivalent of English money : and this is called an exchange 
 unfavorable to the United States. The only persons in the 
 United States, however, to whom it is really unfavorable are 
 those who have money to pay in England, for they come into 
 the bill market as buyers, and have to pay a premium ; but ' 
 to those who have money to receive in England the same 
 state of things is favorable ; for they come as sellers and re- 
 ceive the premium. The premium, however, indicates that 
 a balance is due by the United States, which must be event- 
 ually liquidated in the precious metals ; and since, according 
 to the old theory, the benefit of a trade consisted in bringing 
 money into the country, this prejudice introduced the prac- 
 tice of calling the exchange favorable when it indicated a 
 balance to receive, and unfavorable when it indicated one to 
 pay ; and the phrases in turn tended to maintain the prejudice. 
 
 § 2. It might be supposed at first sight that when the 
 exchange is unfavorable, or, in other words, when bills are 
 at a premium, the premium must always amount to a full 
 equivalent for the cost of transmitting money. But a small 
 excess of imports above exports, or any other small amount 
 of debt to be paid to foreign countries, does not usually 
 affect the exchanges to the full extent of the cost and risk of 
 transporting bullion. The length of credit allowed generally 
 permits, on the part of some of the debtors, a postponement 
 
416 EXCHANGE. 
 
 of payment, and in the mean time the balance may turn the 
 other way, and restore the equality of debts and credits with- 
 out any actual transmission of the metals. And this is the 
 more likely to happen, as there is a self-adjusting power in 
 the variations of the exchange itself. Bills are at a premium 
 because a greater money value has been imported than ex- 
 ported. But the premium is itself an extra profit to those 
 who export. Besides the price they obtain for their goods, 
 they draw for the amount and gain the premium. It is, on 
 the other hand, a diminution of profit to those who import. 
 Besides the price of the goods, they have to pay a premium 
 for remittance. So that what is called an unfavorable ex- 
 change is an encouragement to export, and a discouragement 
 to import. And if the balance due is of small amount, and 
 is the consequence of some merely casual disturbance in the 
 ordinary course of trade, it is soon liquidated in commodi- 
 ties, and the account adjusted by means of bills, without the 
 transmission of any bullion. ]STot so, however, when the 
 excess of imports above exports, which has made the ex- 
 change unfavorable, arises from a permanent cause. In that 
 case, what disturbed the equilibrium must have been the 
 state of prices, and it can only be restored by acting on 
 prices. It is impossible that prices should be such as to in- 
 vite to an excess of imports, and yet that the exports should 
 be kept permanently up to the imports by the extra profit on 
 exportation derived from the premium on bills ; for, if the 
 exports were kept np to the imports, bills would not be at a 
 premium, and the extra profit would not exist. It is through 
 the prices of commodities that the correction must be admin- 
 istered. 
 
 Disturbances, therefore, of the equilibrium of imports 
 and exports, and consequent disturbances of the exchange, 
 may be considered as of two classes : the one casual or acci- 
 dental, which, if not on too large a scale, correct themselves 
 through the premium on bills, without any transmission of 
 the precious metals ; the other arising from the general state 
 of prices, which can not be corrected without the subtraction 
 
THE FOREIGN EXCHANGES. 
 
 417 
 
 of actual money from the circulation of one of the countries, 
 or an annihilation of credit equivalent to it. 
 
 It remains to observe that the exchanges do not depend 
 on the balance of debts and credits with each country sepa- 
 rately, but with all countries taken together. The United 
 States may owe a balance of payments to England ; but it 
 does not follow that the exchange with England will be 
 against the United States, and that bills on England will be 
 at a premium ; because a balance may be due to the United 
 States from Holland or Hamburg, and she may pay her debts 
 to England with bills on those places ; which is technically 
 called arbitration of exchange. There is some little addi- 
 tional expense, partly commission and partly loss of interest 
 in settling debts in this circuitous manner, and to the extent 
 of that small difference the exchange with one country may 
 vary apart from that with others. 
 
 A common use of bills of exchange is that by which, when 
 three countries are concerned, two of them may strike a bal- 
 ance through the third, if both coun- 
 tries have dealings with that third Hong-Kong. 
 country. New York merchants may 
 buy of China, but China may not be 
 buying of New York, although both 
 may have dealings with London. London. 
 
 A, we will suppose, is a buyer of 
 £1,000 worth of tea from F,in Hong- 
 Kong ; B is an exporter of wheat 
 (£1,000) to C in London ; D has sent 
 £1,000 worth of cotton goods to E 
 in Hong-Kong. A can now pay F 
 through London without the trans- 
 mission of coin. A buys B's claim 
 on C for £1,000, and sends it to F. 
 E wishes to pay D in London for 
 the cotton goods he bought of him ; 
 therefore, he buys from F for £1,000 
 the claim he now holds (i. e., a bill of exchange on London) 
 against C for £1,000. E sends it to D, and, when D collects it 
 from C, the whole circle of exchanges is completed without the 
 transmission of the precious metals. 
 21 
 
CHAPTER XYII. 
 
 OF THE DISTRIBUTION OF THE PRECIOUS METALS THROUGH 
 THE COMMERCIAL "WORLD. 
 
 § 1. Having now examined the mechanism by which the 
 commercial transactions between nations are actually conduct- 
 ed, we have next to inquire whether this mode of conducting 
 them makes any difference in the conclusions respecting in- 
 ternational values, which we previously arrived at on the 
 hypothesis of barter. 
 
 The nearest analogy would lead us to presume the nega- 
 tive. We did not find that the intervention of money and 
 its substitutes made any difference in the law of value as ap- 
 plied to adjacent places. Things which would have been 
 equal in value if the mode of exchange had been by barter 
 are worth equal sums of money. The introduction of money 
 is a mere addition of one more commodity, of which the value 
 is regulated by the same laws as that of all other commodities. 
 We shall not be surprised, therefore, if we find that interna- 
 tional values also are determined by the same causes under a 
 money and bill system as they would be under a system of 
 barter, and that money has little to do in the matter, except 
 to furnish a convenient mode of comparing values. 
 
 All interchange is, in substance and effect, barter ; who- 
 ever sells commodities for money, and with that money buys 
 other goods, really buys those goods with his own commodi- 
 ties. And so of nations : their trade is a mere exchange of 
 exports for imports ; and, whether money is employed or not, 
 things are only in their permanent state when the exports 
 and imports exactly pay for each other. When this is the 
 
THE DISTRIBUTION OF THE PRECIOUS METALS. 419 
 
 case, equal sums of money are due from each country to the 
 other, the debts are settled by bills, and there is no balance 
 to be paid in the precious metals. The trade is in a state 
 like that which is called in mechanics a condition of stable 
 equilibrium. 
 
 But the process by which things are brought back to this 
 state when they happen to deviate from it is, at least out- 
 wardly, not the same in a barter system and in a money sys- 
 tem. Under the first, the country which wants more im- 
 ports than its exports will pay for must offer its exports at 
 a cheaper rate, as the sole means of creating a demand for 
 them sufficient to re-establish the equilibrium. When money 
 is used, the country seems to do a thing totally different. 
 She takes the additional imports at the same price as before, 
 and, as she exports no equivalent, the balance of payments 
 turns against her; the exchange becomes unfavorable, and 
 the difference has to be paid in money. This is, in appear- 
 ance, a very distinct operation from the former. Let us see 
 if it differs in its essence, or only in its mechanism. 
 
 Let the country which has the balance to pay be the 
 United States, 1 and the country which receives it, England. 
 By this transmission of the precious metals, the quantity of 
 the currency is diminished in the United States, and increased 
 in England. This I am at liberty to assume. We are now 
 supposing that there is an excess of imports over exports, 
 arising from the fact that the equation of international de- 
 mand is not yet established : that there is at the ordinary 
 prices a permanent demand in the United States for more 
 English goods than the American goods required in England 
 at the ordinary prices will pay^ for. When this is the case, 
 if a change were not made in the prices, there would be a 
 perpetually renewed balance to be paid in money. The im- 
 ports require to be permanently diminished, or the exports 
 to be increased, which can only be accomplished through 
 
 1 I have changed the names of the countries in the illustrations contained in 
 this chapter, but have not further altered the language beyond the occasional 
 change of a pronoun. 
 
420 EXCHANGE. 
 
 prices ; and hence, even if the balances are at first paid from 
 hoards, or by the exportation of bullion, they will reach the 
 circulation at last, for, until they do, nothing can stop the 
 drain. 
 
 "When, therefore, the state of prices is such that the equa- 
 tion of international demand can not establish itself, the 
 country requiring more imports than can be paid for by the 
 exports, it is a sign that the country has more of the precious 
 metals, or their substitutes, in circulation, than can perma- 
 nently circulate, and must necessarily part with some of them 
 before the balance can be restored. The currency is accord- 
 ingly contracted : prices fall, and, among the rest, the prices 
 of exportable articles; for which, accordingly, there arises, 
 in foreign countries, a greater demand : while imported com- 
 modities have possibly risen in price, from the influx of 
 money into foreign countries, and at all events have not par- 
 ticipated in the general fall. But, until the increased cheap- 
 ness of American goods induces foreign countries to take a 
 greater pecuniary value, or until the increased dearness (posi- 
 tive or comparative) of foreign goods makes the United 
 States take a less pecuniary value, the exports of the United 
 States will be no nearer to paying for the imports than be- 
 fore, and the stream of the precious metals which had begun 
 to flow out of the United States will still flow on. This 
 efflux will continue until the fall of prices in the United 
 States brings within reach of the foreign market some com- 
 modity which the United States did not previously send 
 thither ; or, until the reduced price of the things which she 
 did send has forced a demand abroad for a sufficient quan- 
 tity to pay for the imports, aided perhaps by a reduction of 
 the American demand for foreign goods, through their en- 
 hanced price, either positive or comparative. 
 
 Now, this is the very process which took place on our 
 original supposition of barter. Not only, therefore, does the 
 trade between nations tend to the same equilibrium between 
 exports and imports, whether money is employed or not, but 
 the means by which this equilibrium is established are essen- 
 
THE DISTRIBUTION OF THE PRECIOUS METALS. 421 
 
 tially the same. The country whose exports are not sufficient 
 to pay for her imports offers them on cheaper terms, until 
 she succeeds in forcing the necessary demand: in other 
 words, the equation of international demand, under a money 
 system as well as under a barter system, is the law of inter- 
 national trade. Every country exports and imports the very 
 same things, and in the very same quantity, under the one 
 system as under the other. In a barter system, the trade 
 gravitates to the point at which the sum of the imports ex- 
 actly exchanges for the sum of the exports : in a money sys- 
 tem, it gravitates to the point at which the sum of the im- 
 ports and the sum of the exports exchange for the same 
 quantity of money. And, since things which are equal to the 
 same thing are equal to one another, the exports and imports 
 which are equal in money price would, if money were not 
 used, precisely exchange for one another. 1 
 
 1 The subjoined extract from the separate essay [" Some Unsettled Ques- 
 tions of Political Economy "] previously referred to will give some assistance in 
 following the course of the phenomena. It is adapted to the imaginary case 
 used for illustration throughout that essay, the case of a trade between England 
 and Germany in cloth and linen. 
 
 " We may, at first, make whatever supposition we will with respect to the 
 value of money. Let us suppose, therefore, that, before the opening of the 
 trade, the price of cloth is the same in both countries, namely, six shillings per 
 yard. As ten yards of cloth were supposed to exchange in England for fifteen 
 yards of linen, in Germany for twenty, we must suppose that linen is sold in 
 England at four shillings per yard, in Germany at three. Cost of carriage and 
 importer's profit are left, as before, out of consideration. 
 
 " In this state of prices, cloth, it is evident, can not yet be exported from 
 England into Germany ; but linen can be imported from Germany into England. 
 It will be so ; and, in the first instance, the linen will be paid for in money. 
 
 " The efflux of money from England and its influx into Germany will raise 
 money prices in the latter country, and lower them in the former. Linen will 
 rise in Germany above three shillings per yard, and cloth above six shillings. 
 Linen in England, being imported from Germany, will (since cost of carriage is 
 not reckoned) sink to the same price as in that country, while cloth will fall be- 
 low six shillings. As soon as the price of cloth is lower in England than in 
 Germany, it will begin to be exported, and the price of cloth in Germany will 
 fall to what it is in England. As long as the cloth exported does not suffice to 
 pay for the linen imported, money will continue to flow from England into Ger- 
 many, and prices generally will continue to fall in England and rise in Germany. 
 
422 EXCHANGE. 
 
 § 2. Let us proceed to [examine] to what extent the bene- 
 fit of an improvement in the production of an exportable 
 article is participated in by the countries importing it. 
 
 The improvement may either consist in the cheapening 
 of some article which was already a staple production of the 
 country, or in the establishment of some new branch of in- 
 dustry, or of some process rendering an article exportable 
 which had not till then been exported at all. It will be 
 convenient to begin with the case of a new export, as being 
 somewhat the simpler of the two. 
 
 By the fall, however, of cloth in England, cloth will fall in Germany also, and 
 the demand for it will increase. By the rise of linen in Germany, linen must 
 rise in England also, and the demand for it will diminish. As cloth fell in price 
 and linen rose, there would he some particular price of both articles at which 
 the cloth exported and the linen imported would exactly pay for each other. 
 At this point prices would remain, because money would then cease to move out 
 of England into Germany. What this point might be would entirely depend 
 upon the circumstances and inclinations of the purchasers on both sides. If the 
 fall of cloth did not much increase the demand for it in Germany, and the rise 
 of linen did not diminish very rapidly the demand for it in England, much 
 money must pass before the equilibrium is restored ; cloth would fall very much, 
 and linen would rise, until England, perhaps, had to pay nearly as much for it as 
 when she produced it for herself. But, if, on the contrary, the fall of cloth 
 caused a very rapid increase of the demand for it in Germany, and the rise of 
 linen in Germany reduced very rapidly the demand in England from what it was 
 under the influence of the first cheapness produced by the opening of the trade, 
 the cloth would very soon suffice to pay for the linen, little money would pass 
 between the two countries, and England would derive a large portion of the 
 benefit of the trade. We have thus arrived at precisely the same conclusion, in 
 supposing the employment of money, which we found to hold under the supposi- 
 tion of barter. 
 
 " In what shape the benefit accrues to the two nations from the trade is clear 
 enough. Germany, before the commencement of the trade, paid six shillings 
 per yard for broadcloth ; she now obtains it at a low«r price. This, however, is 
 not the whole of her advantage. As the money-prices of all her other commodi- 
 ties have risen, the money-incomes of all her producers have increased. This is 
 no advantage to them in buying from each other, because the price of what they 
 buy has risen in the same ratio with their means of paying for it : but it is an 
 advantage to them in buying anything which has not risen, and, still more, any- 
 thing which has fallen. They, therefore, benefit as consumers of cloth, not 
 merely to the extent to which cloth has fallen, but also to the extent to which 
 other prices have risen. Suppose that this is one tenth. The same proportion 
 of their money-incomes as before will suffice to supply their other wants ; and 
 
THE DISTRIBUTION OF THE PRECIOUS METALS. 423 
 
 The first effect is that the article falls in price, and a 
 demand arises for it abroad. This new exportation disturbs 
 the balance, turns the exchanges, money flows into the coun- 
 try (which we 6hall suppose to be the United States), and 
 continues to flow until prices rise. This higher range of 
 prices will somewhat check the demand in foreign countries 
 for the new article of export ; and will diminish the demand 
 which existed abroad for the other things which the United 
 States was in the habit of exporting. The exports will thus 
 be diminished ; while at the same time the American public, 
 
 the remainder, being increased one tenth in amount, will enable them to pur- 
 chase one tenth more cloth than before, even though cloth had not fallen : but 
 it has fallen ; so that they are doubly gainers. They purchase the same quan- 
 tity with less money, and have more to expend upon their other wants. 
 
 " In England, on the contrary, general money-prices have fallen. Linen, 
 however, has fallen more than the rest, having been lowered in price by importa- 
 tion from a country where it was cheaper ; whereas the others have fallen only 
 from the consequent efflux of money. Notwithstanding, therefore, the general 
 fall of money-prices, the English producers will be exactly as they were in all 
 other respects, while they will gain as purchasers of linen. 
 
 "The greater the efflux of money required to restore the equilibrium, the 
 greater will be the gain of Germany, both by the fall of cloth and by the rise of 
 her general prices. The less the efflux of money requisite, the greater will be 
 the gain of England; because the price of linen will continue lower, and her 
 general prices will not be reduced so much. It must not, however, be imagined 
 that high money-prices are a good, and low money-prices an evil, in themselves. 
 But, the higher the general money-prices in any country, the greater will be that 
 country's means of purchasing those commodities, which, being imported from 
 abroad, are independent of the causes which keep prices high at home." 
 
 In practice, the cloth and the linen would not, as here supposed, be at the 
 same price in England and in Germany : each would be dearer in money-price 
 in the country which imported than in that which produced it, by the amount of 
 the cost of carriage, together with the ordinary profit on the importer's capital 
 for the average length of time which elapsed before the commodity could be dis- 
 posed of. But it docs not follow that each country pays the cost of carriage of 
 the commodity it imports ; for the addition of this item to the price may operate 
 as a greater check to demand on one side than on the other ; and the equation 
 of international demand, and consequent equilibrium of payments, may not be 
 maintained. Money would then flow out of one country into the other, until, in 
 the manner already illustrated, the equilibrium was restored : and, when this 
 was effected, one country would be paying more than its own cost of carriage, 
 and the other less. — Mill. 
 
424 EXCHANGE. 
 
 having more money, will have a greater power of purchasing 
 foreign commodities. If they make use of this increased 
 power of purchase, there will be an increase of imports ; 
 and by this, and the check to exportation, the equilibrium 
 of imports and exports will be restored. The result to for- 
 eign countries will be, that they have to pay dearer than be- 
 fore for their other imports, and obtain the new commodity 
 cheaper than before, but not so much cheaper as the United 
 States herself does. I say this, being well aware that the 
 article would be actually at the very same price (cost of car- 
 riage excepted) in the United States and in other countries. 
 The cheapness, however, of the article is not measured solely 
 by the money-price, but by that price compared with the 
 money-incomes of the consumers. The price is the same to 
 the American and to the foreign consumers ; but the former 
 pay that price from money-incomes which have been in- 
 creased by the new distribution of the precious metals ; 
 while the latter have had their money-incomes probably di- 
 minished by the same cause. The trade, therefore, has not 
 imparted to the foreign consumer the whole, but only a por- 
 tion, of the benefit which the American consumer has de- 
 rived from the improvement ; while the United States has 
 also benefited in the prices of foreign commodities. Thus, 
 then, any industrial improvement which leads to the open- 
 ing of a new branch of export trade benefits a country not 
 only by the cheapness of the article in which the improve- 
 ment has taken place, but by a general cheapening of all im- 
 ported products. 
 
 Let us now change the hypothesis, and suppose that the 
 improvement, instead of creating a new export from the 
 United States, cheapens an existing one. Let the commodity 
 in which there is an improvement be [cotton] cloth. The 
 first effect of the improvement is that its price falls, and 
 there is an increased demand for it in the foreign market. 
 But this demand is of uncertain amount. Suppose the for- 
 eign consumers to increase their purchases in the exact ratio 
 of the cheapness, or, in other words, to lay out in cloth the 
 
THE DISTRIBUTION OF THE PRECIOUS METALS. 425 
 
 same sum of money as before ; the same aggregate payment 
 as before will be due from foreign countries to the United 
 States ; the equilibrium of exports and imports will remain 
 undisturbed, and foreigners will obtain the full advantage of 
 the increased cheapness of cloth. But if the foreign demand 
 for cloth is of such a character as to increase in a greater 
 ratio than the cheapness, a larger sum than formerly will be 
 due to the United States for cloth, and when paid will raise 
 American prices, the price of cloth included ; this rise, how- 
 ever, will affect only the foreign purchaser, American in- 
 comes being raised in a corresponding proportion ; and the 
 foreign consumer will thus derive a less advantage than the 
 United States from the improvement. If, on the contrary, 
 the cheapening of cloth does not extend the foreign demand 
 for it in a proportional degree, a less sum of debts than be- 
 fore will be due to the United States for cloth, while there 
 will be the usual sum of debts due from the United States 
 to foreign countries ; the balance of trade will turn against 
 the United States, money will be exported, prices (that of 
 cloth included) will fall, and cloth will eventually be cheap- 
 ened to the foreign purchaser in a still greater ratio than the 
 improvement has cheapened it to the United States. These 
 are the very conclusions which [would be] deduced on the 
 hypothesis of barter. 1 
 
 The result of the preceding discussion can not be better 
 summed up than in the words of Eicardo.' " Gold and sil- 
 ver having been chosen for the general medium of circula- 
 tion, they are, by the competition of commerce, distributed 
 in such proportions among the different countries of the 
 world as to accommodate themselves to the natural traffic 
 which would take place if no such metals existed, and the 
 trade between countries were purely a trade of barter." Of 
 this principle, so fertile in consequences, previous to which 
 the theory of foreign trade was an unintelligible chaos, Mr. 
 
 1 See Book III, Chap. XVIII, § 5, of Mill's original work. 
 
 * " Principles of Political Economy and Taxation," third edition, p. 143. 
 
426 EXCHANGE. 
 
 Ricardo, though he did not pursue it into its ramifications, 
 was the real originator. 
 
 On the principles of trade which we have before explained, 
 the same rule will apply to the distribution of money in differ- 
 ent parts of the same country, especially of a large country 
 with various kinds of production, like the United States. The 
 medium of exchange will, by the competition of commerce, be 
 distributed in such proportions among the different parts of the 
 United States, by natural laws, as to accommodate itself to the 
 number of transactions which would take place if no such me- 
 dium existed. For this reason, we find more money in the so- 
 called great financial centers, because there are more exchanges 
 of goods there. In sparsely settled parts of the West there 
 will be less money precisely because there are fewer transac- 
 tions than in the older and more settled districts. So that there 
 could be no worse folly than the following legislation of Con- 
 gress to distribute the national-bank circulation : " That $150,- 
 000,000 of the entire amount of circulating notes authorized to 
 be issued shall be apportioned to associations in the States, in 
 the District of Columbia, and in the Territories, according to 
 representative population" (act of March 3, 1865). 
 
 § 3. It is now necessary to inquire in what manner this 
 law of the distribution of the precious metals by means of 
 the exchanges affects the exchange value of money itself ; 
 and how it tallies with the law by which we found that the 
 value of money is regulated when imported as a mere article 
 of merchandise. 
 
 The causes which bring money into or carry it out of a 
 country (1) through the exchanges, to restore the equilibrium 
 of trade, and which thereby raise its value in some countries 
 and lower it in others, are the very same causes on which 
 the local value of money would depend, if it were never im- 
 ported except (2) as a merchandise, and never except directly 
 from the mines. When the value of money in a country is 
 permanently lowered (1) [as a medium of exchange] by an 
 influx of it through the balance of trade, the cause, if it is 
 not diminished cost of production, must be one of those 
 causes which compel a new adjustment, more favorable to the 
 country, of the equation of international demand — namely, 
 either an increased demand abroad for her commodities, or 
 
THE DISTRIBUTION OF THE PRECIOUS METALS. 427 
 
 a diminished demand on her part for those of foreign coun- 
 tries. Now, an increased foreign demand for the commodi- 
 ties of a country, or a diminished demand in the country for 
 imported commodities, are the very causes which, on the 
 general principles of trade, enable a country to purchase all 
 imports, and consequently (2) the precious metals, at a lower 
 value. There is, therefore, no contradiction, but the most 
 perfect accordance, in the results of the two different modes 
 [ (1) as a medium of exchange ; and (2) as merchandise] in 
 which the precious metals may be obtained. When money 
 [as a medium of exchange] flows from country to country 
 in consequence of changes in the international demand for 
 commodities, and by so doing alters its own local value, it 
 merely realizes, by a more rapid process, the effect which 
 would otherwise take place more slowly by an alteration in 
 the relative breadth of the streams by which the precious 
 metals [as merchandise] flow into different regions of the 
 earth from the mining countries. As, therefore, we before 
 saw that the use of money as a medium of exchange does 
 not in the least alter the law on which the values of other 
 things, either in the same country or internationally, depend, 
 so neither does it alter the law of the value of the precious 
 metals itself ; and there is in the whole doctrine of inter- 
 national values, as now laid down, a unity and harmony which 
 are a strong collateral presumption of truth. 
 
 § 4. Before closing this discussion, it is fitting to point 
 out in what manner and degree the preceding conclusions are 
 affected by the existence of international payments not origi- 
 nating in commerce, and for which no equivalent in either 
 money or commodities is expected or received — such as a 
 tribute, or remittances, or interest to foreign creditors, or a 
 government expenditure abroad. 
 
 To begin with the case of barter. The supposed annual 
 remittances being made in commodities, and being exports 
 for which there is to be no return, it is no longer requisite 
 that the imports and exports should pay for one another ; on 
 the contrary, there must be an annual excess of exports over 
 
428 EXCHANGE. 
 
 imports, equal to the value of the remittance. If, before 
 the country became liable to the annual payment, foreign 
 commerce was in its natural state of equilibrium, it will now 
 be necessary, for the purpose of effecting the remittances, 
 that foreign countries should be induced to take a greater 
 quantity of exports than before, which can only be done by 
 offering those exports on cheaper terms, or, in other words, 
 by paying dearer for foreign, commodities. The international 
 values will so adjust themselves that, either by greater ex- 
 ports or smaller imports, or both, the requisite excess on the 
 side of exports will be brought about, and this excess will 
 become the permanent state. The result is, that a country 
 which makes regular payments to foreign countries, besides 
 losing what it pays, loses also something more, by the less 
 advantageous terms on which it is forced to exchange its 
 productions for foreign commodities. 
 
 The same results follow on the supposition of money. 
 Commerce being supposed to be in a state of equilibrium 
 when the obligatory remittances begin, the first remittance 
 is necessarily made in money. This lowers prices in the 
 remitting country, and raises them in the receiving. The 
 natural effect is, that more commodities are exported than 
 before, and fewer imported, and that, on the score of com- 
 merce alone, a balance of money will be constantly due from 
 the receiving to the paying country. "When the debt thus 
 annually due to the tributary country becomes equal to the 
 annual tribute or other regular payment due from it, no fur- 
 ther transmission of money takes place ; the equilibrium of 
 exports and imports will no longer exist, but that of pay- 
 ments will ; the exchange will be at par, the two debts will 
 be set off against one another, and the tribute or remittance 
 will be virtually paid in goods. The result to the interests of 
 the two countries will be as already pointed out — the paying 
 country will give a higher price for all that it buys from the 
 receiving country, while the latter, besides receiving the 
 tribute, obtains the exportable produce of the tributary 
 country at a lower price. 
 
THE DISTRIBUTION OF THE PRECIOUS METALS. 429 
 
 It has been seen, as in Chart No. XIII, that, considering 
 the exports and imports merely as merchandise, there is, in 
 fact, no actual equilibrium at any given time in accordance 
 with the equation of International Demand. Another element, 
 the " financial account " between the United States and foreign 
 countries, must be considered before we can know all the factors 
 necessary to bring about the equation. If we had been bor- 
 rowing largely of England, Holland, and Germany, we should 
 owe a regular annual sum as interest, and our exports must, as 
 a rule, be exactly that much more (under right and normal 
 conditions) than the imports. Or, take another case, if capital 
 is borrowed in Europe for railways in the United States, this 
 capital generally comes over in the form of imports of various 
 kinds ; but, if our exports are not sufficient at once to balance 
 the increased imports, we go in debt for a time — or, in other 
 words, in order to establish the balance, we send United States 
 securities abroad instead of actual exports. This shipment of 
 securities is not seen and recorded as among the exports ; and 
 so we find a period, like that during and after the war, from 
 1862 to 1873, of a vast excess of imports. Since 1873 the 
 country has been practically paying the indebtedness incurred 
 in the former period ; and there has been a vast excess of ex- 
 ports over imports, and an apparent discrepancy in the equi- 
 librium. But our government bonds and other securities have 
 been coming back to us, producing a return current to balance 
 the excessive exports. 1 In brief, the use of securities and vari- 
 ous forms of indebtedness permits the period of actual payment 
 to be deferred, so that an excess of imports at one time may be 
 offset by an excess of exports at another, and generally a later, 
 time. Moreover, the large expenses of people traveling in 
 Europe will require us to remit abroad in the form of exports 
 more than would ordinarily balance our imports by the amount 
 spent by the travelers. The financial operations, therefore, 
 between the United States and foreign countries, must be well 
 considered in striking the equation between our exports and 
 imports. As formulated by Mr. Cairnes, 3 the Equation of 
 International Demand should be stated more broadly, as fol- 
 lows : " The state of international demand which results in 
 commercial equilibrium is realized when the reciprocal demand 
 of trading countries produces such a relation of exports and 
 imports among them as enables each country by means of her 
 exports to discharge all her foreign liabilities.'''' If we were a 
 great lending instead of a great borrowing country, we should 
 have, as a rule, a permanent excess of imports. 
 
 1 For an exceedingly good study on the conditions of our foreign trade down 
 to 1873, and a prophecy of the panic of 1873, see Cairnes, " Leading Principles," 
 pp. 364-374. * " Leading Principles," p. 357. 
 
CHAPTEE XYIII. 
 
 INFLUENCE OF THE CURRENCY ON THE EXCHANGES AND ON 
 FOREIGN TRADE. 
 
 § 1. In our inquiry into the laws of international trade, 
 we commenced with the principles which determine inter- 
 national exchanges and international values on the hypothe- 
 sis of barter. We next showed that the introduction of 
 money, as a medium of exchange, makes no difference in 
 the laws of exchanges and of values between country and 
 country, no more than between individual and individual: 
 since the precious metals, under the influence of those same 
 laws, distribute themselves in such proportions among the 
 different countries of the world as to allow the very same 
 exchanges to go on, and at the same values, as would be 
 the case under a system of barter. "We lastly considered 
 how the value of money itself is affected by those alter- 
 ations in the state of trade which arise from alterations 
 either in the demand and supply of commodities or in their 
 cost of production. It remains to consider the alterations 
 in the state of trade which originate not in commodities but 
 in money. 
 
 Gold and silver may vary like other things, though they 
 are not so likely to vary as other things in their cost of pro- 
 duction. The demand for them in foreign countries may 
 also vary. It may increase by augmented employment of 
 the metals for purposes of art and ornament, or because the 
 increase of production and of transactions has created a 
 greater amount of business to be done by the circulating 
 medium. It may diminish, for the opposite reasons; or, 
 
INFLUENCE OF THE CURRENCY ON THE EXCHANGES. 43 1 
 
 from the extension of the economizing expedients by which 
 the use of metallic money is partially dispensed with. 
 These changes act upon the trade between other countries 
 and the mining countries, and upon the value of the pre- 
 cious metals, according to the general laws of the value of 
 imported commodities: which have been set forth in the 
 previous chapters with sufficient fullness. 
 
 What I propose to examine in the present chapter is not 
 those circumstances affecting money which alter the perma- 
 nent conditions of its value, but the effects produced on in- 
 ternational trade by casual or temporary variations in the 
 value of money, which have no connection with any causes 
 affecting its permanent value. 
 
 § 2. Let us suppose in any country a circulating medium 
 purely metallic, and a sudden casual increase made to it ; for 
 example, by bringing into circulation hoards of treasure, 
 which had been concealed in a previous period of foreign in- 
 vasion or internal disorder. The natural effect would be a 
 rise of prices. This would check exports and encourage im- 
 ports ; the imports would exceed the exports, the exchanges 
 would become unfavorable, and a newly acquired stock of 
 money would diffuse itself over all countries with which the 
 supposed country carried on trade, and from them, progres- 
 sively, through all parts of the commercial world. The 
 money which thus overflowed would spread itself to an equal 
 depth over all commercial countries. For it would go on 
 flowing until the exports and imports again balanced one 
 another ; and this (as no change is supposed in the perma- 
 nent circumstances of international demand) could only be 
 when the money had diffused itself so equally that prices had 
 risen in the same ratio in all countries, so that the alteration 
 of price would be for all practical purposes ineffective, and 
 the exports and imports, though at a higher money valu- 
 ation, would be exactly the same as they were originally. 
 This diminished value of money throughout the world (at 
 least if the diminution was considerable) would cause a sus- 
 pension, or at least a diminution, of the annual supply from 
 
432 EXCHANGE. 
 
 the mines, since the metal would no longer command a value 
 equivalent to its highest cost of production. The annual 
 waste would, therefore, not be fully made up, and the usual 
 causes of destruction would gradually reduce the aggregate 
 quantity of the precious metals to its former amount ; after 
 which their production would recommence on its former 
 scale. The discovery of the treasure would thus produce 
 only temporary effects ; namely, a brief disturbance of inter- 
 national trade until the treasure had disseminated itself 
 through the world, and then a temporary depression in the 
 value of the metal below that which corresponds to the cost 
 of producing or of obtaining it; which depression would 
 gradually be corrected by a temporarily diminished produc- 
 tion in the producing countries and importation in the im- 
 porting countries. 
 
 The same effects which would thus arise from the discov- 
 ery of a treasure accompany the process by which bank-notes, 
 or any of the other substitutes for money, take the place 
 of the precious metals. Suppose 1 that the United States 
 possessed a currency, wholly metallic, of $200,000,000, and 
 that suddenly $200,000,000 of bank-notes were sent into cir- 
 culation. If these were issued by bankers, they would be 
 employed in loans, or in the purchase of securities, and would 
 therefore create a sudden fall in the rate of interest, which 
 would probably send a great part of the $200,000,000 of gold 
 out of the country as capital, to seek a higher rate of interest 
 elsewhere, before there had been time for any action on prices. 
 But we will suppose that the notes are not issued by bankers, 
 or money-lenders of any kind, but by manufacturers, in the 
 payment of wages and the purchase of materials, or by the 
 Government [as, e. g., greenbacks] in its ordinary expenses, so 
 that the whole amount would be rapidly carried into the mar- 
 kets for commodities. The following would be the natural 
 order of consequences : All prices would rise greatly. Ex- 
 portation would almost cease ; importation would be pro- 
 
 1 The illustrations in this chapter have also been changed, but only so far as 
 to make them apply to the United States. 
 
INFLUENCE OF THE CURRENCY ON THE EXCHANGES. 433 
 
 digiously stimulated. A great balance of payments would 
 become due, the exchanges would turn against the United 
 States, to the full extent of the cost of exporting money ; 
 and the surplus coin would pour itself rapidly forth, over the 
 various countries of the world, in the order of their proxim- 
 ity, geographically and commercially, to the United States. 
 
 A study of Chart No. XIV will show how exactly this de- 
 scription fits the case of our country after 1862, when the rise 
 of prices stimulated imports of merchandise (see Chart No. 
 XIII) in 1862, and sent gold out of the country. 
 
 The efflux would continue until the currencies of all coun- 
 tries had come to a level ; by which I do not mean, until 
 money became of the same value everywhere, but until the 
 differences were only those which existed before, and which 
 corresponded to permanent differences in the cost of obtain- 
 ing it. When the rise of prices had extended itself in an 
 equal degree to all countries, exports and imports would 
 everywhere revert to what they were at first, would balance 
 one another, and the exchanges would return to par. If such 
 a sum of money as $200,000,000, when spread over the whole 
 surface of the commercial world, were sufficient to raise the 
 general level in a perceptible degree, the effect would be of 
 no long duration. No alteration having occurred in the gen- 
 eral conditions under which the metals were procured, either 
 in the world at large or in any part of it, the reduced value 
 would no longer be remunerating, and the supply from the 
 mines would cease partially or wholly, until the $200,000,000 
 were absorbed. 1 
 
 Effects of another kind, however, will have been pro- 
 duced : $200,000,000, which formerly existed in the unpro- 
 
 1 1 am here supposing a state of things in which gold and silver mining are 
 a permanent branch of industry, carried on under known conditions ; and not 
 the present state of uncertainty, in which gold-gathering is a game of chance, 
 prosecuted (for the present) in the spirit of an adventure, not in that of a regu- 
 lar industrial pursuit. — Mill. It is, however, worth recalling that gold and sil- 
 ver mining have not been — for large effects on the value of the metals — anything 
 like a permanent branch of industry, but that, in the main, great additions have 
 been obtained suddenly and by chance discoveries. — J. L. L. 
 28 
 
434 EXCHANGE. 
 
 ductive form of metallic money, have been converted into 
 what is, or is capable of becoming, productive capital. This 
 gain is at first made by the United States at the expense 
 of other countries, who have taken her superfluity of this 
 costly and unproductive article off her hands, giving for it an 
 equivalent value in other commodities. By degrees the loss 
 is made up to those countries by diminished influx from the 
 mines, and finally the world has gained a virtual addition 
 of $200,000,000 to its productive resources. Adam Smith's 
 illustration, though so well known, deserves for its extreme 
 aptness to be once more repeated. He compares the substitu- 
 tion of paper in the room of the precious metals to the con- 
 struction of a highway through the air, by which the ground 
 now occupied by roads would become available for agricult- 
 ure. As in that case a portion of the soil, so in this a part 
 of the accumulated wealth of the country, would be relieved 
 from a function in which it was only employed in rendering 
 other soils and capitals productive, and would itself become 
 applicable to production; the office it previously fulfilled 
 being equally well discharged by a medium which costs 
 nothing. 
 
 The value saved to the community by thus dispensing 
 with metallic money is a clear gain to those who provide the 
 substitute. They have the use of $200,000,000 of circulat- 
 ing medium which have cost them only the expense of an 
 engraver's plate. If they employ this accession to their for- 
 tunes as productive capital, the produce of the country is 
 increased and the community benefited, as much as by any 
 other capital of equal amount. Whether it is so employed 
 or not depends, in some degree, upon the mode of issuing it. 
 If issued by the Government, and employed in paying off 
 debt, it would probably become productive capital. The 
 Government, however, may prefer employing this extraordi- 
 nary resource in its ordinary expenses ; may squander it use- 
 lessly, or make it a mere temporary substitute for taxation 
 to an equivalent amount ; in which last case the amount is 
 saved by the tax-payers at large, who either add it to their 
 
INFLUENCE OF THE CURRENCY ON THE EXCHANGES. 435 
 
 capital or spend it as income. "When [a part of the] paper 
 currency is supplied, as in our own country, by banking 
 companies, the amount is almost wholly turned into produc- 
 tive capital ; for the issuers, being at all times liable to be 
 called upon to refund the value, are under the strongest in- 
 ducements not to squander it, and the only cases in which it 
 is not forthcoming are cases of fraud or mismanagement. A 
 banker's profession being that of a money-lender, his issue 
 of notes is a simple extension of his ordinary occupation. 
 He lends the amount to farmers, manufacturers, or dealers, 
 who employ it in their several businesses. So employed, it 
 yields, like any other capital, wages of labor, and profits of 
 stock. The profit is shared between the banker, who re- 
 ceives interest, and a succession of borrowers, mostly for 
 short periods, who, after paying the interest, gain a profit in 
 addition, or a convenience equivalent to profit. The capital 
 itself in the long run becomes entirely wages, and, when 
 replaced by the sale of the produce, becomes wages again ; 
 thus affording a perpetual fund, of the value of $200,000,000, 
 for the maintenance of productive labor, and increasing the 
 annual produce of the country by all that can be produced 
 through the means of a capital of that value. To this gain 
 must be added a further saving to the country, of the annual 
 supply of the precious metals necessary for repairing the 
 wear and tear, and other waste, of a metallic currency. 
 
 The substitution, therefore, of paper for the precious 
 metals should always be carried as far as is consistent with 
 safety, no greater amount of metallic currency being re- 
 tained than is necessary to maintain, both in fact and in 
 public belief, the convertibility of the paper. 
 
 But since gold wanted for exportation is almost invaria- 
 bly drawn from the reserves of the banks, and is never likely 
 to be taken directly from the circulation while the banks 
 remain solvent, the only advantage which can be obtained 
 from retaining partially a metallic currency for daily pur- 
 poses is, that the banks may occasionally replenish their 
 reserves from it. 
 
436 EXCHANGE. 
 
 § 3. When metallic money had been entirely super- 
 seded and expelled from circulation, by the substitution of 
 an equal amount of bank-notes, any attempt to keep a still 
 further quantity of paper in circulation must, if the notes are 
 convertible [into gold], be a complete failure. 
 
 This brings up the whole question at issue between the 
 " Currency Principle " and the " Banking Principle." The 
 latter, maintained by Fullerton, Wilson, Price, and Tooke 
 (in his later writings), held that, if notes were convertible, the 
 value of notes could not differ from the value of the metal 
 into which they were convertible ; while the former, advocated 
 by Lord Ov^rstone, G. W. Norman, Colonel Torrens, Tooke 
 (in his earlier writings), and Sir Robert Peel, implied that 
 even a convertible paper was liable to over-issues. This last 
 school brought about the Bank Act of 1844. 1 
 
 The new issue would again set in motion the same train 
 of consequences by which the gold coin had already been ex- 
 pelled. The metals would, as before, be required for expor- 
 tation, and would be for that purpose demanded from the 
 banks, to the full extent of the superfluous notes, which thus 
 could not possibly be retained in circulation. If, indeed, the 
 notes were inconvertible, there would be no such obstacle to 
 the increase in their quantity. An inconvertible paper acts in 
 the same way as a convertible, while there remains any coin 
 for it to supersede ; the difference begins to manifest itself 
 when all the coin is driven from circulation (except what may 
 be retained for the convenience of small change), and the 
 issues still go on increasing. When the paper begins to ex- 
 ceed in quantity the metallic currency which it superseded, 
 prices of course rise ; things which were worth $25 in me- 
 tallic money become worth $30 in inconvertible paper, or 
 more, as the case may be. But this rise of price will not, as 
 in the cases before examined, stimulate import and discour- 
 age export. The imports and exports are determined by the 
 metallic prices of things, not by the paper prices ; and it is 
 only when the paper is exchangeable at pleasure for the 
 metals that paper prices and metallic prices must correspond. 
 
 1 See Walker, " Money," Chap. XIX. 
 
INFLUENCE OF THE CURRENCY ON THE EXCHANGES. 437 
 
 Let us suppose that the United States is the country 
 which has the depreciated paper. Suppose that some Amer- 
 ican production could be bought, while the currency was still 
 metallic, for $25, and sold in England for $27.50, the differ- 
 ence covering the expense and risk, and affording a profit to 
 the merchant. On account of the depreciation, this commodity 
 will now cost in the United States $30, and can not be Bold 
 in England for more than $27.50, and yet it will be exported 
 as before. Why ? Because the $27.50 which the exporter 
 can get for it in England is not depreciated paper, but gold 
 or silver ; and since in the United States bullion has risen 
 in the same proportion with other things — if the merchant 
 brings the gold or silver to the United States, he can sell his 
 $27.50 [in coin] for $33 [in paper], and obtain as before 10 
 per cent for profit and expenses. 
 
 It thus appears that a depreciation of the currency does 
 not affect the foreign trade of the country : this is carried 
 on precisely as if the currency maintained its value. But, 
 though the trade is not affected, the exchanges are. When 
 the imports and exports are in equilibrium, the exchange, in 
 a metallic currency, would be at par ; a bill on England for 
 the equivalent of $25 would be worth $25. But $25, or the 
 quantity of gold contained in them, having come to be 
 worth in the United States $30, it follows that a bill on 
 England for $25 will be worth $30. When, therefore, the 
 real exchange is at par, there will be a nominal exchange 
 against the country of as much per cent as the amount of 
 the depreciation. If the currency is depreciated 10, 15, or 
 20 per cent, then in whatever way the real exchange, arising 
 from the variations of international debts and credits, may 
 vary, the quoted exchange will always differ 10, 15, or 20 
 per cent from it. However high this nominal premium may 
 be, it has no tendency to send gold out of the country for 
 the purpose of drawing a bill against it and profiting by the 
 premium ; because the gold so sent must be procured, not 
 from the banks and at par, as in the case of a convertible 
 currency, but in the market, at an advance of price equal 
 
438 EXCHANGE. 
 
 to the premium. In such cases, instead of saying that the 
 exchange is unfavorable, it would be a more correct repre- 
 sentation to say that the par has altered, since there is now- 
 required a larger quantity of American currency to be 
 equivalent to the same quantity of foreign. The exchanges, 
 however, continue to be computed according to the metallic 
 par. The quoted exchanges, therefore, when there is a de- 
 preciated currency, are compounded of two elements or fac- 
 tors : (1) the real exchange, which follows the variations of 
 international payments, and (2) the nominal exchange, which 
 varies with the depreciation of the currency, but which, 
 while there is any depreciation at all, must always be unfa- 
 vorable. Since the amount of depreciation is exactly meas- 
 ured by the degree in which the market price of bullion 
 exceeds the mint valuation, we have a sure criterion to de- 
 termine what portion of the quoted exchange, being refer- 
 able to depreciation, may be struck off as nominal, the result 
 so corrected expressing the real exchange. 
 
 The same disturbance of the exchanges and of interna- 
 tional trade which is produced by an increased issue of con- 
 vertible bank-notes is in like manner produced by those ex- 
 tensions of credit which, as was so fully shown in a preced- 
 ing chapter, have the same effect on prices as an increase of 
 the currency. Whenever circumstances have given such an 
 impulse to the spirit of speculation as to occasion a great in- 
 crease of purchases on credit, money prices rise, just as much as 
 they would have risen if each person who so buys on credit had 
 bought with money. All the effects, therefore, must be simi- 
 lar. As a consequence of high prices, exportation is checked 
 and importation stimulated ; though in fact the increase of 
 importation seldom waits for the rise of prices which is the 
 consequence of speculation, inasmuch as some of the great ar- 
 ticles of import are usually among the things in which specu- 
 lative overtrading first shows itself. There is, therefore, in 
 such periods, usually a great excess of imports over exports ; 
 and, when the time comes at which these must be paid for, 
 the exchanges become unfavorable and gold flows out of the 
 
INFLUENCE OF THE CURRENCY ON THE EXCHANGES. 439 
 
 country. This efflux of gold takes effect on prices [by with- 
 drawing gold from the reserves of the banks, and so by stop- 
 ping loans and the use of credit, or purchasing power] : its 
 effect is to make them recoil downward. The recoil once be- 
 gun, generally becomes a total rout, and the unusual exten- 
 sion of credit is rapidly exchanged for an unusual contrac- 
 tion of it. Accordingly, when credit has been imprudently 
 stretched, and the speculative spirit carried to excess, the turn 
 of the exchanges and consequent pressure on the banks to 
 obtain gold for exportation are generally the proximate cause 
 of the catastrophe. 
 
 A glance at Chart No. XIII will give illustration to the 
 situation here described. After the war, and until 1873, while 
 the United States was under the influence of high prices and a 
 speculation which has been seldom equaled in our history, the 
 resulting great excess of imports became very striking. It 
 was an unhealthy and abnormal condition of trade. The sud- 
 den reversal of the trade by the crisis in 1873 is equally strik- 
 ing, and, as prices fell, exports began to increase. The effect 
 on international trade of a collapse of credit is thus clearly 
 marked by the lines on the chart. 
 
CHAPTER XIX. 
 
 OF THE KATE OF INTEREST. 
 
 § 1. The two topics of Currency and Loans, though in 
 themselves distinct, are so intimately blended in the phenom- 
 ena of what is called the money market, that it is impossi- 
 ble to understand the one without the other, and in many 
 minds the two subjects are mixed up in the most inextri- 
 cable confusion. 
 
 In the preceding book ' we denned the relation in which 
 interest stands to profit. We found that the gross profit of 
 capital might be distinguished into three parts, which are re- 
 spectively the remuneration for risk, for trouble, and for the 
 capital itself, and may be termed insurance, wages of super- 
 intendence, and interest. After making compensation for 
 risk, that is, after covering the average losses to which capi- 
 tal is exposed either by the general circumstances of society 
 or by the hazards of the particular employment, there re- 
 mains a surplus, which partly goes to repay the owner of the 
 capital for his abstinence, and partly the employer of it for 
 his time and trouble. How much goes to the one and how 
 much to the other is shown by the amount of the remunera- 
 tion which, when the two functions are separated, the owner 
 of capital can obtain from the employer for its use. This is 
 evidently a question of demand and supply. Nor have de- 
 mand and supply any different meaning or effect in this case 
 from what they have in all others. The rate of interest will 
 be such as to equalize the demand for loans with the supply 
 
 1 Book II, Chap. V, § 1. 
 
TEE RATE OF INTEREST. 441 
 
 of them. It will be such that, exactly as much as some 
 people are desirous to borrow at that rate, others shall be 
 willing to lend. If there is more offered than demanded, in- 
 terest will fall ; if more is demanded than offered, it will rise ; 
 and in both cases, to the point at which the equation of sup- 
 ply and demand is re-established. 
 
 The desire to borrow and the willingness to lend are 
 more or less influenced by every circumstance which affects 
 the state or prospects of industry or commerce, either gener- 
 ally or in any of their branches. The rate of interest, there- 
 fore, on good security, which alone we have here to consider 
 (for interest in which considerations of risk bear a part may 
 swell to any amount), is seldom, in the great centers of money 
 transactions, precisely the same for two days together ; as is 
 shown by the never-ceasing variations in the quoted prices 
 of the funds and other negotiable securities. Nevertheless, 
 there must be, as in other cases of value, some rate which 
 (in the language of Adam Smith and Bicardo) may be called 
 the natural rate ; some rate about which the market rate os- 
 cillates, and to which it always tends to return. This rate 
 partly depends on the amount of accumulation going on in 
 the hands of persons who can not themselves attend to the 
 employment of their savings, and partly on the comparative 
 taste existing in the community for the active pursuits of 
 industry, or for the leisure, ease, and independence of an 
 annuitant. 
 
 § 2. In [ordinary] circumstances, the more thriving produ- 
 cers and traders have their capital fully employed, and many 
 are able to transact business to a considerably greater extent 
 than they have capital for. These are naturally borrowers : 
 and the amount which they desire to borrow, and can give 
 security for, constitutes the demand for loans on account of 
 productive employment. To these must be added the loans 
 required by Government, and by land-owners, or other un- 
 productive consumers who have good security to give. This 
 constitutes the mass of loans for which there is an habitual 
 demand. 
 
442 EXCHANGE. 
 
 Now, it is conceivable that there might exist, in the hands 
 of persons disinclined or disqualified for engaging personally 
 in business, (1) a mass of capital equal to, and even exceed- 
 ing, this demand. In that case there would be an habitual 
 excess of competition on the part of lenders, and the rate of 
 interest would bear a low proportion to the rate of profit. 
 Interest would be forced down to the point which would 
 either tempt borrowers to take a greater amount of loans than 
 they had a reasonable expectation of being able to employ in 
 their business, or would so discourage a portion of the lend- 
 ers as to make them either forbear to accumulate or endeavor 
 to increase their income by engaging in business on their own 
 account, and incurring the risks, if not the labors, of indus- 
 trial employment. 
 
 The low rates of interest, rather, tempt people to take some 
 additional risk, and enter into investments which offer a higher 
 rate of dividends ; so that a period of low interest is a time 
 when speculative enterprises find victims, and then by bad and 
 worthless investments much of the loanable funds is actually 
 lost ; thereby reducing the total quantity of loans more nearly 
 to that demand which will give an ordinary rate of interest. 
 
 (2.) On the other hand, the capital owned by persons who 
 prefer lending it at interest, or whose avocations prevent 
 them from personally superintending its employment, may 
 be short of the habitual demand for loans. It may be in 
 great part absorbed by the investments afforded by the pub- 
 lic debt and by mortgages, and the remainder may not be 
 sufficient to supply the wants of commerce. If so, the rate 
 of interest will be raised so high as in some way to re-estab- 
 lish the equilibrium. When there is only a small difference 
 between interest and profit, many borrowers may no longer 
 be willing to increase their responsibilities and involve their 
 credit for so small a remuneration : or some, who would oth- 
 erwise have engaged in business, may prefer leisure, and be- 
 come lenders instead of borrowers : or others, under the 
 inducement of high interest and easy investment for their 
 capital, may retire from business earlier, and with smaller 
 fortunes, than they otherwise would have done. 
 
THE RATE OF INTEREST. 443 
 
 Or, lastly, instead of [capital] being afforded by persons 
 not in business, the affording it may itself become a business. 
 A portion of the capital employed in trade may be supplied 
 by a class of professional money-lenders. These money lend- 
 ers, however, must have more than a mere interest ; they 
 must have the ordinary rate of profit on their capital, risk 
 and all other circumstances being allowed for. [For] it can 
 never answer, to any one who borrows for the purposes of his 
 business, to pay a full profit for capital from which he will 
 only derive a full profit : and money-lending, as an employ- 
 ment, for the regular supply of trade, can not, therefore, be 
 carried on except by persons who, in addition to their own 
 capital, can lend their credit, or, in other words, the capital 
 of other people. A bank which lends its notes lends capital 
 which it borrows from the community, and for which it pays 
 no interest. 
 
 Of late years, however, banks are generally not permitted 
 to issue notes on their simple credit. That privilege has been 
 so often abused in this country that now, in the national bank- 
 ing system, a separate part of the resources are set aside for 
 the security of the circulating notes (as is also true of the Bank 
 of England since 1844). It is not generally true, then, that 
 banks now create the means to make loans by issuing notes 
 by which they borrow capital from the community without pay- 
 ing interest. They do, however, depend almost entirely on de- 
 posits. 
 
 A bank of deposit lends capital which it collects from the 
 community in small parcels, sometimes without paying any 
 interest, and, if it does pay interest, it still pays much less 
 than it receives ; for the depositors, who in any other way 
 could mostly obtain for such small balances no interest worth 
 taking any trouble for, are glad to receive even a little. Hav- 
 ing this subsidiary resource, bankers are enabled to obtain, 
 by lending at interest, the ordinary rate of profit on their 
 own capital. The disposable capital deposited in banks, to- 
 gether with the funds belonging to those who, either from 
 necessity or preference, live upon the interest of their prop- 
 erty, constitute the general loan fund of the country ; and 
 
444 EXCHANGE. 
 
 the amount of this aggregate fund, when set against the habit- 
 ual demands of producers and dealers, and those of the Gov- 
 ernment and of unproductive consumers, determines the per- 
 manent or average rate of interest, which must always be 
 such as to adjust these two amounts to one another. 1 But, 
 while the whole of this mass of lent capital takes effect upon 
 the permanent rate of interest, the fluctuations depend al- 
 most entirely upon the portion which is in the hands of 
 bankers ; for it is that portion almost exclusively which, 
 being lent for short times only, is continually in the market 
 seeking an investment. The capital of those who live on 
 the interest of their own fortunes has generally sought and 
 found some fixed, investment, such as the public funds, 
 mortgages, or the bonds of public companies, which invest- 
 ment, except under peculiar temptations or necessities, is not 
 changed. 
 
 § 3. Fluctuations in the rate of interest arise from varia- 
 tions either in the demand, for loans or in the supply. The 
 supply is liable to variation, though less so than the demand. 
 The willingness to lend is greater than usual at the com- 
 mencement of a period of speculation, and much less than 
 usual during the revulsion which follows. In speculative 
 times, money-lenders as well as other people are inclined to 
 extend their business by stretching their credit ; they lend 
 more than usual (just as other classes of dealers and pro- 
 ducers employ more than usual) of capital which does not 
 belong to them. Accordingly, these are the times when the 
 rate of interest is low ; though for this too (as we shall im- 
 mediately see) there are other causes. During the revulsion, 
 on the contrary, interest always rises inordinately, because, 
 while there is a most pressing need on the part of many 
 persons to borrow, there is a general disinclination to lend." 
 
 1 1 do not include in the general loan fund of the country the capitals, large 
 as they sometimes are, which are habitually employed in speculatively buying 
 and selling the public funds and other securities. — Mill. 
 
 2 The rate of interest at such crises in New York has several times risen to 
 400 or 500 per cent per annum. 
 
THE RATE OF INTEREST. 44.5 
 
 This disinclination, when at its extreme point, is called a 
 panic. It occurs when a succession of unexpected failures 
 has created in the mercantile, and sometimes also in the non- 
 mercantile public, a general distrust in each other's solvency ; 
 disposing every one not only to refuse fresh credit, except 
 on very onerous terms, but to call in, if possible, all credit 
 which he has already given. Deposits are withdrawn from 
 banks ; notes are returned on the issuers in exchauge for spe- 
 cie ; bankers raise their rate of discount, and withhold their 
 customary advances ; merchants refuse to renew mercantile 
 bills. At such times the most calamitous consequences were 
 formerly experienced from the attempt of the law to prevent 
 more than a certain limited rate of interest from being given 
 or taken. Persons who could not borrow at five per cent 
 had to pay, not six or seven, but ten or fifteen per cent, to 
 compensate the lender for risking the penalties of the law ; 
 or had to sell securities or goods for ready money at a still 
 greater sacrifice. 
 
 The pernicious and hurtful custom exists in various States 
 in this country of making any interest beyond a certain rate 
 illegal. When it is remembered that legitimate business is 
 often largely done on credit — until the proceeds of goods sold 
 on credit are collected — the rate of interest from day to day is 
 very important to trade. So, when there is a sudden demand 
 for loans, a rate higher than the legal one will certainly be 
 paid, and the law violated, if the getting of a loan is absolutely 
 necessary to save the borrower from commercial ruin. The ef- 
 fect of a legal rate is to stop loans at the very time when loans 
 are most essential to the business public. It would be far better 
 to adopt such a sliding scale as exists at great European banks, 
 which allows the rate of interest to rise with the demand. No 
 one, then, with good security, need want loans if he is willing 
 to pay the high rates ; and those not really in need will defer 
 their demand until the sudden emergency is past. Already in 
 New York the legal penalty has been removed for loaning at 
 higher than the legal rates when charged upon call-loans ; and 
 it has mitigated the extreme fluctuations of the rate in a market 
 when financial necessity is contending against the law. 
 
 Except at such periods, the amount of capital disposable on 
 loan is subject to little other variation than that which arises 
 from the gradual process of accumulation ; which process, 
 
446 EXCHANGE. 
 
 however, in the great commercial countries, is sufficiently- 
 rapid to account for the almost periodical recurrence of these 
 fits of speculation ; since, when a few years have elapsed 
 without a crisis, and no new and tempting channel for in- 
 vestment has been opened in the mean time, there is always 
 found to have occurred in those few years so large an increase 
 of capital seeking investment as to have lowered considerably 
 the rate of interest, whether indicated by the prices of securi- 
 ties or by the rate of discount on bills ; and this diminution 
 of interest tempts the possessors to incur hazards in hopes of 
 a more considerable return. 
 
 The demand for loans varies much more largely than the 
 supply, and embraces longer cycles of years in its aberrations. 
 A time of war, for example, is a period of unusual draughts 
 on the loan market. The Government, at such times, gen- 
 erally incurs new loans, and, as these usually succeed each 
 other rapidly as long as the war lasts, the general rate of in- 
 terest is kept higher in war than in peace, without reference 
 to the rate of profit, and productive industry is stinted of its 
 usual supplies. 
 
 The United States during the late war found that it could 
 not borrow at even six or seven per cent. By receiving depre- 
 ciated paper at par for its bonds it really agreed to pay six 
 gold dollars on each loan of one hundred dollars in paper 
 (worth, perhaps, at the worst only forty gold dollars), which 
 was equivalent to fifteen per cent. This high rate was largely 
 due to the weakened credit of the Government ; but still it 
 remains true that the rate was higher because the United 
 States was in the market as a competitor for large loans. Now 
 the Government can refund its bonds at three per cent. 
 
 Nor does the influence of these loans altogether cease when 
 the Government ceases to contract others ; for those already 
 contracted continue to afford an investment for a greatly 
 increased amount of the disposable capital of the conntry, 
 which, if the national debt were paid off, would be added to 
 the mass of capital seeking investment, and (independently 
 of temporary disturbance) could not but, to some extent, per- 
 manently lower the rate of interest. 
 
THE RATE OF INTEREST. 447 
 
 The rapid payment of the public debt by the United States, 
 $137,823,253 in 1882-1883, and more than $100,000,000 in 1883- 
 1884, has taken away the former investment for enormous sums 
 of loanable funds, and to the same extent increased the supply 
 in the market. Without doubt this aids in making the present 
 rate of interest a very low one. Whether the rate will remain 
 "permanently lower," however, will depend upon whether the 
 field of investment in the United States is already practically 
 occupied. We believe it is not. 
 
 The same effect on interest which is produced by govern- 
 ment loans for war expenditure is produced by the sudden 
 opening of any new and generally attractive mode of perma- 
 nent investment. The only instance of the kind in recent 
 history, on a scale comparable to that of the war loans, is the 
 absorption of capital in the construction of railways. This 
 capital must have been principally drawn from the deposits 
 in banks, or from savings which would have gone into de- 
 posit, and which were destined to be ultimately employed 
 in buying securities from persons who would have employed 
 the purchase-money in discounts or other loans at interest : 
 in either case, it was a draft on the general loan fund. It 
 is, in fact, evident that, unless savings were made expressly 
 to be employed in railway adventure, the amount thus em- 
 ployed must have been derived either from the actual capital 
 of persons in business or from capital which would have 
 been lent to persons in business. 
 
 § 4. From the preceding considerations it would be seen, 
 even if it were not otherwise evident, how great an error it 
 is to imagine that the rate of interest bears any necessary 
 relation to the quantity or value of the money in circulation. 
 An increase of the currency has in itself no effect, and is 
 incapable of having any effect, on the rate of interest. A 
 paper currency issued by Government in the payment of its 
 ordinary expenses, in however great excess it may be issued, 
 affects the rate of interest in no manner whatever. It 
 diminishes, indeed, the power of money to buy commodities, 
 but not the power of money to buy money. If a hundred 
 dollars will buy a perpetual annuity of four dollars a year, a 
 
448 EXCHANGE. 
 
 depreciation which makes the hundred dollars worth only 
 half as much as before has precisely the same effect on the 
 four dollars, and therefore can not alter the relation between 
 the two. Unless, indeed, it is known and reckoned upon 
 that the depreciation will only be temporary; for people 
 certainly might be willing to lend the depreciated currency 
 on cheaper terms if they expected to be repaid in money of 
 full value. 
 
 In considering the effect produced by the proceedings of 
 banks in encouraging the excesses of speculation, an immense 
 effect is usually attributed to their issues of notes, but until 
 of late hardly any attention was paid to the management of 
 their deposits, though nothing is more certain than that their 
 imprudent^ extensions of credit take place more frequently 
 by means of their deposits than of their issues. Says Mr. 
 Tooke : " Supposing all the deposits received by a banker to 
 be in coin, is he not, just as much as the issuing banker, ex- 
 posed to the importunity of customers, whom it may be im- 
 politic to refuse, for loans or discounts, or to be tempted by 
 a high interest ; and may he not be induced to encroach so 
 much upon his deposits as to leave him, under not improb- 
 able circumstances, unable to meet the demands of his depos- 
 itors?" 
 
 In truth, the most difficult questions of banking center 
 around the functions of discount and deposit. The separation 
 of the Issue from the Banking Department by the act of 1844, 
 which renewed the charter of the Bank of England, makes this 
 perfectly clear. After entirely removing from their effect on 
 credit all influences due to issues, England has had the same 
 difficulties to encounter as before, which shows that the real 
 question is concerned with the two essential functions of bank- 
 ing — discount and deposit. Since 1844, there have been the 
 commercial disturbances of 1847, 1857, 1866, and 1873. Al- 
 though no expansion of notes, without a corresponding deposit 
 of specie, is possible. 
 
 § 5. Before quitting the general subject of this chapter, 
 I will make the obvious remark that the rate of interest 
 determines the value and price of all those salable articles 
 which are desired and bought, not for themselves, but for 
 
THE RATE OF INTEREST. 449 
 
 the income which they are capable of yielding. The pub- 
 lic funds, shares in joint-stock companies, and all descriptions 
 of securities, are at a high price in proportion as the rate of 
 interest is low. They are sold at the price which will give 
 the market rate of interest on the purchase-money, with 
 allowance for all differences in the risk incurred, or in any 
 circumstance of convenience. 
 
 The price of land, mines, and all other fixed sources of 
 income, depends in like manner on the rate of interest. Land 
 usually sells at a higher price, in proportion to the income 
 afforded by it, than the public funds, not only because it is 
 thought, even in [England], to be somewhat more secure, 
 but because ideas of power and dignity are associated with 
 its possession. But these differences are constant, or nearly 
 so; and, in the variations of price, land follows, cceteris pari- 
 bus, the permanent (though, of course, not the daily) varia- 
 tions of the rate of interest. "When interest is low, land will 
 naturally be dear ; when interest is high, land will be cheap. 
 
 A lot of land, which fifty years ago gave an annual return 
 of $100, if ten per cent was then the common rate of interest, 
 would sell for $1,000. If the return from the land remains 
 the same ($100) to-day, and if the usual rate of interest is 
 now five per cent, the same piece of land, therefore, would sell 
 for $2,000, since $100 is five per cent of $2,000. 
 
 The price of a bond, it may be said, also varies with the 
 time it has to run. At the same rate of interest, a bond run- 
 ning for a long term of years is better for an investment than 
 one for a short term. The lumberman, who looks at two trees 
 of equal diameter at the base, estimates the total value of each 
 according to the height of the tree. Then, again, a bond run- 
 ning for a short term may be worth less than one for a long 
 term, even though the first bears a higher rate of interest. 
 That is, to resume the illustration, one tree, not rising very 
 high, although larger at the bottom, may not contain so many 
 square feet as another, with perhaps a less diameter at the bot- 
 tom, but which stretches much higher up into the air. 
 29 
 
CHAPTER XX. 
 
 OF THE COMPETITION OF DIFFERENT COUNTRIES IN THE SAME 
 
 MARKET. 
 
 § 1. In the phraseology of the Mercantile System, there 
 is no word of more frequent recurrence or more perilous im- 
 port than the word underselling. To undersell other coun- 
 tries — not to be undersold by other countries — were spoken 
 of, and are still very often spoken of, almost as if they were 
 the sole purposes for which production and commodities 
 exist. 
 
 Nations may, like individual dealers, be competitors, with 
 opposite interests, in the markets of some commodities, while 
 in others they are in the more fortunate relation of reciprocal 
 customers. The benefit of commerce does not consist, as it 
 was once thought to do, in the commodities sold ; but, since 
 the commodities sold are the means of obtaining those which 
 are bought, a nation would be cut off from the real advan- 
 tage of commerce, the imports, if it could not induce other 
 nations to take any of its commodities in exchange ; and in 
 proportion as the competition of other countries compels it 
 to offer its commodities on cheaper terms, on pain of not 
 selling them at all, the imports which it obtains by its foreign 
 trade are procured at greater cost. 
 
 One country (A) can only undersell another (B) in a 
 given market, to the extent of entirely expelling her from it, 
 on two conditions : (1) In the first place, she (A) must have 
 a greater advantage than the second country (B) in the pro- 
 duction of the article exported by both ; meaning by a greater 
 advantage (as has been already so fully explained) not abso- 
 
THE COMPETITION OF DIFFERENT COUNTRIES. 451 
 
 lutely, but in comparison with other commodities ; and (2) 
 in the second place, such must be her (A's) relation with the 
 customer-country in respect to the demand for each other's 
 products, and such the consequent state of international 
 values, as to give away to the customer-country more than 
 the whole advantage possessed by the rival country (B) ; oth- 
 erwise the rival will still be able to hold her ground in the 
 market. 
 
 Let us suppose a trade between England and the United 
 States, in iron and wheat. England being capable of produc- 
 ing ten cwts. of iron at the same cost as fifteen bushels of 
 wheat, the United States at the same cost as twenty bushels, 
 and the two commodities being exchanged between the two 
 countries (cost of carriage apart) at some intermediate rate, say 
 ten for seventeen. The United States could not be perma- 
 nently undersold in the English market, and expelled from it, 
 unless by a country (such as India) which offered not merely 
 more than seventeen, but more than twenty bushels of wheat 
 for ten cwts. of iron. Short of that, the competition would 
 only oblige the United States to pay dearer for iron, but would 
 not disable her from exporting wheat. The country, therefore, 
 which could undersell the United States, must, in the first 
 place, be able to produce wheat at less cost, compared with 
 iron, than the United States herself ; and, in the next place, 
 must have such a demand for iron, or other English commodi- 
 ties, as would compel her, even when she became sole occupant 
 of the market, to give a greater advantage to England than the 
 United States could give by resigning the whole of hers ; to 
 give, for example, twenty-one bushels for ten cwts. For if 
 not — if, for example, the equation of international demand, 
 after the United States was excluded, gave a ratio of eighteen 
 for ten — the United States would be now the underselling na- 
 tion ; and there would be a point, perhaps nineteen for ten, at 
 which both countries would be able to maintain their ground, 
 and to sell in England enough wheat to pay for the iron, or 
 other English commodities, for which, on these newly adjusted 
 terms of interchange, they had a demand. In like manner, 
 England, as an exporter of iron, could only be driven from the 
 American market by some rival whose superior advantages in 
 the production of iron enabled her, and the intensity of whose 
 demand for American produce compelled her, to offer ten cwts. 
 of iron, not merely for less than seventeen bushels of wheat, 
 but for less than fifteen. In that case, England could no 
 longer carry on the trade without loss ; but, in any case short 
 
452 EXCHANGE. 
 
 of this, she would merely be obliged to give to the United 
 States more iron for less wheat than she had previously given. 
 
 It thus appears that the alarm of being permanently 
 undersold may be taken much too easily ; may be taken 
 when the thing really to be anticipated is not the loss of the 
 trade, but the minor inconvenience of carrying it on at a 
 diminished advantage ; an inconvenience chiefly falling on 
 the consumers of foreign commodities, and not on the pro- 
 ducers or sellers of the exported article. It is no sufficient 
 ground of apprehension to the [American] producers, to find 
 that some other country can sell [wheat] in foreign markets, 
 at some particular time, a trifle cheaper than they can them- 
 selves afford to do in the existing state of prices in [the 
 United States]. Suppose them to be temporarily unsold, and 
 their exports diminished ; the imports will exceed the ex- 
 ports, there will be a new distribution of the precious met- 
 als, prices will fall, and, as all the money expenses of the 
 [American] producers will be diminished, they will be able 
 (if the case falls short of that stated in the preceding para- 
 graph) again to compete with their rivals. 
 
 The loss which [the United States] will incur will not fall 
 upon the exporters, but upon those who consume imported 
 commodities ; who, with money incomes reduced in amount, 
 will have to pay the same or even an increased price for all 
 things produced in foreign countries. 
 
 But the business world would regard what was going on 
 under economic laws as a great and dreaded disaster, if it 
 meant that prices were to fall, and gold leave the country. 
 Those holding large stocks of goods would for that time suffer ; 
 and so, at first, it might really happen that " exporters," in the 
 sense of exporting agents (not the producers, perhaps, of the 
 exportable article), would incur a loss. In the end, of course, 
 the consumers of imports suffer. But, temporarily, and on the 
 face of it, exporters do lose. 
 
 § 2. According to the preceding doctrine, a country can 
 not be undersold in any commodity, unless the rival country 
 
 1 In this illustration I have retained as nearly as possible the form of that 
 given by Mr. Mill for the trade between England and Germany in cloth and linen. 
 
THE COMPETITION OF DIFFERENT COUNTRIES. 453 
 
 has a stronger inducement than itself for devoting its labor 
 and capital to the production of the commodity ; arising 
 from the fact that by doing so it occasions a greater saving 
 of labor and capital, to be shared between itself and its cus- 
 tomers — a greater increase of the aggregate produce of the 
 world. The underselling, therefore, though a loss to the 
 undersold country, is an advantage to the world at large ; the 
 substituted commerce being one which economizes more of 
 the labor and capital of mankind, and adds more to their col- 
 lective wealth, than the commerce superseded by it. The 
 advantage, of course, consists in being able to produce the 
 commodity of better quality, or with less labor (compared 
 with other things) ; or perhaps not with less labor, but in 
 less time ; with a less prolonged detention of the capital em- 
 ployed. This may arise from greater natural advantages 
 (such as soil, climate, richness of mines) ; superior capability, 
 either natural or acquired, in the laborers ; better division of 
 labor, and better tools, or machinery. But there is no place 
 left in this theory for the case of lower wages. This, how- 
 ever, in the theories commonly current, is a favorite cause 
 of underselling. We continually hear of the disadvantage 
 under which the [American] producer labors, both in foreign 
 markets and even in his own, through the lower wages paid 
 by his foreign rivals. These lower wages, we are told, en- 
 able, or are always on the point of enabling, them to sell at 
 lower prices, and to dislodge the [American] manufacturer 
 from all markets in which he is not artificially protected. 
 
 It will be remembered that, as we have before seen, inter- 
 national trade, in actual practice, depends on comparative prices 
 within the same country (even though the exporter may not 
 consciously make a comparison). We send wheat abroad, be- 
 cause it is low in price relatively to certain manufactured goods ; 
 that is, we send the wheat, but we do not send the manufactured 
 goods. But, so far, this is considering only the comparative 
 prices in the same country. Yet we shall fail to realize in 
 actual practice the application of the above principles, when we 
 use the terms prices and money, if we do not admit that there 
 is in the matter of underselling a comparison, also, between the 
 absolute price of the goods in one country and the absolute 
 
454 EXCHANGE. 
 
 price of the same goods in the competing country. For ex- 
 ample, wheat is not shipped to England unless the price is 
 lower here than there. If India or Morocco were to send wheat 
 into the English market in close competition with the United 
 States, and the price were to fall in London, it would mean that, 
 if we continued our shipments of wheat to England, we must 
 part with our wheat at a less advantage in the international 
 exchange. In the illustration already used, we must, for ex- 
 ample, offer more than seventeen bushels of wheat for ten cwts. 
 of iron. The fall in the price of wheat, without any change in 
 that of iron, implies the necessity of offering a greater quantity 
 of wheat for the same quantity of iron, perhaps nineteen or 
 twenty bushels for ten cwts. of iron. If the price went so low 
 as to require twenty-one bushels to pay for ten cwts. of iron, 
 then we should be entirely undersold ; and the price here as 
 compared with the price in London would be an indication of 
 the fact. So that the comparison of prices here with prices 
 abroad is merely a register of the terms at which our interna- 
 tional exchanges are performed ; but not the cause of the ex- 
 istence of the international trade. If the price falls so low in 
 a foreign market that we can not sell wheat there, it simply 
 means that we have reached in the exchange ratios the limit of 
 our comparative advantages in wheat and iron ; so that we are 
 obliged to offer twenty or more bushels of wheat for ten cwts. 
 of iron. 
 
 But in all this it must be noted that this price must in- 
 clude the return to capital also, and that it must be equal to 
 the usual reward for capital in other competing industries, 
 that is, the ordinary rate of profit. In exporting wheat from 
 the United States the capital engaged will insist on getting 
 the rate of profit to be found in other occupations to which 
 the capital can go, in the United States. Now, the price, 
 if it stands for the value (which is supposed to be governed 
 by cost of production in this case), is the sum out of which 
 wages and profits are paid. If the price were to fall in the 
 foreign market, then there might not be the means with which 
 to pay the usual rate of wages and the usual rate of profit 
 also. Then we should probably hear of complaints by the 
 shippers that there is no profit in the exportation of wheat, and 
 of a falling off in the trade. In other words, as the capitalist 
 is the one who manages the operation, and is the one first af- 
 fected, the diminution of advantage in foreign trade arising 
 from competition, generally shows itself first in lessened prof- 
 its. The price, then, is the means by which we determine 
 whether a certain article gives us that comparative advantage 
 which will insure a gain from international trade. 
 
 The low price in this country of an exportable article — 
 
THE COMPETITION OF DIFFERENT COUNTRIES. 455 
 
 since it is for this reason selected as an export — is one whose 
 cost is low. If the cost be low, it means that the industry- 
 is very productive ; that the same capital and labor produce 
 more for their exertion in this than in other industries. And 
 yet it is precisely in the most productive industries that higher 
 wages and profits can be, and are, paid. Although each arti- 
 cle is sold at a low price, the great quantity produced makes 
 the total sum, or value, out of which the industrial rewards, 
 profits, and wages, are paid, large. That is, the price may be 
 very low (lower, also, in direct comparison with prices abroad) 
 and yet pay the rate of wages and profits current in this coun- 
 try. Consequently, although wages and profits may be very 
 high (relatively to older countries) in those industries of the 
 United States whose productiveness is great, yet the very fact 
 of this low cost, and consequently this low price (where com- 
 petition is effective), is that which fits the commodity for ex- 
 portation. We are, therefore, inevitably led to a position in 
 which we see that high wages and low prices naturally go 
 together in an exportable commodity. In practice, certainly, 
 the high wages do not, by raising the price, prevent us, by com- 
 paring our price with English prices, from sending goods 
 abroad — because we send goods abroad from our most pro- 
 ductive employments. As an illustration of this principle, it is 
 found that the leading exports of the United States, in 1883, 
 were cotton, breadstuffs, provisions, tobacco, mineral oils, and 
 wood. 
 
 But, since a direct comparison is in practice made between 
 prices here and prices in England (for example), in order to 
 determine whether the trade can be a profitable one, we con- 
 stantly hear it said that we can not send goods abroad because 
 our labor is so dear. It need scarcely be observed that we do 
 not hear this from those engaged in any of the extractive in- 
 dustries just mentioned as furnishing large exports, which are 
 admittedly very productive ; it is generally heard in regard to 
 certain kinds of manufactured goods. The difficulty arises 
 not with regard to articles in which we have the greatest ad- 
 vantage in productiveness, but those in which we have a less 
 advantage. If the majority of occupations are so productive 
 as to assure a generally high reward to labor and capital 
 throughout the country, these less advantageously situated in- 
 dustries — not being so productive as others (either from lack 
 of skill or good management, or high cost of machinery and 
 materials, or peculiarities of climate, or heavy taxation) — can 
 not pay the usual high reward to labor, and at the same time 
 get for the capitalist the same high reward he can everywhere 
 else receive at home. For, at a price low enough to warrant an 
 exportation, the quantity made by a given amount of labor and 
 
456 EXCHANGE. 
 
 capital does not yield a total value so great as is given in the 
 majority of other occupations to the same amount of labor and 
 capital, and out of which the usual high wages and profits can 
 be paid. The less productiveness of an industry, compared with 
 other industries in the same country, then, is the real cause which 
 prevents it from competing with foreign countries consistently 
 with receiving the ordinary rate of profit. It is the high rate 
 of profits as well as the high rate of wages common in the 
 country which prevents selling abroad. It is absurd to say 
 that it is only high wages : it is just as much high profits. 
 Of course, if the less productive industries wish to compete 
 with England, and if they pay — as we know they must — the 
 high rate of wages due to the general productiveness of our 
 country's industries, they must submit to less profits for the 
 pleasure of having that particular desire. It is not possible that 
 we should produce everything equally well here ; nor is it possi- 
 ble that England should produce everything equally well. If 
 we wish to send any goods at all to England, we must receive 
 some goods from her. In order to get the gain arising from 
 our productiveness, we must earnestly wish that England should 
 have some commodity also in which she has a comparative ad- 
 vantage, in order that any trade whatever may exist. It is not, 
 however, worth while, in my opinion, to go on in this discus- 
 sion to consider the position of those who would shut us off 
 from any and all foreign trade. 
 
 Our present high wages should be a cause for congratulation, 
 because they are due to the generally high productiveness of our 
 resources, or, in other words, due to low cost ; and it is to be 
 hoped that they may long continue high. We do not seem to 
 be in imminent danger of not having goods which we can export 
 in quantities which will buy for us all we may wish to import 
 from abroad. (See Chart No. XIII, and note the vast increase of 
 exports at the same time that wages are known to be higher in 
 this country than abroad.) So long as wages continue high, we 
 may possibly be unwilling to see gratified that false and igno- 
 rant desire which leads some people to think that we ought to 
 produce, equally well with any competitor in the world, every- 
 thing that is made. If, as was pointed out under the discus- 
 sion on cost of labor, 1 we must necessarily connect with effi- 
 ciency of labor all natural advantages under which labor works, 
 it is easy to see that high wages are entirely consistent with 
 low prices ; and that high wages do not prevent us to-day from 
 having an hitherto unequaled export trade. Even if all wages 
 and all profits were lower, it would, however, affect all indus- 
 tries alike, and some would still be more productive relatively 
 
 1 Book II, Chap. V, § 5. 
 
THE COMPETITION OF DIFFERENT COUNTRIES. 457 
 
 to others, and the same inequality would remain. If, however, 
 we learn to use our materials better, use machinery with more 
 effect on the quantity produced, adapt our industries to our 
 climate, get the raw products more cheaply, free ourselves from 
 excessive and unreasonable taxation, it would be difficult to 
 say what commodities we might not be able eventually to 
 manufacture in competition with the rest of the world. For 
 we have scarcely ever, as a country, had the advantage of such 
 conditions to aid us in our foreign trade. 
 
 Mr. Mill now goes on to consider the suggestive fact that 
 wages are higher in England than on the Continent, and yet 
 that the English have no difficulty in underselling their Conti- 
 nental rivals. 
 
 Before examining this opinion on grounds of principle, 
 it is worth while to bestow a moment's consideration upon 
 it as a question of fact. Is it true that the wages of manu- 
 facturing labor are lower in foreign countries than in Eng- 
 land, in any sense in which low wages are an advantage to 
 the capitalist ? The artisan of Ghent or Lyons may earn less 
 wages in a day, but does he not do less work ? Degrees of 
 efficiency considered, does his labor cost less to his employer ? 
 Though wages may be lower on the Continent, is not the 
 Cost of Labor, which is the real element in the competition, 
 very nearly the same ? That it is so seems the opinion of 
 competent judges, and is confirmed by the very little differ- 
 ence in the rate of profit between England and the Conti- 
 nental countries. But, if so, the opinion is absurd that Eng- 
 lish producers can be undersold by their Continental rivals 
 from this cause. It is only in America that the supposition 
 is prima facie admissible. In America wages are much 
 higher than in England, if we mean by wages the daily earn- 
 ings of a laborer; but the productive power of American 
 labor is so great — its efficiency, combined with the favorable 
 circumstances in which it is exerted, makes it worth so much 
 to the purchaser — that the Cost of Labor is lower in America 
 than in England ; as is proved by the fact that the general 
 rate of profits and of interest is very much higher. 
 
 § 3. But is it true that low wages, even in the sense of 
 low Cost of Labor, enable a country to 6ell cheaper in the 
 
458 EXCHANGE. 
 
 foreign market ? I mean, of course, low wages which are 
 common to the whole productive industry of the country. 
 
 If wages, in any of the departments of industry which 
 supply exports, are kept, artificially or by some accidental 
 cause, below the general rate of wages in the country, this 
 is a real advantage in the foreign market. It lessens the 
 comparative cost of production of those articles in relation 
 to others, and has the same effect as if their production re- 
 quired so much less labor. Take, for instance, the case of 
 the United States in respect to certain commodities. In that 
 country tobacco and cotton, two great articles of export, are 
 produced by slave-labor, while food and manufactures gen- 
 erally are produced by free laborers, who either work on 
 their own account or are paid by wages. In spite of the 
 inferior efficiency of slave-labor, there can be no reasonable 
 doubt that, in a country where the wages of free labor are 
 so high, the work executed by slaves is a better bargain to 
 the capitalist. To whatever extent it is so, this smaller cost 
 of labor, being not general, but limited to those employ- 
 ments, is just as much a cause of cheapness in the products, 
 both in the home and in the foreign market, as if they had 
 been made by a less quantity of labor. If the slaves in the 
 Southern States were emancipated, and their wages rose to 
 the general level of the earnings of free labor in America, 
 that country might be obliged to erase some of the slave- 
 grown articles from the Catalogue of its exports, and would 
 certainly be unable to sell any of them in the foreign market 
 at the present price. Their cheapness is partly an artificial 
 cheapness, which may be compared to that produced by a 
 bounty on production or on exportation ; or, considering the 
 means by which it is obtained, an apter comparison would be 
 with the cheapness of stolen goods. 
 
 How far Mr. Mill was in error may be seen by Chart No. 
 XV, which shows the enormous increase of cotton produc- 
 tion under the regime of free labor as compared with that 
 of slave-labor in the United States. The abolition of slavery 
 has been an economic gain to the South. Moreover, the ex- 
 ports of raw cotton have increased from 644,327,921 pounds in 
 
THE COMPETITION OF DIFFERENT COUNTrdER. 
 
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460 EXCHANGE. 
 
 1869, to 2,288,075,062 pounds in 1888 ; while for correspond- 
 ing years the exports of tobacco increased from 181,527,630 to 
 235,628,360 pounds. In other words, exports of tobacco were 
 increased by 30 per cent, and those of raw cotton by no less 
 than 255 per cent. Besides, the prices of cotton and tobacco 
 are no higher now than before 1850. 
 
 An advantage of a similar economical, though of a very 
 different moral character, is that possessed by domestic manu- 
 factures ; fabrics produced in the leisure hours of f amilies 
 partially occupied in other pursuits, who, not depending for 
 subsistence on the produce of the manufacture, can afford to 
 sell it at any price, however low, for which they think it 
 worth while to take the trouble of producing. The work- 
 man of Zurich is to-day a manufacturer, to-morrow again an 
 agriculturist, and changes his occupations with the seasons in 
 a continual round. Manufacturing industry and tillage ad- 
 vance hand in hand, in inseparable alliance, and in this union 
 of the two occupations the secret may be found why the 
 simple and unlearned Swiss manufacturer can always go on 
 competing and increasing in prosperity in the face of those 
 extensive establishments fitted out with great economic and 
 (what is still more important) intellectual resources. 
 
 In the case of these domestic manufactures, the compara- 
 tive cost of production, on which the interchange between 
 countries depends, is much lower than in proportion to the 
 quantity of labor employed. The work-people, looking to 
 the earnings of their loom for a part only, if for any part, 
 of their actual maintenance, can afford to work for a less re- 
 muneration than the lowest rate of wages which can perma- 
 nently exist in the employments by which the laborer has to 
 support the whole expense of a family. "Working, as they 
 do, not for an employer but for themselves, they may be 
 said to carry on the manufacture at no cost at all, except the 
 small expense of a loom and of the material ; and the limit 
 of possible cheapness is not the necessity of living by their 
 trade, but that of earning enough by the work to make that 
 social employment of their leisure hours not disagreeable. 
 
 §4. These two cases, of slave-labor and of domestic 
 
THE COMPETITION OF DIFFERENT COUNTRIES. 461 
 
 manufactures, exemplify the conditions under which low- 
 wages enable a country to sell its commodities cheaper in 
 foreign markets, and consequently to undersell its rivals, or 
 to avoid being undersold by them. But no such advantage 
 is conferred by low wages when common to all branches of 
 industry. General low wages never caused any country to 
 undersell its rivals, nor did general high wages ever hinder 
 it from doing so. 
 
 To demonstrate this, we must turn to an elementary 
 principle which was discussed in a former chapter. 1 Gen- 
 eral low wages do not cause low prices, nor high wages high 
 prices, within the country itself. General prices are not 
 raised by a rise of wages, any more than they would be 
 raised by an increase of the quantity of labor required in 
 all production. Expenses which affect all commodities equal- 
 ly have no influence on prices. If the maker of broadcloth 
 or cutlery, and nobody else, had to pay higher wages, the 
 price of his commodity would rise, just as it would if he had 
 to employ more labor; because otherwise he would gain less 
 profit than other producers, and nobody would engage in the 
 employment. But if everybody has to pay higher wages, 
 or everybody to employ more labor, the loss must be submit- 
 ted to ; as it affects everybody alike, no one can hope to get 
 rid of it by a change of employment; each, therefore, re- 
 signs himself to a diminution of profits, and prices remain 
 as they were. In like manner, general low wages, or a gen- 
 eral increase in the productiveness of labor, does not make 
 prices low, but profits high. If wages fall (meaning here 
 by wages the cost of labor), why, on that account, should the 
 producer lower his price? He will be forced, it may be 
 said, by the competition of other capitalists who will crowd 
 into his employment. But other capitalists are also paying 
 V>wer wages, and by entering into competition with him 
 they would gain nothing but what they are gaining already. 
 The rate, then, at which labor is paid, as well as the quantity 
 
 1 Book II, Chap. II, § 8. 
 
462 EXCHANGE. 
 
 of it which is employed, affects neither the value nor the 
 price of the commodity produced, except in so far as it is 
 peculiar to that commodity, and not common to commodities 
 generally. 
 
 However, without there being any change in the produc- 
 tiveness of any industry, if the price of the article should rise, 
 for instance, from an increased demand, that would make the 
 total value arising from the products of the industry larger in 
 its purchasing power, and so there would he a larger sum to 
 he divided among labor and capital. If there be free compe- 
 tition, more capital would move into this one industry under 
 the hope of larger profits, and so wages would rise. There- 
 fore, it is possible that high wages and high prices may go to- 
 gether, but not as cause and effect. In fact, the change in 
 price generally precedes the change in wages. On the other 
 hand, while low wages are not the cause of low prices nor 
 high wages of high prices, yet the two may be found together, 
 as both due to a common cause, viz., the small or great value 
 of the total product. 1 
 
 Since low wages are not a cause of low prices in the 
 country itself, so neither do they cause it to offer its com- 
 modities in foreign markets at a lower price. It is quite 
 true that, if the cost of labor is lower in America than in 
 England, America could sell her cottons to Cuba at a lower 
 price than England, and still gain as high a profit as the 
 English manufacturer. But it is not with the profit of the 
 English manufacturer that the American cotton-spinner will 
 make his comparison ; it is with the profits of other Ameri- 
 can capitalists. These enjoy, in common with himself, the 
 benefit of a low cost of labor, and have accordingly a high 
 rate of profit. This high profit the cotton-spinner must also 
 have : he will not content himself with the English profit. 
 It is true he may go on for a time at that lower rate, rather 
 than change his employment ; and a trade may be carried 
 on, sometimes for a long period, at a much lower profit than 
 that for which it would have been originally engaged in. 
 Countries which have a low cost of labor and high profits do 
 not for that reason undersell others, but they do oppose a 
 
 1 Cf. Cairnes, " Leading Principles," p. 209. 
 
THE COMPETITION OF DIFFERENT COUNTRIES. 463 
 
 more obstinate resistance to being undersold, because the pro- 
 ducers can often submit to a diminution of profit without 
 being unable to live, and even to thrive, by their business. 
 But this is all which their advantage does for them ; and in 
 this resistance they will not long persevere when a change 
 of times which may give them equal profits with the rest of 
 their countrymen has become manifestly hopeless. 
 
 § 5. It is worth while also to notice a third class of small, 
 but in this case mostly independent communities, which have 
 supported and enriched themselves almost without any pro- 
 ductions of their own (except ships and marine equipments), 
 by a mere carrying-trade, and commerce of entrepot ; by buy- 
 ing the produce of one country, to sell it at a profit in an- 
 other. Such were Yenice and the Hanse Towns. 
 
 When the Venetians became the agents of the general 
 commerce of Southern Europe, they had scarcely any com- 
 petitors : the thing would not have been done at all without 
 them, and there was really no limit to their profits except 
 the limit to what the ignorant feudal nobility could and 
 would give for the unknown luxuries then first presented to 
 their sight. At a later period competition arose, and the 
 profit of this operation, like that of others, became amenable 
 to natural laws. The carrying-trade was taken up by Hol- 
 land, a country with productions of its own and a large ac- 
 cumulated capital. The other nations of Europe also had 
 now capital to spare, and were capable of conducting their 
 foreign trade for themselves : but Holland, having, from the 
 variety of circumstances, a lower rate of profit at home, could 
 afford to carry for other countries at a smaller advance on 
 the orginal cost of the goods than would have been required 
 by their own capitalists ; and Holland, therefore, engrossed 
 the greatest part of the carrying-trade of all those countries 
 which did not keep it to themselves by navigation laws, 1 con- 
 structed, like those of England, for the express purpose. 
 
 1 For a brief bibliography on our own Navigation Laws and the Shipping 
 Question, see Appendix L 
 
4-64: EXCHANGE. 
 
 In the United States, early in the century, a retaliatory 
 policy against England gave us a body of navigation laws 
 copied after the mediaeval statutes of England and the Conti- 
 nent, which still remain on the statute-book. They do not 
 permit an American to buy a vessel abroad and sail it under 
 our flag without paying enormous duties ; a provision which 
 is intended to foster ship-building in the United States. Even 
 with this legislation, ships, as a fact, are not built here for 
 the foreign trade ; and our ship - builders practically supply 
 the coasting-trade only (which is not open to foreigners). The 
 ability to buy ships anywhere, and enter them to registry under 
 our flag free of duty, is what is meant by the demand for 
 " free ships." This, however, has to do with ship-building. But 
 ship-owning or ship-sailing, is quite distinct from it. The 
 ability to get as great a return from capital and labor invested 
 in a ship as from other occupations open to Americans is another 
 thing. Even if we had " free ships," the higher returns in other 
 industries in our country, particularly as regards profits, might 
 cause capitalists naturally to neglect a less foi? a more pro- 
 ductive business. In 1884 Congress has very properly taken 
 away many vexatious restrictions upon ships, which diminished 
 the returns from ship-sailing, and it remains to be seen whether 
 we can thereby regain any of our foreign carrying-trade. At 
 present we have a very small tonnage even in that part of the 
 shipping engaged in carrying our own goods. 
 
CHAPTER XXI. 
 
 OF DISTRIBUTION, AS AFFECTED BY EXCHANGE. 
 
 § 1. The division of the produce among the three classes, 
 laborers, capitalists, and landlords, when considered without 
 any reference to exchange, appeared to depend on certain 
 general laws. It is fit that we should now consider whether 
 these same laws still operate, when the distribution takes 
 place through the complex mechanism of exchange and 
 money ; or whether the properties of the mechanism inter- 
 fere with and modify the presiding principles. 
 
 The primary division of the produce of human exertion 
 and frugality is, as we have seen, into three shares — wages, 
 profits, and rents ; and these shares are portioned out, to the 
 persons entitled to them, in the form of money and by a 
 process of exchange ; or, rather, the capitalist, with whom in 
 the usual arrangements of society the produce remains, pays 
 in money, to the other two sharers, the market value of their 
 labor and land. If we examine on what the pecuniary value 
 of labor and the pecuniary value of the use of land depend, 
 we shall find that it is on the very same causes by which we 
 found that wages and rent would be regulated if there were 
 no money and no exchange of commodities. 
 
 It is evident, in the first place, that the law of wages is 
 not affected by the existence or non-existence of exchange or 
 money. "Wages depend on the ratio between population and 
 capital [taking into account the nature of a country's indus- 
 tries] ; and would do so if all the capital in the world were 
 the property of one association, or if the capitalists among 
 30 
 
466 EXCHANGE. 
 
 whom it is shared maintained each an establishment for the 
 production of every article consumed in the community, ex- 
 change of commodities having no existence. As the ratio 
 between capital and population, everywhere but in new col- 
 onies, depends on the strength of the checks by which the 
 too rapid increase of population is restrained, it may be said, 
 popularly speaking, that wages depend on the checks to popu- 
 lation ; that, when the check is not death by starvation or 
 disease, wages depend on the prudence of the laboring peo- 
 ple ; and that wages in any country are habitually at the 
 lowest rate to which in that country the laborer will suffer 
 them to be depressed rather than put a restraint upon multi- 
 plication. 
 
 What is here meant, however, by wages, is the laborer's 
 real scale of comfort ; the quantity he obtains of the things 
 which nature or habit has made necessary or agreeable to 
 him : wages in the sense in which they are of importance to 
 the receiver. In the sense in which they are of importance 
 to the payer, they do not depend exclusively on such simple 
 principles. Wages in the first sense, the wages on which the 
 laborer's comfort depends, we will call real wages, or wages 
 in kind. Wages in the second sense we may be permitted 
 to call, for the present, money wages ; assuming, as it is al- 
 lowable to do, that money remains for the time an invariable 
 standard, no alteration taking place in the conditions under 
 which the circulating medium itself is produced or obtained. 
 If money itself undergoes no variation in cost, the money 
 price of labor is an exact measure of the cost of labor, and 
 may be made use of as a convenient symbol to express it 
 [if the efficiency of labor also be supposed to remain the 
 same]. 
 
 The money wages of labor are a compound result of two 
 elements : first, real wages, or wages in kind, or, in other 
 words, the quantity which the laborer obtains of the ordi- 
 nary articles of consumption ; and, secondly, the money prices 
 of those articles. In all old countries — all countries in which 
 the increase of population is in any degree checked by the 
 
DISTRIBUTION, AS AFFECTED BY EXCHANGE. 4.QI 
 
 difficulty of obtaining subsistence — the habitual money price 
 of labor is that which will just enable the laborers, one 
 with another, to purchase the commodities without which 
 they either can not or will not keep up the population at its 
 customary rate of increase. Their standard of comfort being 
 given (and by the standard of comfort in a laboring class is 
 meant that rather than forego which they will abstain from 
 multiplication), money wages depend on the money price, 
 and therefore on the cost of production, of the various arti- 
 cles which the laborers habitually consume : because, if their 
 wages can not procure them a given quantity of these, their 
 increase will slacken and their wages rise. Of these articles, 
 food and other agricultural produce are so much the princi- 
 pal as to leave little influence to anything else. 
 
 It is at this point that we are enabled to invoke the aid 
 of the principles which have been laid down in this Third 
 Part. The cost of production of food and agricultural prod- 
 uce has been analyzed in a preceding chapter. It depends 
 on the productiveness of the least fertile land, or of the least 
 productively employed portion of capital, which the neces- 
 sities of society have as yet put in requisition for agricultural 
 purposes. The cost of production of the food grown in 
 these least advantageous circumstances determines, as we 
 have seen, the exchange value and money price of the whole. 
 In any given state, therefore, of the laborers' habits, their 
 money wages depend on the productiveness of the least fer- 
 tile land, or least productive agricultural capital : on the point 
 which cultivation has reached in its downward progress — in 
 its encroachments on the barren lands, and its gradually in- 
 creased strain upon the powers of the more fertile. Now, 
 the force which urges cultivation in this downward course 
 is the increase of people ; while the counter-force, which 
 checks the descent, is the improvement of agricultural sci- 
 ence and practice, enabling the same soil to yield to the same 
 labor more ample returns. The costliness of the most costly 
 part of the produce of cultivation is an exact expression of 
 the state, at any given moment, of the race which popula- 
 
468 EXCHANGE. 
 
 tion and agricultural skill are always running against each 
 
 other. 
 
 It will be noted, in this exposition, that Mr. Mill has in view 
 an old country, with a population so dense that numbers are 
 always pressing close upon subsistence ; that their wages are 
 so low as to give the laborers little more than the necessary 
 wants of life. That these are not the economic conditions in 
 the United States goes without saying. First of all, the mar- 
 gin of cultivation is bigh : only soils of high productiveness 
 are in cultivation, and the returns to labor and capital are, con- 
 sequently, very large. High wages are found together with 
 low prices of food. The existing population is not so numer- 
 ous as to require for the cultivation of food any but lands of a 
 very high grade of fertility. The ability to command a high 
 reward for labor (as compared with European industries), owing 
 to the general prevalence of high returns in the United States, 
 has resulted in the establishment of a higher standard for our 
 laborers. The standard being relatively so high, there is no 
 intimate connection between the increase of population here 
 and the price of food ; for, as a rule, wages are not so low that 
 any change in the cost of producing food would require checks 
 upon population. There is a considerable margin above neces- 
 saries, in the laborer's real wages in the United States, which 
 may go for comforts, decencies, and amusements. 
 
 § 2. The degree of productiveness of this extreme margin 
 is an index to the existing state of the distribution of the 
 produce among the three classes, of laborers, capitalists, and 
 landlords. When the demand of an increasing population 
 for more food can not be satisfied without extending cultiva- 
 tion to less fertile land, or incurring additional outlay, with 
 a less proportional return, on land already in cultivation, it is 
 a necessary condition of this increase of agricultural produce 
 that the value and price of that produce must first rise. The 
 price of food will always on the average be such that the 
 worst land, and the least productive installment of the capital 
 employed on the better lands, shall just replace the expenses 
 with the ordinary profit. If the least favored land and capi- 
 tal just do thus much, all other land and capital will yield an 
 extra profit, equal to the proceeds of the extra produce due 
 to their superior productiveness ; and this extra profit be- 
 comes, by competition, the prize of the landlords. Exchange 
 
DISTRIBUTION, AS AFFECTED BY EXCHANGE. 4.Q9 
 
 and money, therefore, make no difference in the law of rent : 
 it is the same as we originally * found it. Rent is the extra 
 return made to agricultural capital when employed with pe- 
 culiar advantages ; the exact equivalent of what those advan- 
 tages enable the producers to economize in the cost of pro- 
 duction : the value and price of the produce being regulated 
 by the cost of production to those producers who have no 
 advantages ; by the return to that portion of agricultural 
 capital the circumstances of which are the least favorable. 
 
 § 3. Wages and rent being thus regulated by the same 
 principles when paid in money, as they would be if appor- 
 tioned in kind, it follows that. Profits are so likewise. For 
 the surplus, after replacing wages and paying rent, consti- 
 tutes Profits. 
 
 We found, in the last chapter of the Second Book, that 
 the advances of the capitalist, when analyzed to their ulti- 
 mate elements, consist either in the purchase or maintenance 
 of labor, or in the profits of former capitalists ; and that, 
 therefore, profits in the last resort depend upon the Cost of 
 Labor, falling as that rises, and rising as it falls. Let us en- 
 deavor to trace more minutely the operation of this law. 
 
 There are two modes in which the Cost of Labor, which 
 is correctly represented (money being supposed invariable as 
 well as efficiency) by the money wages of the laborer, may 
 be increased. The laborer may obtain greater comforts ; 
 wages in kind — real wages — may rise. Or the progress of 
 population may force down cultivation to inferior soils and 
 more costly processes ; thus raising the cost of production, 
 the value, and the price, of the chief articles of the laborer's 
 consumption. On either of these suppositions the rate of 
 profit will fall. 
 
 If the laborer obtains more abundant commodities only 
 by reason of their greater cheapness, if he obtains a greater 
 quantity, but not on the whole a greater cost, real wages 
 will be increased, but not money wages, and there will be 
 
 1 Book III, Chap. Ill, § 1. 
 
470 EXCHANGE. 
 
 nothing to affect the rate of profit. But, if he obtains a 
 greater quantity of commodities of which the cost of pro- 
 duction is not lowered, he obtains a greater cost ; his money 
 wages are higher. The expense of these increased money 
 wages falls wholly on the capitalist. There are no conceiv- 
 able means by which he can shake it off. It may be said — 
 it used formerly to be said — that he will get rid of it by rais- 
 ing his price. But this opinion we have already, and more 
 than once, fully refuted. 1 
 
 The doctrine, indeed, that a rise of wages causes an 
 equivalent rise of prices, is, as we formerly observed, self- 
 contradictory : for, if it did so, it would not be a rise of 
 wages; the laborer would get no more of any commodity 
 than he had before, let his money wages rise ever so much ; 
 a rise of real wages would be an impossibility. This being 
 equally contrary to reason and to fact, it is evident that a rise 
 of money wages does not raise prices ; that high wages are 
 not a cause of high prices. A rise of general wages falls on 
 profits. There is no possible alternative. 
 
 Having disposed of the case in which the increase of 
 money wages, and of the Cost of Labor, arises from the 
 laborer's obtaining more ample wages in kind, let us now 
 suppose it to arise from the increased cost of production of 
 the things which he consumes, owing to an increase of popu- 
 lation unaccompanied by an equivalent increase of agricult- 
 ural skill. The augmented supply required by the popula- 
 tion would not be obtained, unless the price of food rose 
 sufficiently to remunerate the farmer for the increased cost 
 of production. The farmer, however, in this case sustains a 
 twofold disadvantage. He has to carry on his cultivation 
 under less favorable conditions of productiveness than before. 
 For this, as it is a disadvantage belonging to him only as a 
 farmer, and not shared by other employers, he will, on the 
 general principles of value, be compensated by a rise of the 
 price of his commodity; indeed, until this rise has taken 
 
 1 Supra, Book III, Chap. II, § 2, and Chap. XX, § 4. 
 
DISTRIBUTION, AS AFFECTED BY EXCHANGE. 471 
 
 place, he will not bring to market the required increase of 
 produce. But this very rise of price involves him in another 
 necessity, for which he is not compensated. He must pay 
 higher money wages to his laborers [if they retain the same 
 quantity of real wages]. This necessity, being common to 
 him with all other capitalists, forms no ground for a rise of 
 price. The price will rise, until it has placed him in as good 
 a situation, in respect of profits, as other employers of labor ; 
 it will rise so as to indemnify him for the increased labor 
 which he must now employ in order to produce a given 
 quantity of food ; but the increased wages of that labor are 
 a burden common to all, and for which no one can be indem- 
 nified. It will be paid wholly from profits. 
 
 Thus we see that increased wages, when common to all 
 descriptions of productive laborers, and when really repre- 
 senting a greater Cost of Labor, are always and necessarily 
 at the expense of profits. And by reversing the cases, we 
 should find in like manner that diminished wages, when 
 representing a really diminished Cost of Labor, are equiva- 
 lent to a rise of profits. But the opposition of pecuniary 
 interest thus indicated between the class of capitalists and 
 that of laborers is to a great extent only apparent. Real 
 wages are a very different thing from the Cost of Labor, and 
 are generally highest at the times and places where, from 
 the easy terms on which the land yields all the produce as 
 yet required from it, the value and price of food being low, 
 the cost of labor to the employer, notwithstanding its ample 
 remuneration, is comparatively cheap, and the rate of profit 
 consequently high, as at present in the United States. "We 
 thus obtain a full confirmation of our original theorem that 
 Profits depend on the Cost of Labor : or, to express the 
 meaning with still greater accuracy, the rate of profit and 
 the cost of labor vary inversely as one another, and are joint 
 effects of the same agencies or causes. 
 
BOOK IT. 
 
 INFLUENCE OF THE PROGRESS OF SOCIETY 
 ON PRODUCTION AND DISTRIBUTION. 
 
BOOK IV. 
 
 INFLUENCE OF THE PROGRESS OF SOCIETY ON PRO- 
 DUCTION AND DISTRIBUTION. 
 
 CHAPTEE I. 
 
 INFLUENCE OF THE PROGRESS OF INDUSTRY AND POPULATION 
 ON VALUES AND PRICES. 
 
 § 1. In the leading countries of the world, and in all others 
 as they come within the influence of those leading countries, 
 there is at least one progressive movement which continues 
 with little interruption from year to year and from genera- 
 tion to generation — a progress in wealth ; an advancement 
 in what is called material prosperity. All the nations which 
 we are accustomed to call civilized increase gradually in pro- 
 duction and in population : and there is no reason to doubt 
 that not only these nations will for some time continue so to 
 increase, but that most of the other nations of the world, 
 including some not yet founded, will successively enter upon 
 the same career. It will, therefore, be our first object to 
 examine the nature and consequences of this progressive 
 change, the elements which constitute it, and the effects it 
 produces on the various economical facts of which we have 
 been tracing the laws, and especially on wages, profits, rents, 
 values, and prices. 
 
 Of the features which characterize this progressive eco- 
 nomical movement of civilized nations, that which first ex- 
 cites attention, through its intimate connection with the phe- 
 nomena of Production, is the perpetual, and, so far as human 
 foresight can extend (1), the unlimited, growth of man's 
 
476 INFLUENCE OF THE PROGEESS OF SOCIETY. 
 
 power over nature. Our knowledge of the properties and 
 laws of physical objects shows no sign of approaching its 
 ultimate boundaries : it is advancing more rapidly, and in a 
 greater number of directions at once, than in any previous 
 ao-e or generation, and affording such frequent glimpses of 
 unexplored fields beyond as to justify the belief that our 
 acquaintance with nature is still almost in its infancy. 
 
 Another change, which has always hitherto characterized, 
 and will assuredly continue to characterize, the progress of 
 civilized society, is (2) a continual increase of the security of 
 person and property. Of this increased security, one of the 
 most unfailing effects is a great increase both of production 
 and of accumulation. Industry and frugality can not exist 
 where there is not a preponderant probability that those who 
 labor and spare will be permitted to enjoy. 
 
 One of the changes which most infallibly attend the 
 progress of modern society is, (3) an improvement in the 
 business capacities of the general mass of mankind. I do 
 not mean that the practical sagacity of an individual human 
 being is greater than formerly. What is lost in the separate 
 efficiency of each is far more than made up by the greater 
 capacity of united action. Works of all sorts, impracticable 
 to the savage or the half-civilized, are daily accomplished by 
 civilized nations, not by any greatness of faculties in the 
 actual agents, but through the fact that each is able to rely 
 with certainty on the others for the portion of the work 
 which they respectively undertake. The peculiar character- 
 istic, in short, of civilized beings, is the capacity of co-opera- 
 tion ; and this, like other faculties, tends to improve by prac- 
 tice, and becomes capable of assuming a constantly wider 
 sphere of action. 
 
 [This progress affords] space and scope for an indefinite 
 increase of capital and production, and for the increase of 
 population which is its ordinary accompaniment. That the 
 growth of population will overpass the increase of produc- 
 tion, there is not much reason to apprehend. It is, however, 
 quite possible that there might be a great progress in indus- 
 
INFLUENCE ON VALUES AND PRICES. 477 
 
 trial improvement, and in the signs of what is commonly- 
 called national prosperity ; a great increase of aggregate 
 wealth, and even, in some respects, a better distribution of 
 it ; that not only the rich might grow richer, but many of 
 the poor might grow rich, that the intermediate classes might 
 become more numerous and powerful, and the means of en- 
 joyable existence be more and more largely diffused, while 
 yet the great class at the base of the whole might increase in 
 numbers only, and not in comfort nor in cultivation. We 
 must, therefore, in considering the effects of the progress of 
 industry, admit as a supposition, however greatly we depre- 
 cate as a fact, an increase of population as long-continued, as 
 indefinite, and possibly even as rapid, as the increase of pro- 
 duction and accumulation. 
 
 § 2. The changes which the progress of industry causes 
 or presupposes in the circumstances of production are neces- 
 sarily attended with changes in the values of commodities. 
 
 The permanent values of all things which are neither 
 under a natural nor under an artificial monopoly depend, as 
 we have seen, on their cost of production. (1.) But the in- 
 creasing power which mankind are constantly acquiring over 
 nature increases more and more the efficiency of human ex- 
 ertion, or, in other words, diminishes cost of production. All 
 inventions by which a greater quantity of any commodity 
 can be produced with the same labor, or the same quantity 
 with less labor, or which abridge the process, so that the 
 capital employed needs not be advanced for so long a time, 
 lessen the cost of production of the commodity. As, how- 
 ever, value is relative, if inventions and improvements in 
 production were made in all commodities, and all in the same 
 degree, there would be no alteration in values. 
 
 As for prices, in these circumstances they would be af- 
 fected or not, according as the improvements in production 
 did or did not extend to the precious metals. If the mate- 
 rials of money were an exception to the general diminution 
 of cost of production, the values of all other things would fall 
 in relation to money — that is, there would be a fall of gen- 
 
478 
 
 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 eral prices throughout the world. But if money, like other 
 things, and in the same degree as other things, were obtained 
 in greater abundance and cheapness, prices would be no more 
 affected than values would. 
 
 As regards the precious metals, it is to be said that since 
 1850 there has been a vast increase in their amount, and prob- 
 ably in greater proportion than the need arising from increased 
 transactions. This is certainly true of silver ; and it is admitted 
 to be true of gold as late as about 1865. It has been asserted 
 by Mr. Goschen that since then, especially since 1873, gold has 
 not existed in a quantity that would permit it to keep its 
 former proportions to commodities, and that it had appreciated. 
 An appreciation, of course, would show itself in lower gold 
 prices. On the other hand, gold has, as I think, not appreciated. 
 Prices, even in the collapse of credit after the panic of 1873 
 down to 1879, were not quite so low as in 1845-1850, as is seen 
 by the following table taken from the London " Economist " — 
 2,200 indicating the price of a given number of articles in 1845- 
 1850, as the basis of the table with which the prices of other 
 years are compared : 
 
 TEAK. 
 
 Index numbers. 
 
 TEAE. 
 
 Index numbers. 
 
 1845-1850 
 
 1857, July 1 
 
 1858, January 1. . . 
 1865 
 
 2,200 
 2,996 
 2,612 
 3,575 
 3,564 
 3,024 
 2,682 
 2,666 
 2,689 
 2,590 
 2,835 
 
 a 
 .2 
 
 Oi 
 
 u - 
 
 1873 
 
 f 1874 
 
 1875 
 
 1876 
 
 1877 
 
 1878 
 
 J879 
 
 ""1880 
 
 2,947 
 2,891 
 2,778 
 2,711 
 2,723 
 2 529 
 
 1866 
 
 1867 
 
 1868 
 
 2,202 
 
 1869 
 
 2,538 
 2,376 
 2,435 
 
 1870 
 
 1881 
 
 1882 
 
 1871 
 
 1872 
 
 
 1883 
 
 2,343 
 
 But the progress of society, particularly in the direction of 
 improved and cheapened processes of manufacturing, has vastly 
 lowered the cost of a great number of articles of common con- 
 sumption. The process has been already seen in the diminished 
 charge for railway transportation (see Chart No. V). More- 
 over, the years of a depression are exactly those in which there 
 is always a forced economy, and is generally a period in which 
 cheapening goes on at its best. Hence, if prices have had a 
 tendency to fall, owing to the lowered cost of production con- 
 sequent on improvements — and if they are not, as a rule, lower 
 than in 1850 — it shows that they are still supported by the 
 high tide of the great gold production of this century. And 
 
INFLUENCE ON VALUES AND PRICES. 479 
 
 even the access to more fertile land in the world has not tended 
 to cause an increase in the prices of agricultural products such as 
 would offset the fall of manufactured goods. That is, the fact 
 that prices have not fallen as much as might be expected, indi- 
 cates that the gold has prevented the lower costs due to the 
 progress of industry from being fully seen. 
 
 Improvements in production are not the only circum- 
 stance accompanying the progress of industry, which tends 
 to diminish the cost of producing, or at least of obtaining, 
 commodities. (2.) Another circumstance is the increase of 
 intercourse between different parts of the world. As com- 
 merce extends, and the ignorant attempts to restrain it by 
 tariffs become obsolete, commodities tend more and more to 
 be produced in the places in which their production can be 
 carried on at the least expense of labor and capital to man- 
 kind. (3.) Much will also depend on the increasing migra- 
 tion of labor and capital to unoccupied parts of the earth, of 
 which the soil, climate, and situation are found, by the ample 
 means of exploration now possessed, to promise not only a 
 large return to industry, but great facilities of producing 
 commodities suited to the markets of old countries. Much 
 as the collective industry of the earth is likely to be increased 
 in efficiency by the extension of science and of the industrial 
 arts, a still more active source of increased cheapness of pro- 
 duction will be found, probably, for some time to come, in 
 the gradually unfolding consequences of Free Trade, and in 
 the increasing scale on which Emigration and Colonization 
 will be carried on. 
 
 From the causes now enumerated, unless counteracted by 
 others, the progress of things enables a country to obtain, at 
 less and less of real cost, not only its own productions but 
 those of foreign countries. Indeed, whatever diminishes the 
 cost of its own productions, when of an exportable character, 
 enables it, as we have already seen, to obtain its imports at 
 less real cost. 
 
 § 3. Are no causes of an opposite character, brought into 
 operation by the same progress, sufficient in some cases not 
 only to neutralize but to overcome the former, and convert 
 
480 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 the descending movement of cost of production into an 
 ascending movement ? "We are already aware that there are 
 such causes, and that, in the case of the most important 
 classes of commodities, food, and materials, there is a tend- 
 ency diametrically opposite to that of which we have been 
 speaking. The cost of production of these commodities 
 tends to increase. 
 
 This is not a property inherent in the commodities them- 
 selves. If population were stationary, and the produce of 
 the earth never needed to be augmented in quantity, there 
 would be no cause for greater cost of production. 1 The only 
 products of industry which, if population did not increase, 
 would be liable to a real increase of cost of production, are 
 those which, depending on a material which is not renewed, 
 are either wholly or partially exhaustible, such as coal, and 
 most if not all metals ; for even iron, the most abundant as 
 well as most useful of metallic products, which forms an in- 
 gredient of most minerals and of almost all rocks, is suscepti- 
 ble of exhaustion so far as regards its richest and most tract- 
 able ores. 
 
 When, however, population increases, as it has never yet 
 failed to do, then comes into effect that fundamental law 
 of production from the soil on which we have so frequently 
 had occasion to expatiate, the law that increased labor, in 
 any given state of agricultural skill, is attended with a less 
 than proportional increase of produce. The cost of produc 
 tion of the fruits of the earth increases, cceteris paribus, with 
 every increase of the demand. 
 
 Mr. Cairnes has made some essential contributions to the 
 discussion of changes of value arising from the progress of 
 society : a " When a colony establishes itself in a new country, 
 the course of its industrial development naturally follows the 
 character of the opportunities offered to industrial enterprise 
 
 1 Henry George, however, asserts that, " irrespective of the increase of 
 population, the effect of improvements in methods of production and exchange 
 is to increase rent " (" Progress and Poverty," p. 220). 
 
 2 " Leading Principles," Part T, chap. v. 
 
INFLUENCE ON VALUES AND PRICES. 481 
 
 by the environment. These will, of course, vary a good deal, 
 according to the part of the world in which the new society 
 happens to be placed ; but, speaking broadly, they will be such 
 as to draw the bulk of the industrial activity of the new people 
 into some one or more of those branches of industry which 
 have been conveniently designated 'extractive.' Agriculture, 
 pastoral and mining pursuits, and the cutting of lumber, are 
 among the principal of such industries." To these pursuits 
 apply " that law of Political Economy, or, more properly, of 
 physical nature, which Mr. Mill has rightly characterized as 
 the most important proposition in economic science — the law, 
 as he phrased it, of ' diminishing productiveness.' It may be 
 thus briefly stated : In any given state of the arts of produc- 
 tion, the returns to human industry employed upon natural 
 agents will, up to a certain point, be the maximum which 
 those natural agents, cultivated with the degree of skill 
 brought to bear upon them, are capable of yielding ; but, after 
 this point has been passed, though an increased application of 
 labor and capital will obtain an increased return, it will not 
 obtain a proportionally increased return ; on the contrary, 
 every further increase of outlay — always assuming that the 
 skill employed in applying it continues the same as before — 
 will be attended with a return constantly diminishing. . . . 
 What I am now concerned to show is the manner in which, 
 with the progress of society, the law in question affects the 
 course of normal ' values in all commodities coming under its 
 influence. 
 
 " The class of commodities in the production of which the 
 facilities possessed by new communities, as compared with old, 
 attain their greatest height, are those of which timber and 
 meat may be taken as the type, and comprises such articles as 
 wool, game, furs, hides, horns, pitch, resin, etc. The circum- 
 stance which most powerfully affects the course of values in 
 the products of extractive industry, and in the commodities 
 just referred to among the rest, is the degree in which they 
 admit of being transported from place to place — that is to say, 
 their portableness — depending, as it does, partly on their dura- 
 bility and partly on their bulk." It is found that, taking tim- 
 ber and meat as a type — one possessing portableness in a vastly 
 greater degree than the other — in the early settlement of a 
 new country, the portable article, like timber, at once rises in 
 price "to a level lower than that prevailing in old countries only 
 by the cost of transport " ; on the other hand, perishable articles 
 like meat are " confined for a market, if not to the immediate 
 
 1 For the distinction between normal and market values, see supra, Book 
 III, Chap. II, § 4, and p. 269. 
 31 
 
482 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 locality where it is produced, at least to the bordering coun- 
 tries ; and, being raised in new countries at very low cost, their 
 value during the early stages of their growth is necessarily 
 low. But, as population advances, and agriculture encroaches 
 on the natural pasture-lands originally available for the rearing 
 of cattle, still more as it becomes necessary to cultivate land 
 for the purpose of pasture, the cost of meat constantly rises." 
 As population increases there will be an increased demand for 
 dairy-products, eggs, small fruits, fresh vegetables, milk, etc., 
 and thereby it becomes more profitable to employ land near 
 populous centers for such perishable products than for the 
 products of large farming. Almost every one, who knows the 
 high prices of butter, eggs, and vegetables in large cities as 
 compared with their prices in country districts, is familiar with 
 the phenomena which illustrate this principle. Moreover, as a 
 denser population settles on our Western prairies, now given 
 over to ranches and vast pasturing-grounds for cattle — since 
 cattle in general require a large extent of land — the cost of 
 meat will rise. The prices of perishable articles, therefore, 
 will rise without any limit except that set by increasing num- 
 bers, and can not be kept down by the force of competition 
 from other distant places, as is the case with such easily trans- 
 portable things as timber and wool. What has been said of the 
 transportableness of meat, however, is to be modified some- 
 what by the introduction of improved processes of transport- 
 ing meat in refrigerator-cars ; but there still exist commodities 
 of which meat was only taken as a type. 
 
 No tendency of a like kind exists with respect to manu- 
 factured articles. The tendency is in the contrary direction. 
 The larger the scale on which manufacturing operations are 
 carried on, the more cheaply they can in general be per- 
 formed. As manufactures, however, depend for their mate- 
 rials either upon agriculture, or mining, or the spontaneous 
 produce of the earth, manufacturing industry is subject, in 
 respect of one of its essentials, to the same law as agriculture. 
 But the crude material generally forms so small a portion of 
 the total cost that any tendency which may exist to a pro- 
 gressive increase in that single item is much overbalanced 
 by the diminution continually taking place in all the other 
 elements ; to which diminution it is impossible at present to 
 assign any limit. 
 
 It follows that the exchange values of manufactured arti- 
 
INFLUENCE ON VALUES AND PRICES. 483 
 
 cles, compared with the products of agriculture and of 
 mines, have, as population and industry advance, a certain 
 and decided tendency to fall. Money being a product of 
 mines, it may also be laid down as a rule that manufactured 
 articles tend, as society advances, to fall in money price. 
 The industrial history of modern nations, especially during 
 the last hundred years, fully bears out this assertion. 
 
 In regard to manufactures, as opposed to raw products, it 
 is to be remarked " that, as the course of price in the field of 
 raw products is, on the whole, upward, so in that of manufact- 
 ured goods the course is, not less strikingly, in the opposite 
 direction. The reasons of this are exceedingly plain. In the 
 first place, division of laboi — the first and most powerful of 
 all cheapeners of production, but for which there is in extract- 
 ive industry but very limited scope — finds in manufacturing 
 industry an almost unbounded range for its application ; and, 
 secondly, it is in manufacturing industry also that machinery \ 
 the other great cheapener of production, admits of being em- 
 ployed on the largest scale, and has, in fact, been employed 
 with the most signal success. It follows at once from these 
 facts, taken in connection with the further fact that industrial 
 invention does not take place per saltum, but gradually — one 
 invention ever treading on the heels of another — and that its 
 advance seems to be subject to no limitation ; it follows, I say, 
 from these considerations, that that portion of the cost of manu- 
 factured goods which properly belongs to the manufacturing 
 process must, with the progress of society, undergo constant 
 diminution. ... In all the great branches of manufacturing 
 industry the portion of the cost incurred in the manufactur- 
 ing process bears in general a large proportion to that repre- 
 sented by the raw material, while the influence of industrial 
 invention, in reducing this portion of the cost, is, as every one 
 knows, great and unremitting in its action." 
 
 As has been said, " the two great cheapeners of production 
 are division of labor and machinery, and the degree in which 
 these admit of being applied to manufacture is mainiy depend- 
 ent upon the scale on which the manufacturing process is car- 
 ried on. Those manufactures, therefore, that are produced 
 upon a large scale are the sort of manufactures in which we 
 may expect the greatest reduction in cost ; in which, there- 
 fore, the fall in price, with the progress of society, will be 
 most marked. But the manufactures which are produced upon 
 the largest scale are those for which there exists the largest 
 demand — that is to say, are those which enter most extensively 
 into the consumption of the great mass of people. They are 
 
484 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 also, I may add, those in which a fall in price is apt to stimu- 
 late a great increase of demand. All the common kinds of 
 clothing, furniture, and utensils fall within the scope of this 
 remark ; and it is in these, rather than in the commodities con- 
 sumed exclusively or mainly by the richer classes, that we should, 
 accordingly, expect to find the greatest marvels of cheapen- 
 ing." But the articles of common consumption are those in 
 which "the amount of manufacture bestowed upon them bears 
 a smaller proportion to the raw material than is the case with 
 the more elaborate manufactures. Such coarser manufactures, 
 therefore, would feel the effects of the advancing cost of the 
 raw material more sensibly than the refined sorts. Neverthe- 
 less, it can not be supposed to compensate the advantages due 
 to the causes I have pointed out which fall to the share of the 
 commoner sorts. It is in this class of goods that the most re- 
 markable reductions in price have been accomplished in the 
 past, and it is in them, probably, that we shall witness in the 
 future the greatest results of the same kind." 
 
 § 4. Whether agricultural produce increases in absolute 
 as well as comparative cost of production depends on the 
 conflict of the two antagonist agencies — increase of popula- 
 tion and improvement in agricultural skill. In some, per- 
 haps in most, states of society (looking at the whole surface 
 of the earth), both agricultural skill and population are either 
 stationary, or increase very slowly, and the cost of produc- 
 tion of food, therefore, is nearly stationary. In a society 
 which is advancing in wealth, population generally increases 
 faster than agricultural skill, and food consequently tends to 
 become more costly ; but there are times when a strong im- 
 pulse sets in toward agricultural improvement. Such an im- 
 pulse has shown itself in Great Britain during the last fifteen 
 or twenty years [before 1847]. In England and Scotland 
 agricultural skill has of late increased considerably faster 
 than population, insomuch that food and other agricultural 
 produce, notwithstanding the increase of people, can be 
 grown at less cost than they were thirty years ago ; and the 
 abolition of the Corn Laws has given an additional stimulus 
 to the spirit of improvement. In some other countries, and 
 particularly in France, the improvement of agriculture gains 
 ground still more decidedly upon population, because though 
 
INFLUENCE ON VALUES AND PRICES. 485 
 
 agriculture, except in a few provinces, advances slowly, 
 population advances still more slowly, and even with increas- 
 ing slowness, its growth being kept down, not by poverty, 
 which is diminishing, but by prudence. 
 
 Moreover, the cheapened cost of transportation has admit- 
 ted to England and the Continent the wheat supplies of our 
 Western States at a low price even after having been carried to 
 transatlantic markets. New methods of getting food-supplies 
 from foreign countries act equally with improvements at home. 
 
 § 5. Thus far, of the effect of the progress of society on 
 the permanent or average values and prices of commodities. 
 It remains to be considered in what manner the same prog- 
 ress affects their fluctuations. Concerning the answer to this 
 question there can be no doubt. It tends in a very high de- 
 gree to diminish them. 
 
 In poor and backward societies, as in the East, and in 
 Europe during the middle ages, extraordinary differences in 
 the price of the same commodity might exist in places not 
 very distant from each other, because the want of roads and 
 canals, the imperfection of marine navigation, and the inse- 
 curity of communications generally, prevented things from 
 being transported from the places where they were cheap 
 to those where they were dear. The things most liable to 
 fluctuations in value, those directly influenced by the sea- 
 sons, and especially food, were seldom carried to any great 
 distances. In most years, accordingly, there was, in some 
 part or other of any large country, a real dearth ; while a 
 deficiency at all considerable, extending to the whole world, 
 is [now] a thing almost unknown. In modern times, there- 
 fore, there is only dearth, where there formerly would have 
 been famine, and sufficiency everywhere when anciently 
 there would have been scarcity in some places and superfluity 
 in others. 
 
 The same change has taken place with respect to all other 
 articles of commerce. The safety and cheapness of commu- 
 nications, which enable a deficiency in one place to be sup- 
 plied from the surplus of another, at a moderate or even a 
 
486 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 small advance on the ordinary price, render the fluctuations 
 of prices much less extreme than formerly. This effect is 
 much promoted by the existence of large capitals, belonging 
 to what are called speculative merchants, whose business it 
 is to buy goods in order to resell them at a profit. These 
 dealers naturally buying things when they are cheapest, and 
 storing them up to be brought again into the market when 
 the price has become ususually high, the tendency of their 
 operations is to equalize price, or at least to moderate its ine- 
 qualities. The prices of things are neither so much depressed 
 at one time, nor so much raised at another, as they would be 
 if speculative dealers did not exist. 
 
 Mr. Mill uses the term "speculative" in a different sense 
 from that which is customary in this country. Merchants who 
 buy outright and store up grain are not speculators in the 
 sense in which the word is used with us ; but those gamblers 
 who purchase, " for future delivery," grain which they never 
 see, and which they sell in the same way, are here known as 
 speculators. 
 
 It appears, then, that the fluctuations of values and prices 
 arising from variations of supply, or from alterations in real 
 (as distinguished from speculative) demand, may be expected 
 to become more moderate as society advances. With regard 
 to those which arise from miscalculation, and especially from 
 the alternations of undue expansion and excessive contrac- 
 tion of credit, which occupy so conspicuous a place among 
 commercial phenomena, the same thing can not be affirmed 
 with equal confidence. Such vicissitudes, beginning with 
 irrational speculation and ending with a commercial crisis, 
 have not hitherto become either less frequent or less violent 
 with the growth of capital and extension of industry. Rather 
 they may be said to have become more so, in consequence, 
 as is often said, of increased competition, but, as I prefer to 
 say, of a lower rate of profits and interest, which makes capi- 
 talists dissatisfied with the ordinary course of safe mercantile 
 gains. The connection of this low rate of profit with the 
 advance of population and accumulation is one of the points 
 to be illustrated in the ensuing chapters. 
 
INFLUENCE ON VALUES AND PRICES. 487 
 
 Mr. Cairnes also adds some investigations as to the fluctua- 
 tions of value : " Hitherto I have examined the derivative laws 
 of value in so far only as they are exemplified in the move- 
 ments of normal prices. It will be interesting now to consider 
 whether it is possible to discover in the movements of market 
 prices any corresponding phenomena. 
 
 " Taking manufactures first, it is evident at once that, as 
 regards conditions of protection, the circumstances of the case 
 are such as to secure, in general, (1) great rapidity and great 
 certainty in bringing commodities to market. A deal table 
 may be made in a few hours, a piece of cloth in a few weeks, 
 and a moderate-sized house in a month or little more. Tables, 
 cloth, and houses may be produced with certainty in any quan- 
 tity required. It results from this that it is scarcely possible 
 that, under ordinary circumstances, the selling price of a prod- 
 uct of manufacture should for any long time much exceed its 
 normal price. (2.) The nature of manufactures is, in general, 
 such as to fit them admirably for distant transport. Any con- 
 siderable elevation of price, therefore, is pretty certain to at- 
 tract supplies from remote sources. (3.) Further, considered in 
 their relation to human needs, I think it may be said of manu- 
 factured goods, that either the need for them is not very urgent, 
 or, where it happens to be so, substitutes . . . may easily be 
 found. From all these circumstances it results that an advance 
 in the price . . . either attracts supplies, or deters purchasers, 
 . . . preventing any great departure from the usual terms of 
 the market. 
 
 " Turning now to the products of agricultural, pastoral, or, 
 more generally, ' extractive ' industry, we find the circum- 
 stances under which this class of goods is brought to market 
 in all respects extremely different from those which we have 
 just examined, and such as to permit a much wider margin of 
 deviation for the market from the normal price. Here the 
 period of production is longer, the result of the process much 
 more uncertain, the commodity at once more perishable and 
 less portable, and human requirements in relation to it are mostly 
 of a more urgent kind : (1.) The shortest period within which 
 additions can be made to the supply of food and raw material 
 of the vegetable kind is in general a year, and, if the com- 
 modity be of animal origin, the minimum is considerably larger. 
 (2.) Again, the farmer may decide upon the breadth of ground 
 to be devoted to a particular crop, or upon the number of cat- 
 tle he will maintain ; but the actual returns will vary accord- 
 ing to the season, and may prove far in excess or far in defect 
 of his calculations. These circumstances all present obstacles 
 to the adjustment of supply and demand, and consequently 
 tend to produce frequent and extensive deviations of the mar- 
 
488 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 ket from the normal price. Nor are the other conditions of the 
 case such as to neutralize the influence of such disturbing agen- 
 cies. (3.) The nature, indeed, of some of the principal agri- 
 cultural products fits them sufficiently well for distant trans- 
 port, and so far tends to correct fluctuations of price. But, on 
 the other hand, (4) the relation of these products to human 
 wants is such as greatly to enhance that tendency to violent 
 fluctuation incident to the conditions of their production. More 
 especially is this the case with the commodity, whatever it may 
 be, which forms the staple food of a people. For observe the 
 peculiar nature of human requirements with reference to such 
 a commodity. They are of this kind, that, given the number of 
 a population, the quantity of the staple food required is nearly 
 a fixed quantity, and this almost irrespective of price. Except 
 among the poorest, increased cheapness will not stimulate a 
 larger consumption ; while, on the other hand, all, at any cost 
 within the range of their means, will obtain their usual supply. 
 The consequence is that, when even a moderate deficiency or 
 excess occurs in the supply of the staple food of a people, in 
 the one case (a), the competition of consumers for their usual 
 quantum of food rapidly forces up the price far out of propor- 
 tion to the diminution in the supply ; in the other (b), no one 
 being inclined to increase his usual consumption, the competi- 
 tion of sellers, in their eagerness to find a market for the super- 
 fluous portion of the supply, is equally powerful to depress it." 
 
CHAPTER II. 
 
 INFLUENCE OF THE PROGRESS OF INDUSTRY AND POPULATION 
 ON RENTS, PROFITS, AND WAGES. 
 
 § 1. Continuing the inquiry into the nature of the eco- 
 nomical changes taking place in a society which is in a state 
 of industrial progress, we shall next consider what is the 
 effect of that progress on the distribution of the produce 
 among the various classes who share in it. We may confine 
 our attention to the system of distribution which is the most 
 complex, and which virtually includes all others — that in 
 which the produce of manufactures is shared between two 
 classes, laborers and capitalists, and the produce of agricult- 
 ure among three, laborers, capitalists, and landlords. 
 
 The characteristic features of what is commonly meant 
 by industrial progress resolve themselves mainly into three, 
 increase of capital, increase of population, and improvements 
 in production ; understanding the last expression, in its 
 widest sense, to include the process of procuring commodi- 
 ties from a distance, as well as that of producing them. It 
 will be convenient to set out by considering each of the three 
 causes, as operating separately ; after which we can suppose 
 them combined in any manner we think fit. 1 
 
 § 2. For the sake of clearness we will form two general 
 groups of these causes : 
 
 A. The Influence of Population and Capital (Improve- 
 ments remaining stationary). 
 
 B. The Influence of Improvements {Population and Capi- 
 tal remaining stationary). 
 
 1 Before beginning this discussion the reader is advised to review the rela- 
 tion of profits to cost of labor, and the dependence of the latter on its three 
 factors, Book II, Chap. V, § 5. 
 
490 INFLUENCE OF THE PROGEESS OF SOCIETY. 
 
 We will first take up A, and under this division make for 
 convenience two separate suppositions : 
 
 I. The first is that, while Population is advancing, Capital 
 is stationary. By this means we can study separately the opera- 
 tion of one of the factors of societary progress, Population, and 
 see its influence on rents, profits, and wages. There heing only 
 the same given quantity of wealth in the form of capital to 
 be now distributed among more laborers (1), real wages must 
 fall ; whereupon, if the same capital purchases more labor, and 
 obtains 'more produce (2), profits rise. Now, if the laborers 
 were so well off before as to suffer the reduction of wages to 
 take place not in their food, but in their other comforts, then, 
 if each laborer uses as much food as before, and if, as by the 
 supposition, there are more laborers, an increased quantity of 
 food will be required from the soil. This supply can be pro- 
 duced only at a greater cost, and, as inferior soils are called 
 into cultivation (3), rents will rise. This last action (3), how- 
 ever, will have an influence on the rise of profits (2). For it 
 was only by a reduction of real wages that profits rose ; but if 
 the cost of food, that is, the real wages, have since risen, then 
 one of the elements entering into cost of labor has risen, and 
 in so far will offset the fall of real wages ; so that profits will 
 not gain so much as if rents had not risen. The result of this 
 first supposition, then, is, that the landlord is the chief gainer : 
 
 I. (1.) Wages fall. 
 
 (2.) Profits rise (less if rents rise). 
 Rents rise. 
 
 n 
 
 II. We will now take up the second supposition under A, 
 that while Capital is advancing Population remains stationary. 
 Then, of course (1), wages will rise ; and, as there is no im- 
 provement to cheapen the cost of their real wages, there will 
 be an increase in cost of labor to the capitalist, and (2) prof- 
 its will fall. If, now, the laborers, being better off, demand 
 more food, the new food would cost more, as the margin of 
 cultivation was pushed down, and (3) rents would inevitably 
 rise. But not only have the laborers received more real wages, 
 but since that change the cost, as just described, of these real 
 wages has increased. Therefore (2), profits would fall still 
 more than by the rise of real wages. In this supposition, con- 
 sequently, while the laborer gains, so does the landlord : 
 
 II. (1.) Wages rise. 
 
 (2.) Profits fall (more if rents rise). 
 (3.) Rents rise. 
 
 A. It is easy for us now to take into our view the total 
 effects under A, and see what the combined action of I and 
 
PROGRESS OF INDUSTRY AND POPULATION. 491 
 
 II would be. That is, if both Capital and Population (im- 
 provements remaining stationary) increase, what will be the 
 effect on Wages, Profits, and Rent ? Of course, we must sup- 
 pose that Capital and Population just keep pace with each 
 other ; and in that case (1) real wages remain the same, each 
 laborer receiving the same quantity and same quality of com- 
 modities as before. Hence, if each laborer receives the same 
 quantity as before, and there are many more laborers, there 
 will be an increased demand put upon the soil for food, poorer 
 soils will be cultivated, and the cost of the products will rise. 
 So (3) rents rise. But if each laborer receives the same quan- 
 tity of real wages as before, and the cost of them has risen, as 
 just explained, an increased cost of labor will result which 
 must come out of profits. (2) Profits will fall. So that the 
 results of A upon distribution, taken separately from B, are 
 that the owner of capital loses ; but the owner of land again 
 gains. 
 
 A. (1.) Wages the same. 
 
 (2.) Profits fall. 
 
 (3.) Rents rise. 
 
 § 3. Now, let us go back to our first general group of 
 causes, B — an advance in the arts of pi*oduction (while capital 
 and population remain stationary). We can now study by 
 themselves the effect of improvements on wages, profits, and 
 rent. The general effects arising from the extended intro- 
 duction of machinery into agriculture and manufactures, the 
 lowered cost of transportation by steam, have been to lessen 
 the value of articles consumed chiefly by the laboring-classes. 
 For the sake of clearness, imagine that the irmprovement comes 
 suddenly. The first effect will be to lower the value and price 
 of articles entering into the real wages of the laborers ; and, if 
 those consist mostly of food, thei'e will be a rise in the margin 
 of cultivation and a fall in rents (3). It has been previously 
 shown ' that improvements retard, or put back, the law of 
 diminishing returns from land (or in manufactures compensate 
 for it), and so lower rents. The poorest soil cultivated is now of 
 a better grade than before, and the produce is yielded at a less 
 cost and value ; so that the land with which the best grades are 
 compared, to determine the rent, is not separated from the best 
 grades by so wide a gap. It would at first blush seem, then, 
 that the interests of the landlord were antagonistic to improve- 
 ments, since they lower rents ; but, in practice, it is not so, as 
 we shall soon see. 
 
 We have seen that improvements cheapen the price of arti- 
 
 1 Book I, Chap. IX. 
 
492 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 cles entering into the real wages of the laborer. Having had 
 a given sum as money wages before the change, then, when 
 the sudden change of improvements came, it lowered prices to 
 the laborer, and the same money wages bought more (1) real 
 wages. If nothing more happened, we could see that improve- 
 ments raised real wages — without lowering (2) profits (because 
 cost of labor remains the same, since the lowered cost of the 
 articles consumed was exactly in proportion to the increase of 
 real wages). And, if the laborers chose to retain this higher 
 standard, this would be the situation. Sadly enough, however, 
 in practice they are apt to be satisfied with the old standard ; 
 and the amount of real wages to give the old standard of liv- 
 ing can be had now for less money wages. While only the 
 same number, without any increase, can live at the new (higher) 
 standard, a larger number can live at the old (lower) standard. 
 In short, the obstacles to an increase of population will be re- 
 moved by the possession of higher money wages. After a 
 generation, it is very probable that a larger number of laborers 
 will be in existence living at the same (or possibly a slightly 
 higher) standard of real wages, and money wages will have 
 fallen. 
 
 Now we can understand better than before what would be 
 the practical result of the causes under B. (3.) Rent has fall- 
 en ; money wages have fallen (even if (2) real wages have not) ; 
 and, since real wages have not fallen in the proportion that 
 their cost has been reduced, (2) profits will have risen. The 
 general result of the causes under B alone, acting as just de- 
 scribed, will then be : 
 
 B. (1.) Real wages remain the same ; money wages less. 
 (2.) Profits rise. 
 (3.) Rents fall. 
 
 § 4. We have considered, on the one hand, under A, the 
 manner in which the distribution of the produce into rent, 
 profits, and wages is affected by the ordinary increase of Popu- 
 lation and Capital ; and on the other, under B, how it is affected 
 by improvements in production, and more especially in agricult- 
 ure, as follows : 
 
 A. (1.) Wages the same. B. (1.) Real wages the same, money 
 
 wages less. 
 (2.) Profits fall. (2.) Profits rise. 
 
 (3.) Rents rise. (3.) Rents fall. 
 
 The effects are clearly contrasted. Under A, we see a tend- 
 ency to a rise of rents (3), an increased cost of labor, and a fall 
 of profits (2) ; under B, a fall of rents (3), a diminished cost of 
 labor, and a rise of profits (2). We have, therefore, analyzed 
 
PROGRESS OF INDUSTRY AND POPULATION. 493 
 
 the forces belonging to the progress of industry, and found two 
 distinct and antagonistic forces, working against each other. 
 If, at any period, improvements (B) advance faster than popu- 
 lation and capital (A), rent and money wages will tend down- 
 ward and profits upward. If, on the other hand, population 
 advances faster than improvements (B) either the laborers will 
 submit to a reduction in the quantity or quality of their food, 
 or, if not, rent and money wages will progressively rise, and 
 profits will fall. 
 
 § 5. This, however, is not the final and practical result. 
 We have hitherto supposed that improvements, B, come sud- 
 denly. In point of fact, agricultural skill is slowly diffused, 
 and inventions and discoveries are, in general, only occasional, 
 not continuous in their action, as is the increase of capital and 
 population. Inasmuch as it seldom happens that improvement 
 has so much the start of population and capital as actually to 
 lower rent, or raise the rate of profits, population almost every- 
 where " treads close on the heels of agricultural improvement," 
 and effaces its effects as fast as they are produced. 
 
 The reason why agricultural improvement seldom lowers 
 rent is, that it seldom cheapens food, but only prevents it 
 from growing dearer ; and seldom, if ever, throws land out 
 of cultivation, but only enables worse and worse land to be 
 taken in for the supply of an increasing demand. What is 
 sometimes called the natural state of a country which is but 
 half cultivated, namely, that the land is highly productive, 
 and food obtained in great abundance by little labor, is only 
 true of unoccupied countries colonized by a civilized people. 
 In the United States the worst land in cultivation is of a high 
 quality (except sometimes in the immediate vicinity of mar- 
 kets or means of conveyance, where a bad quality is compen- 
 sated by a good situation) ; and even if no further improve- 
 ments were made in agriculture or locomotion, cultivation 
 would have many steps yet to descend, before the increase 
 of population and capital would be brought to a stand ; but 
 in Europe five hundred years ago, though so thinly peopled 
 in comparison to the present population, it is probable that 
 the worst land under the plow was, from the rude state of 
 agriculture, quite as unproductive as the worst land now cul- 
 tivated, and that cultivation had approached as near to the 
 ultimate limit of profitable tillage in those times as in the 
 
494 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 present. What the agricultural improvements since made 
 have really done is, by increasing the capacity of production 
 of land in general, to enable tillage to extend downward to 
 a much worse natural quality of land than the worst which 
 at that time would have admitted of cultivation by a capital- 
 ist for profit ; thus rendering a much greater increase of capi- 
 tal and population possible, and removing always a little and 
 a little further oft' the barrier which restrains them ; popu- 
 lation meanwhile always pressing so hard against the barrier 
 that there is never any visible margin left for it to seize, 
 every inch of ground made vacant for it by improvement 
 being at once filled up by its advancing columns. Agricult- 
 ural improvement may thus be considered to be not so much 
 a counter-force conflicting with increase of population as a 
 partial relaxation of the bonds which confine that increase. 
 
 Now, since improvements enable a much poorer quality of 
 land to be ultimately cultivated, under the constant pressure of 
 the increase of population and capital, improvements enable 
 rent (3) in the end to rise gradually to a much higher limit than 
 it could otherwise have attained. 
 
 If a great agricultural improvement were suddenly introduced, 
 it might throw back rent for a considerable space, leaving it 
 to regain its lost ground by the progress of population and 
 capital, and afterward to go on further. But taking place, 
 as such improvement always does, very gradually, it causes no 
 retrograde movement of either rent or cultivation ; it merely 
 enables the one to go on rising, and the other extending, long 
 after they must otherwise have stopped. 
 
 Inasmuch as, in point of fact, B never gets the start of A, 
 but follows along with A, the general result will be that which 
 we found true under A— a rise of rents (3), and increased cost 
 of labor to the capitalist, arising from an increased cost of labor- 
 ers' subsistence and a fall of profits (2). The effect of a more 
 rapid advance of improvements, at any one time, will tem- 
 porarily better the_ condition of the laborers and also raise 
 profits ; but, if it is followed immediately by an increase of 
 population, the land -owners will reap the benefits of the im- 
 provement in the rise of rent. The final result, then, is as fol- 
 lows : 
 
PROGRESS OF INDUSTRY AND POPULATION. 495 
 
 (1.) Real wages, probably higher. 
 
 (2.) Profits fall. 
 
 (3.) Rents rise. 
 
 It is possible that a different combination from the above 
 may sometimes occur in the causes which underlie the progress 
 of society : (1.) There may be a period in which capital is in- 
 creasing more rapidly than population, and when there seems 
 to be an era of industrial improvements also. Then both wages 
 and profits will be high, and it will be a period of general 
 satisfaction. (2.) If capital goes on increasing, but improve- 
 ments are few, wages will rise ; but profits must suff er a fall. In 
 this country, where population has not yet increased so as to 
 press seriously against subsistence, and where capital increases 
 with incredible swiftness, these cases are often exemplified. 
 The extraordinary resources of the newer States have permitted 
 an unlimited increase of population, and capital has found no 
 difficulty in finding an investment. But yet those States which 
 have been burdened with the disabilities of the old slave regime 
 are far behind the others. The changes in the rank of the 
 States, in respect of population, at each decade, as seen in Chart 
 No. XVI, are suggestive. 
 
496 
 
 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 Hrl»M'*100t»C(IO>Ort5<eO'*ia»^00»OHSM^O 
 
CHAPTEE III. 
 
 OF THE TENDENCY OF PROFITS TO A MINIMUM. 
 
 § 1. The tendency of profits to fall as society advances, 
 which has been brought to notice in the preceding chapter, 
 was early recognized by writers on industry and commerce ; 
 but, the laws which govern profits not being then understood, 
 the phenomenon was ascribed to a wrong cause. Adam 
 Smith considered profits to be determined by what he called 
 the competition of capital. In Adam Smith's opinion, the 
 manner in which the competition of capital lowers profits is by 
 lowering prices ; that being usually the mode in which an 
 increased investment of capital in any particular trade lowers 
 the profits of that trade. But, if this was his meaning, he 
 overlooked the circumstance that the fall of price, which, if 
 confined to one commodity, really does lower the profits of 
 the producer, ceases to have that effect as soon as it extends to 
 all commodities ; because, when all things have fallen, noth- 
 ing has really fallen, except nominally ; and, even computed in 
 money, the expenses of every producer have diminished as 
 much as his returns. Unless, indeed, labor be the one com- 
 modity which has not fallen in money price, when all other 
 things have : if so, what has really taken place is a rise of 
 wages ; and it is that, and not the fall of prices, which has 
 lowered the profits of capital. There is another thing which 
 escaped the notice of Adam Smith ; that the supposed uni- 
 versal fall of prices, through increased competition of capitals, 
 is a thing which can not take place. Prices are not deter- 
 mined by the competition of the sellers only, but also by that 
 of the buyers ; by demand as well as supply. The demand 
 which affects money prices consists of all the money in the 
 
 32 
 
498 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 hands of the community destined to be laid out in commodi- 
 ties ; and, as long as the proportion of this to the commodities 
 is not diminished, there is no fall of general prices. Now, 
 howsoever capital may increase, and give rise to an increased 
 production of commodities, a full share of the capital will be 
 drawn to the business of producing or importing money, and 
 the quantity of money will be augmented in an equal ratio 
 with the quantity of commodities. For, if this were not the 
 case, and if money, therefore, were, as the theory supposes, 
 perpetually acquiring increased purchasing power, those who 
 produced or imported it would obtain constantly increasing 
 profits ; and this could not happen without attracting labor 
 and capital to that occupation from other employments. If 
 a general fall of prices and increased value of money were 
 really to occur, it could only be as a consequence of increased 
 cost of production, from the gradual exhaustion of the mines. 
 
 It is not tenable, therefore, in theory, that the increase 
 of capital produces, or tends to produce, a general decline of 
 money prices. Neither is it true that any general decline of 
 prices, as capital increased, has manifested itself in fact. The 
 only things observed to fall in price with the progress of soci- 
 ety are those in which there have been improvements in pro- 
 duction, greater than have taken place in the production of the 
 precious metals ; as, for example, all spun and woven fabrics. 
 Other things, again, instead of falling, have risen in price, 
 because their cost of production, compared with that of gold 
 and silver, has increased. Among these are all kinds of food, 
 comparison being made with a much earlier period of history. 
 The doctrine, therefore, that competition of capital lowers 
 profits by lowering prices, is incorrect in fact, as well as 
 unsound in principle. 
 
 Mr. Wakefield, in his Commentary on Adam Smith, and 
 his important writings on Colonization, takes a much clearer 
 view of the subject, and arrives, through a substantially cor- 
 rect series of deductions, at practical conclusions which ap- 
 pear to me just and important. Mr. Wakefield's explanation 
 of the fall of profits is briefly this : Production is limited not 
 
TENDENCY OF PROFITS TO A MINIMUM. 499 
 
 solely by the quantity of capital and of labor, but also by the 
 extent of the " field of employment." The field of employ- 
 ment for capital is twofold : the land of the country, and the 
 capacity of foreign markets to take its manufactured com- 
 modities. On a limited extent of land, only a limited quantity 
 of capital can find employment at a profit. As the quantity 
 of capital approaches this limit, profit falls ; when the limit 
 is attained, profit is annihilated, and can only be restored 
 through an extension of the field of employment, either by 
 the acquisition of fertile land, or by opening new markets in 
 foreign countries, from which food and materials can be pur- 
 chased with the products of domestic capital. 1 
 
 § 2. There is at every time and place some particular rate 
 of profit which is the lowest that will induce the people of 
 that country and time to accumulate savings, and to employ 
 those savings productively. This minimum rate of profit 
 varies according to circumstances. It depends on two ele- 
 ments : One is the strength of the effective desire of accumu- 
 lation ; the comparative estimate, made by the people of that 
 place and era, of future interests when weighed against pres- 
 ent. This element chiefly affects the inclination to save. 
 The other element, which affects not so much the willingness 
 to save as the disposition to employ savings productively, is 
 the degree of security of capital engaged in industrial opera- 
 tions. In employing any funds which a person may possess 
 as capital on his own account, or in lending it to others to be 
 so employed, there is always some additional risk over and 
 above that incurred by keeping it idle in his own custody. 
 This extra risk is great in proportion as the general state of 
 society is insecure : it may be equivalent to twenty, thirty, 
 or fifty per cent, or to no more than one or two ; something 
 however, it must always be ; and for this the expectation of 
 profit must be sufficient to compensate. 
 
 1 Mr. Mill commended, as the most scientific treatment of the subject with 
 which he had met, an " Essay on the Effects of Machinery," by William Ellis, 
 "Westminster Review," January, 1826. 
 
500 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 There would be adequate motives for a certain amount 
 of saving, even if capital yielded no profit. There would be 
 an inducement to lay by in good times a provision for bad ; 
 to reserve something for sickness and infirmity, or as a 
 means of leisure and independence in the latter part of life, 
 or a help to children in the outset of it. Savings, however, 
 which have only these ends in view, have not much tendency 
 to increase the amount of capital permanently in existence. 
 The savings by which an addition is made to the national 
 capital usually emanate from the desire of persons to im- 
 prove what is termed their condition in life, or to make a 
 provision for children or others, independent of their exer- 
 tions. Now, to the strength of these inclinations it makes a 
 very material difference how much of the desired object can 
 be effected by a given amount and duration of self-denial ; 
 which again depends on the rate of profit. And there is in 
 every country some rate of profit below which persons in 
 general will not find sufficient motive to save for the mere 
 purpose of growing richer, or of leaving others better off 
 than themselves. Any accumulation, therefore, by which the 
 general capital is increased, requires as its necessary condition 
 a certain rate of profit — a rate which an average person will 
 deem to be an equivalent for abstinence, with the addition 
 of a sufficient insurance against risk. 
 
 I have already observed that this minimum rate of profit, 
 less than which is not consistent with the further increase of 
 capital, is lower in some states of society than in others ; and 
 I may add that the kind of social progress characteristic of 
 our present civilization tends to diminish it: (1.) In the 
 first place, one of the acknowledged effects of that progress 
 is an increase of general security. Destruction by wars and 
 spoliation by private or public violence are less and less to 
 be apprehended. The risks attending the investment of sav- 
 ings in productive employment require, therefore, a smaller 
 rate of profit to compensate for them than was required a 
 century ago, and will hereafter require less than at present. 
 (2.) In the second place, it is also one of the consequences of 
 
TENDENCY OF PROFITS TO A MINIMUM. 501 
 
 civilization that mankind become less the slaves of the mo- 
 ment, and more habituated to carry their desires and pur- 
 poses forward into a distant future. This increase of provi- 
 dence is a natural result of the increased assurance with 
 which futurity can be looked forward to ; and is, besides, 
 favored by most of the influences which an industrial life 
 exercises over the passions and inclinations of human nature. 
 In proportion as life has fewer vicissitudes, as habits become 
 more fixed, and great prizes are less and less to be hoped for 
 by any other means than long perseverance, mankind become 
 more willing to sacrifice present indulgence for future ob- 
 jects. But, though the minimum rate of profit is liable to 
 vary, and though to specify exactly what it is would at any 
 given time be impossible, such a minimum always exists ; 
 and, whether it be high or low, when once it is reached, no 
 further increase of capital can for the present take place. 
 The country has then attained what is known to political 
 economists under the name of the stationary state. 
 
 § 3. We now arrive at the fundamental proposition 
 which this chapter is intended to inculcate. When a coun- 
 try has long possessed a large production, and a large net 
 income to make savings from, and when, therefore, the 
 means have long existed of making a great annual addition 
 to capital (the country not having, like America, a large re- 
 serve of fertile land still unused), it is one of the character- 
 istics of such a country that the rate of profit is habitually 
 within, as it were, a hand's breadth of the minimum, and 
 the country, therefore, on the very verge of the stationary 
 state. My meaning is, that it would require but a short time 
 to reduce profits to the minimum, if capital continued to in- 
 crease at its present rate, and no circumstances having a tend- 
 ency to raise the rate of profit occurred in the mean time. 
 
 In England, the ordinary rate of interest on government 
 securities, in which the risk is next to nothing, may be esti- 
 mated at a little more than three per cent : in all other in- 
 vestments, therefore, the interest or profit calculated upon 
 (exclusively of what is properly a remuneration for talent 
 
502 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 or exertion) must be as much more than this amount as is 
 equivalent to the degree of risk to which the capital is 
 thought to be exposed. Let us suppose that in England 
 even so small a net profit as one per cent, exclusive of insur- 
 ance against risk, would constitute a sufficient inducement 
 to save, but that less than this would not be a sufficient in- 
 ducement. I now say that the mere continuance of the 
 present annual increase of capital, if no circumstance oc- 
 curred to counteract its effect, would suffice in a small 
 number of years to reduce the rate of net profit to one per 
 cent. 
 
 To fulfill the conditions of the hypothesis, we must sup- 
 pose an entire cessation of the exportation of capital for for- 
 eign investment. We must suppose the entire savings of the 
 community to be annually invested in really productive em- 
 ployment within the country itself, and no new channels 
 opened by industrial inventions, or by a more extensive sub- 
 stitution of the best-known processes for inferior ones. 
 
 The difficulty in finding remunerative employment every 
 year for so much new capital would not consist in any want 
 of a market. If the new capital were duly shared among 
 many varieties of employment, it would raise up a demand 
 for its own produce, and there would be no cause why any 
 part of that produce should remain longer on hand than 
 formerly. What would really be, not merely difficult, but 
 impossible, would be to employ this capital without submit- 
 ting to a rapid reduction of the rate of profit. 
 
 As capital increased, population either would also in- 
 crease, or it would not. If it did not, wages would rise, and 
 a greater capital would be distributed in wages among the 
 same number of laborers. There being no more labor than 
 before, and no improvements to render the labor more effi- 
 cient, there would not be any increase of the produce ; and, 
 as the capital, however largely increased, would only obtain 
 the same gross return, the whole savings of each year would 
 be exactly so much subtracted from the profits of the next 
 and of every following year. 
 
TENDENCY OF PROFITS TO A MINIMUM. 503 
 
 This can be illustrated by supposing that the whole capi- 
 tal is handed out to the producers in a vessel which is re- 
 turned full at the end of the period of production with the 
 original outlay, plus an advance called profit. B C represents 
 the total outlay, A C the total produce, and A B the profit on 
 B C. Now, since the conditions of production remain 
 the same, the same number of laborers can produce, 
 as before, no more than A C ; even though in the 
 second year some of last year's profit, represented 
 by D B, is saved and added to the outlay by the 
 capitalist. If D C is now the outlay of capital, the 
 profit can only be A C, minus D C, or A D ; that 
 is, the profit of the second year is diminished by 
 D B, exactly the amount of savings of the year before. And 
 this would be repeated each successive year, each saving added 
 to B C being " exactly so much subtracted from the profits 
 of the next and of every following year." 
 
 It is hardly necessary to say that in such circumstances 
 profits would very soon fall to the point at which further in- 
 crease of capital would cease. An augmentation of capital, 
 much more rapid than that of population, must soon reach 
 its extreme limit, unless accompanied by increased efficiency 
 of labor (through inventions and discoveries, or improved 
 mental and physical education), or unless some of the idle 
 people, or of the unproductive laborers, became productive. 
 
 If population did increase with the increase of capital 
 and in proportion to it, the fall of profits would still be in- 
 evitable. Increased population implies increased demand 
 for agricultural produce. In the absence of industrial im- 
 provements, this demand can only be supplied at an in- 
 creased cost of production, either by cultivating worse land, 
 or by a more elaborate and costly cultivation of the land 
 already under tillage. The cost of the laborer's subsistence 
 is therefore increased, and, unless the laborer submits to a 
 deterioration of his condition, profits must fall. In an old 
 country like England, if, in addition to supposing all im- 
 provement in domestic agriculture suspended, we suppose 
 that there is no increased production in foreign countries for 
 the English market, the fall of profits would be very rapid. 
 If both these avenues to an increased supply of food were 
 
504 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 closed, and population continued to increase, as it is said to 
 do, at the rate of a thousand a day, all waste land which 
 admits of cultivation in the existing state of knowledge 
 would soon be cultivated, and the cost of production and 
 price of food would be so increased that, if the laborers re- 
 ceived the increased money wages necessary to compensate 
 for their increased expenses, profits would very soon reach 
 the minimum. The fall of profits would be retarded if 
 money wages did not rise, or rose in a less degree ; but the 
 margin which can be gained by a deteiioration of the labor- 
 ers' condition is a very narrow one : in general, they can not 
 bear much reduction ; when they can, they have also a higher 
 standard of necessary requirements, and will not. On the 
 whole, therefore, we may assume that in such a country as 
 England, if the present annual amount of savings were to 
 continue, without any of the counteracting circumstances 
 which now keep in check the natural influence of those sav- 
 ings in reducing profit, the rate of profit would speedily at- 
 tain the minimum, and all further accumulation of capital 
 would for the present cease. 
 
 Mr. Carey, on the other hand, asserts the existence of a law 
 of increasing returns from land, and that, while wages are 
 constantly increasing with the progress of society, there is a 
 diminution in the rate of profit, although the increasing returns 
 permit an increase of absolute, if not of proportional, profit. 
 That is, although wages increase more in proportion than profit, 
 there is still a larger gross amount to be divided among capi- 
 talists as profit, out of a larger product. 
 
 § 4. What, then, are these counteracting circumstances 
 which, in the existing state of things, maintain a tolerably 
 equal struggle against the downward tendency of profits, and 
 prevent the great annual savings which take place in this 
 country from depressing the rate of profit much nearer to 
 that lowest point to which it is always tending, and which, 
 left to itself, it would so promptly attain? The resisting 
 agencies are of several kinds. 
 
 First among them is the waste of capital in periods of 
 overtrading and rash speculation, and in the commercial re- 
 
TENDENCY OF PROFITS TO A MINIMUM. 505 
 
 vulsions by which such times are always followed. Mines 
 are opened, railways or bridges made, and many other works 
 of uncertain profit commenced, and in these enterprises much 
 capital is sunk which yields either no return, or none ade- 
 quate .to the outlay. Factories are built and machinery 
 erected beyond what the market requires, or can keep in 
 employment. Even if they are kept in employment, the 
 capital is no less sunk ; it has been converted from circula- 
 ting into fixed capital, and has ceased to have any influence 
 on wages or profits. Besides this, there is a great unpro- 
 ductive consumption of capital during the stagnation which 
 follows a period of general overtrading. Establishments are 
 shut up, or kept working without any profit. Such are the 
 effects of a commercial revulsion ; and that such revulsions 
 are almost periodical is a consequence of the very tendency 
 of profits which we are considering. By the time a few 
 years have passed over without a crisis, so much additional 
 capital has been accumulated that it is no longer possible to 
 invest it at the accustomed profit ; all public securities rise 
 to a high price, the rate of interest on the best mercantile 
 security falls very low, and the complaint is general among 
 persons in business that no money is to be made. But the 
 diminished scale of all safe gains inclines persons to give a 
 ready ear to any projects which hold out, though at the risk 
 of loss, the hope of a higher rate of profit ; and speculations 
 ensue, which, with the subsequent revulsions, destroy, or 
 transfer to foreigners, a considerable amount of capital, pro- 
 duce a temporary rise of interest and profit, make room for 
 fresh accumulations, and the same round is recommenced. 
 
 This, doubtless, is one considerable cause which arrests 
 profits in their descent to the minimum, by sweeping away 
 from time to time a part of the accumulated mass by which 
 they are forced down. But this is not, as might be inferred 
 from the language of some writers, the principal cause. If 
 it were, the capital of the country would not increase ; but 
 in England it does increase greatly and rapidly. This is 
 shown by the increasing productiveness of almost all taxes, 
 
506 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 by the continual growth of all the signs of national wealth, 
 and by the rapid increase of population, while the condition 
 of the laborers certainly is not on the whole declining. 1 
 
 § 5. This brings us to the second of the counter-agencies, 
 namely, improvements in production. These evidently have 
 the effect of extending what Mr. Wakefield terms the field 
 of employment, that is, they enable a greater amount of capi- 
 tal to be accumulated and employed without depressing the 
 rate of profit ; provided always that they do not raise, to a 
 proportional extent, the habits and requirements of the la- 
 borer. If the laboring-class gain the full advantage of the 
 increased cheapness, in other words, if money wages do not 
 fall, profits are not raised, nor their fall retarded. But, if the 
 laborers people up to the improvement in their condition, 
 and so relapse to their previous state, profits will rise. All 
 inventions which cheapen any of the things consumed by the 
 laborers, unless their requirements are raised in an equivalent 
 degree, in time lower money wages, and, by doing so, enable 
 a greater capital to be accumulated and employed, before 
 profits fall back to what they were previously. 
 
 Improvements which only affect things consumed exclu- 
 sively by the richer classes do not operate precisely in the 
 same manner. The cheapening of lace or velvet has no 
 effect in diminishing the cost of labor ; and no mode can be 
 pointed out in which it can raise the rate of profit, so as to 
 make room for a larger capital before the minimum is at- 
 tained. It, however, produces an effect which is virtually 
 equivalent ; it lowers, or tends to lower, the minimum itself. 
 In the first place, increased cheapness of articles of consump- 
 tion promotes the inclination to save, by affording to all con- 
 sumers a surplus which they may lay by, consistently with 
 their accustomed manner of living. In the next place, what- 
 
 1 Although their needs now attract more attention through the extension of 
 newspapers and cheap books, the condition of the laboring-class is certainly 
 better than it was fifty years ago. See Mr. Robert Giffen's " Progrees of the 
 Working-Classes in the Last Half-Century " (1884), referred to in Book IV, 
 Chap. V, § 1. 
 
TENDENCY OF PROFITS TO A MINIMUM. 507 
 
 ever enables people to live equally well on a smaller income 
 inclines them to lay by capital for a lower rate of profit. If 
 people can live on an independence of [$1,000] a year in the 
 same manner as they formerly could on one of [82,000], some 
 persons will be induced to save in hopes of the one, who 
 would have been deterred by the more remote prospect of 
 the other. All improvements, therefore, in the production 
 of almost any commodity tend in some degree to widen the 
 interval which has to be passed before arriving at the sta- 
 tionary state. 
 
 § 6. Equivalent in effect to improvements in production 
 is the acquisition of any new power of obtaining cheap com- 
 modities from foreign countries. If necessaries are cheap- 
 ened, whether they are so by improvements at home or im- 
 portation from abroad, is exactly the same thing to wages 
 and profits. Unless the laborer obtains and, by an improve- 
 ment of his habitual standard, keeps the whole benefit, the 
 cost of labor is lowered and the rate of profit raised. As 
 long as food can continue to be imported for an increasing 
 population without any diminution of cheapness, so long, the 
 declension of profits through the increase of population and 
 capital is arrested, and accumulation may go on without mak- 
 ing the rate of profit draw nearer to the minimum. And on 
 this ground it is believed by some that the repeal of the corn 
 laws has opened to [England] a long era of rapid increase of 
 capital with an undiminished rate of profit. 
 
 Before inquiring whether this expectation is reasonable, 
 one remark must be made, which is much at variance with 
 commonly received notions. Foreign trade does not neces- 
 sarily increase the field of employment for capital. "When 
 foreign trade makes room for more capital at the same 
 profit, it is by enabling the necessaries of life, or the ha- 
 bitual articles of the laborer's consumption, to be obtained 
 at smaller cost. It may do this in two ways : by the impor- 
 tation either of those commodities themselves, or of the means 
 and appliances for producing them. Cheap iron has, in a 
 certain measure, the same effect on profits and the cost of 
 
508 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 labor as cheap corn, because cheap iron makes cheap tools for 
 agriculture and cheap machinery for clothing. But a foreign 
 trade, which neither directly nor by any indirect consequence 
 increases the cheapness of anything connsumed by the labor- 
 ers, does not, any more than an invention or discovery in the 
 like case, tend to raise profits or retard their fall ; it merely 
 substitutes the production of goods for foreign markets in 
 the room of the home production of luxuries, leaving the em- 
 ployment for capital neither greater nor less than before. 
 
 It must, of course, be supposed that, with the increase of 
 capital, population also increases ; for, if it did not, the conse- 
 quent rise of wages would bring down profits, in spite of any 
 cheapness of food. Suppose, then, that the population of 
 Great Britain goes on increasing at its present rate, and de- 
 mands every year a supply of imported food considerably be- 
 yond that of the year preceding. This annual increase in the 
 food demanded from the exporting countries can only be 
 obtained either by great improvements in their agriculture, or 
 by the application of a great additional capital to the growth 
 of food. The former is likely to be a very slow process, from 
 the rudeness and ignorance of the agricultural classes in the 
 food-exporting countries of Europe, while the British colonies 
 and the United States are already in possession of •most of the 
 improvements yet made, so far as suitable to their circum- 
 stances. There remains, as a resource, the extension of culti- 
 vation. And on this it is to be remarked that the capital by 
 which any such extension can take place is mostly still to be 
 created. In Poland, Russia, Hungary, Spain, the increase of 
 capital is extremely slow. In America it is rapid, but not 
 more rapid than the population. The principal fund at pres- 
 ent available for supplying this country with a yearly increas- 
 ing importation of food is that portion of the annual savings 
 of America which has heretofore been applied to increasing 
 the manufacturing establishments of the United States, and 
 which free trade in corn may possibly divert from that pur- 
 pose to growing food for our market. This limited source of 
 supply, unless great improvements take place in agriculture, 
 
TENDENCY OF PROFITS TO A MINIMUM. 
 
 509 
 
 can not be expected to keep pace with the growing demand 
 of so rapidly increasing a population as that of Great Britain ; 
 and, if our population and capital continue to increase with 
 their present rapidity, the only mode in which food can con- 
 tinue to be supplied cheaply to the one is by sending the 
 other abroad to produce it. 
 
 Mr. Mill here shows that he had no adequate knowledge of 
 the productive capacity of the United States. The grain-tields 
 are not yet all occupied ; and we can easily produce the total 
 cotton consumption of the world on that quantity of land in 
 Texas alone by which the whole cultivable area of that State 
 exceeds the corresponding area of the empire of Austria-Hun- 
 gary (see Chart No. XVIII, which shows the remarkable pro- 
 
 CHART XVII. 
 Grain- Crops of the United States. 
 
 Year. 
 
 Bushels. 
 
 Maize, Wheat, Rye, Oats, Barley, Buckwheat. 
 
 1865 
 1866 
 1867 
 1868 
 1869 
 1870 
 1871 
 1872 
 1873 
 1874 
 1875 
 1876 
 
 1,127,499,187 
 1,343,027,868 
 1,329,729,400 
 1,450,789,000 
 1,491,412,100 
 1,629,027,600 
 1,528,776,100 
 1,664,331,600 
 1,538,892,891 
 1,455,180,200 
 2,032,235,300 
 1,962,821,600 
 2,178,934,646 
 2,302,254,950 
 2,434,884,541 
 2,448,079,181 
 2,066,029,570 
 2,699,394,496 
 2,623,319,089 
 
 
 
 
 
 
 
 
 
 
 
 
 — — - 
 
 1877 
 
 
 1878 
 
 
 1879 
 
 Ummm 
 
 1880 
 
 
 1881 
 
 
 1882 
 
 
 1883 
 
 
 portion of land possessed by the United States as compared 
 with European countries) ; and the exports of agricultural 
 food from the United States are now six times what they 
 were in 1850, about the time when Mr. Mill made the above 
 statements. Immense areas of our soil have not yet been 
 
510 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 broken by the plow, and the quantities of cereals grown in the 
 United States seem to be steadily increasing. In fact, the 
 greatest grain-crop yet grown in this country was that of 1882. 
 The comparison of the crops of late years with those just suc- 
 ceeding the war (as seen in Chart No. XVII) shows a very sug- 
 gestive increase ; since it indicates where employment has 
 been given to vast numbers of laborers, and where investment 
 has been found for our rapidly growing capital. 1 
 
 § 7. This brings lis to the last of the counter-forces which 
 check the downward tendency of profits in a country whose 
 capital increases faster than that of its neighbors, and whose 
 profits are therefore nearer to the minimum. This is, the 
 perpetual overflow of capital into colonies or foreign coun- 
 tries, to seek higher profits than can be obtained at home. I 
 believe this to have been for many years one of the principal 
 causes by which the decline of profits in England has been 
 arrested. It has a twofold operation : In the first place, it 
 does what a fire, or an inundation, or a commercial crisis 
 would have done — it carries off a part of the increase of capi- 
 tal from which the reduction of profits proceeds ; secondly, 
 the capital so carried off is not lost, but is chiefly employed 
 either in founding colonies, which become large exporters of 
 cheap agricultural produce, or in extending and perhaps im- 
 proving the agriculture of older communities. 
 
 In countries which are further advanced in industry and 
 population, and have therefore a lower rate of profit, than 
 others, there is always, long before the actual minimum is 
 reached, a practical minimum, viz., when profits have fallen 
 so much below what they are elsewhere that, were they to 
 fall lower, all further accumulations would go abroad. As 
 long as there are old countries where capital increases very 
 rapidly, and new countries where profit is still high, profits 
 in the old countries will not sink to the rate which would 
 put a stop to accumulation : the fall is stopped at the point 
 which sends capital abroad. 
 
 1 A comparison of Chart No. XVII with Chart No. VI will furnish some 
 means of learning whether the building of railways has gone on faster than is 
 warranted by the increase of our crops (see supra, pp. 138, 139). 
 
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CHAPTER IV. 
 
 CONSEQUENCES OF THE TENDENCY OF PROFITS TO A MINIMUM, 
 AND THE STATIONARY STATE. 
 
 § 1. The theory of the effect of accumulation on profits 
 must greatly abate, or rather, altogether destroy, in countries 
 where profits are low, the immense importance which used 
 to be attached by political economists to the effects which an 
 event or a measure of government might have in adding to 
 or subtracting from the capital of the country. We have 
 now seen that the lowness of profits is a proof that the spirit 
 of accumulation is so active, and that the increase of capital 
 has proceeded at so rapid a rate, as to outstrip the two coun- 
 ter-agencies, improvements in production and increased sup- 
 ply of cheap necessaries from abroad. A sudden abstraction 
 of capital, unless of inordinate amount, [would not] have 
 any real effect in impoverishing the country. After a few 
 months or years, there would exist in the country just as 
 much capital as if none had been taken away. The ab- 
 straction, by raising profits and interest, would give a fresh 
 stimulus to the accumulative principle, which would speedily 
 fill up the vacuum. Probably, indeed, the only effect that 
 would ensue would be that for some time afterward less 
 capital would be exported, and less thrown away in hazard- 
 ous speculation. 
 
 In the first place, then, this view of things greatly weak- 
 ens, in a wealthy and industrious country, the force of the 
 economical argument against the expenditure of public 
 money for really valuable, even though industriously unpro- 
 ductive, purposes. In poor countries, the capital of the 
 country requires the legislator's sedulous care ; he is bound 
 
512 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 to be most cautious of encroaching upon it, and should favor 
 to the utmost its accumulation at home, and its introduction 
 from abroad. But in rich, populous, and highly cultivated 
 countries, it is not capital which is the deficient element, but 
 fertile land ; and what the legislator should desire and pro- 
 mote, is not a greater aggregate saving, but a greater return 
 to savings, either by improved cultivation, or by access to 
 the produce of more fertile lands in other parts of the 
 globe. 
 
 The same considerations enable us to throw aside as un- 
 worthy of regard one of the common arguments against emi- 
 gration as a means of relief for the laboring-class. Emigra- 
 tion, it is said, can do no good to the laborers, if, in order to 
 defray the cost, as much must be taken away from the capi- 
 tal of the country as from its population. If one tenth of 
 the laboring people of England were transferred to the colo- 
 nies, and along with them one tenth of the circulating capi- 
 tal of the country, either wages, or profits, or both, would be 
 greatly benefited, by the diminished pressure of capital and 
 population upon the fertility of the land. The landlords 
 alone would sustain some loss of income ; and even they, 
 only if colonization went to the length of actually diminish- 
 ing capital and population, but not if it merely carried off 
 the annual increase. 
 
 § 2. From the same principles we are now able to arrive 
 at a final conclusion respecting the effects which machinery, 
 and generally the sinking of capital for a productive pur- 
 pose, produce upon the immediate and ultimate interests of 
 the laboring-class. The characteristic property of this class 
 of industrial improvements is the conversion of circulating 
 capital into fixed : and it was shown in the first book 1 that, 
 in a country where capital accumulates slowly, the introduc- 
 tion of machinery, permanent improvements of land, and 
 the like, might be, for the time, extremely injurious ; since 
 the capital so employed might be directly taken from the 
 
 1 Book I, Chap. V, § 2. 
 
TENDENCY OF PROFITS TO A MINIMUM. 513 
 
 wages fund, the subsistence of the people and the employ- 
 ment for labor curtailed, and the gross annual produce of 
 the country actually diminished. But in a country of great 
 annual savings and low profits no such effects need be ap- 
 prehended. It merely draws off at one orifice what was al- 
 ready flowing out at another ; or, if not, the greater vacant 
 space left in the reservoir does but cause a greater quantity 
 to flow in. Accordingly, in spite of the mischievous de- 
 rangements of the money market which have been occasioned 
 by the great sums in process of being sunk in railways, I 
 can not agree with those who aj)prehend any mischief, from 
 this source, to the productive resources of the country. Not 
 on the absurd ground (which to any one acquainted with the 
 elements of the subject needs no confutation) that railway 
 expenditure is a mere transfer of capital from hand to hand, 
 by which nothing is lost or destroyed. This is true of what 
 is spent in the purchase of the land ; a portion too of what is 
 paid to agents, counsels, engineers, and surveyors, is saved 
 by those who receive it, and becomes capital again : but what 
 is laid out in the bona fide construction of the railway itself 
 is lost and gone ; when once expended, it is incapable of ever 
 being paid in wages or applied to the maintenance of labor- 
 ers again ; as a matter of account, the result is, that so much 
 food and clothing and tools have been consumed, and the 
 country has got a railway instead. 
 
 It already appears, from these considerations, that the 
 conversion of circulating capital into fixed, whether by rail- 
 ways, or manufactories, or ships, or machinery, or canals, or 
 mines, or works of drainage and irrigation, is not likely, in 
 any rich country, to diminish the gross produce or the 
 amount of employment for labor. There is hardly any in- 
 crease of fixed capital which does not enable the country to 
 contain eventually a larger circulating capital than it other- 
 wise could possess and employ within its own limits ; for there 
 is hardly any creation of fixed capital which, when it proves 
 successful, does not cheapen the articles on which wages are 
 habitually expended. 
 
 38 
 
514 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 As regards the effects upon the material condition of the 
 wages-receiving class, since it seems clear that capital increases 
 faster than improvements, and probably faster even than popu- 
 lation, it follows that in countries where the laboring-classes 
 are evidently growing in intelligence, they gain in wages with 
 the progress of society. Such certainly seems to be the teach- 
 ing of Mr. Giffen's late studies (see Book IV, Chap. Ill, § 5). 
 
 § 3. Toward what ultimate point is society tending by its 
 industrial progress ? When the progress ceases, in what con- 
 dition are we to expect that it will leave mankind ? 
 
 It must always have been seen, more or less distinctly, by 
 political economists, that the increase of wealth is not bound- 
 less ; that at the end of what they term the progressive state 
 lies the stationary state, that all progress in wealth is but a 
 postponement of this, and that each step in advance is an ap- 
 proach to it. "We have now been led to recognize that this 
 ultimate goal is at all times near enough to be fully in view ; 
 that we are always on the verge of it, and that, if we have 
 not reached it long ago, it is because the goal itself flies be- 
 fore us. The richest and most prosperous countries would 
 very soon attain the stationary state, if no further improve- 
 ments were made in the productive arts, and if there were a 
 suspension of the overflow of capital from those countries 
 into the uncultivated or ill-cultivated regions of the earth. 
 Adam Smith always assumes that the condition of the mass 
 of the people, though it may not be positively distressed, 
 must be pinched and stinted in a stationary condition of 
 wealth, and can only be satisfactory in a progressive state. 
 The doctrine that, to however distant a time incessant strug- 
 gling may put off our doom, the progress of society must 
 " end in shallows and in miseries," far from being, as many 
 people still believe, a wicked invention of Mr. Malthus, was 
 either expressly or tacitly affirmed by his most distinguished 
 predecessors, and can only be successfully combated on his 
 principles. 
 
 Even in a progressive state of capital, in old countries, a 
 conscientious or prudential restraint on population is indis- 
 pensable, to prevent the increase of numbers from outstrip- 
 
TENDENCY OF PROFITS TO A MINIMUM. 515 
 
 ping the increase of capital, and the condition of the classes 
 who are at the bottom of society from being deteriorated. 
 Where there is not, in the people, or in some very large pro- 
 portion of them, a resolute resistance to this deterioration — a 
 determination to preserve an established standard of comfort 
 — the condition of the poorest class sinks, even in a progres- 
 sive state, to the lowest point which they will consent to en- 
 dure. The same determination! would be equally effectual 
 to keep up their condition in the stationary state, and would 
 be quite as likely to exist. 
 
 I can not, therefore, regard the stationary state of capital 
 and wealth with the unaffected aversion so generally mani- 
 fested toward it by political economists of the old school. I 
 am inclined to believe that it would be, on the whole, a 
 very considerable improvement on our present condition. 
 
 It is only in the backward countries of the world that 
 increased production is still an important object; in those 
 most advanced, what is economically needed is a better dis- 
 tribution, of which one indispensable means is a stricter re- 
 straint on population. On the other hand, we may sup- 
 pose this better distribution of property attained, by the 
 joint effect of the prudence and frugality of individuals, 
 and of a system of legislation favoring equality of for- 
 tunes, so far as is consistent with the just claim of the in- 
 dividual to the fruits, whether great or small, of his or her 
 own industry. "We may suppose, for instance (according 
 to the suggestion thrown out in a former chapter '), a lim- 
 itation of the sum which any one person may acquire by 
 gift or inheritance, to the amount sufficient to constitute 
 a moderate independence. Under this twofold influence, 
 society would exhibit these leading features : a well-paid 
 and affluent body of laborers; no enormous fortunes, ex- 
 cept what were earned and accumulated during a single 
 lifetime ; but a much larger body of persons than at present, 
 not only exempt from the coarser toils, but with sufficient 
 
 1 Book II, Chap. I, § 6. 
 
516 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 leisure, both physical and mental, from mechanical details, to 
 cultivate freely the graces of life, and afford examples of 
 them to the classes less favorably circumstanced for their 
 growth. This condition of society, so greatly preferable to 
 the present, is not only perfectly compatible with the station- 
 ary state, but, it would seem, more naturally allied with that 
 state than with any other. 
 
 There is room in the world, no doubt, and even in old 
 countries, for a great increase of population, supposing the 
 arts of life to go on improving, and capital to increase. But 
 even if innocuous, I confess I see very little reason for desir- 
 ing it. The density of population necessary to enable man- 
 kind to obtain, in the greatest degree, all the advantages 
 both of co-operation and of social intercourse, has, in all the 
 most populous countries, been attained. If the earth must 
 lose that great portion of its pleasantness which it owes to 
 things that the unlimited increase of wealth and population 
 would extirpate from it, for the mere purpose of enabling it 
 to support a larger but not a better or a happier population, 
 I sincerely hope, for the sake of posterity, that they will be 
 content to be stationary, long before necessity compels them 
 to it. 
 
 It is scarcely necessary to remark that a stationary condi- 
 tion of capital and population implies no stationary state of 
 human improvement. Even the industrial arts might be as 
 earnestly and as successfully cultivated, with this sole differ- 
 ence, that instead of serving no purpose but the increase of 
 wealth, industrial improvements would produce their legiti- 
 mate effect, that of abridging labor. Hitherto it is question- 
 able if all the mechanical inventions yet made have lightened 
 the day's toil of any human being. They have enabled a 
 greater population to live the same life of drudgery and im- 
 prisonment, and an increased number of manufacturers and 
 others to make fortunes. They have increased the comforts 
 of the middle classes. 
 
 The statement that inventions have not " lightened the day's 
 toil of any human being " has been persistently misquoted 
 
TENDENCY OF PROFITS TO A MINIMUM. 51 7 
 
 by many persons and has been taken out of its connection. 
 Mr. Mill distinctly holds that the laborer's lot could have 
 been improved had there been any limitation of population ; 
 that it is the constant growth of population as society pro- 
 gresses which destroys the gains afforded to the laboring- 
 classes by improvements. But it is quite certain that the ma- 
 terial facts of Mr. Mill's statement are no longer true. In the 
 United States wages have risen, with an additional gain in 
 lower prices ; and Mr. Giffen shows the same progress in Eng- 
 land. Moreover, travelers on the Continent speak of a similar 
 movement already noticeable there. Mr. Giffen's statement in 
 his comparison ' with fifty years ago, is as follows : 
 
 " While the money wages have increased as we have seen, 
 the hours of labor have diminished. It is difficult to estimate 
 what the extent of this diminution has been, but collecting one 
 or two scattered notices I should be inclined to say very nearly 
 20 per cent. There has been at least this reduction in the tex-. 
 tile, engineering, and house-building trades. The workman 
 gets from 50 to 100 per cent more money for 20 per cent less 
 work ; in round figures he has gained from 70 to 120 per cent 
 in fifty years in money return. It is just possible, of course, 
 that the workman may do as much, or nearly as much, in the 
 shorter period as he did in his longer hours. Still, there is the 
 positive gain in his being less time at his task, which many of 
 the classes still tugging lengthily day by day at the oar would 
 appreciate." 
 
 i« Progress of the Working-Classes in the Last Half-Century" (1884), 
 page 8. 
 
CHAPTEK Y. 
 
 ON" THE PROBABLE FUTURITY OF THE LABORING-CLASSES. 
 
 § 1. There has probably never been a time when more at- 
 tention has been called to the material and social conditions of 
 the working-classes than in the last few years. The great in- 
 crease of literature and the extension of the newspaper has 
 brought to every reader, even where public and private chari- 
 ties have not sent eye-witnesses into direct contact with dis- 
 tress, a more explicit knowledge of the working-classes than 
 ever before. The revelation of existing poverty and misery is, 
 often wrongly, taken to be a proof of the increasing degrada- 
 tion of the working-men, and the cause has been ascribed to the 
 grasping cruelty of capitalists. Instances of injustice arising 
 from the relations of employers and employed will occur so 
 long as human nature remains imperfect. But the world hopes 
 that some other relation than that of master and workman may 
 be evolved in which not only many admitted wrongs may be 
 avoided, but also new forces may be applied to raise the laborer 
 out of his dependence on other classes in the community. 
 
 We are, at present, living under a regime of private prop- 
 erty and competition. But certainly the progress of the laborer 
 is not that which can excite enthusiastic hopes for the future, 
 so long as he remains a mere receiver of wages. The progress 
 of industrial improvements has resulted, says Mr. Cairnes, in " a 
 temporary improvement of the laborer's condition, followed 
 by an increase of population and an enlarged demand for the 
 cheapened commodity. . . . Laborers' commodities, however, 
 are for the most part commodities of raw produce, or in which 
 the raw material constitutes the chief element of the value 
 (clothing is, in truth, the only important exception) ; and of 
 all such commodities it is the well-known law that an aug- 
 mentation of quantity can only be obtained, other things being 
 the same, at an increasing proportional cost. Thus, it has hap- 
 pened that the gain in productiveness obtained by improved 
 processes has, after a generation, to a great extent been lost — 
 
Edward Atkinson, of Wagts, 
 ">. 14 yarn. 
 
 he machinery affected production. 
 
 used. 
 
PROBABLE FUTURITY OF THE LABORING-CLASSES. 519 
 
 lost, that is to say, for any benefit that can be derived from 
 it in favor of wages and profits. . . . The large addition to 
 the wealth of the country has gone neither to profits nor to 
 wages, nor yet to the public at large [as consumers], but to 
 swell a fund ever growing even while its proprietors sleep — 
 the rent-roll of the owners of the soil. . . . The aggregate re- 
 turn from the land has immensely increased ; but the cost of 
 the costliest portion of the produce, which is that which deter- 
 mines the price of the whole, remains pretty nearly as it was. 
 Profits, therefore, have not risen at all, and the real remunera- 
 tion of the laborer, taking the whole field of labor, in but a 
 slight degree — at all events in a degree very far from com- 
 mensurate with the general progress of industry." ' 
 
 Under these conditions, it seems that the only hope of an 
 improvement for the laboring-classes lies in the limitation of 
 population — or at least in an increase of numbers less than the 
 increase of capital and improvements. It is possible, however, 
 that Mr. Cairnes, with many others, has failed to recognize the 
 full extent of the improvement which is taking place in the 
 wages of the laborer under the existing social order. Although 
 we hear much of the wrongs of the working-men — and they no 
 doubt exist — yet it is unquestionable that their condition has 
 vastly improved within the last fifty years ; largely, in my opin- 
 ion, because improvements have outstripped population, and be- 
 cause wide areas of fertile land in new and peaceful countries 
 have drawn off the surplus population in the older countries, 
 and because the available spots in the newer countries like the 
 United States have not yet been covered over with a popula- 
 tion sufficiently dense to keep real wages anything below a 
 relatively high standard. The facts to substantiate this opin- 
 ion, so far as regards Great Britain, are to be found in a recent 
 investigation 2 by Mr. Giffen, the statistician of the English 
 Board of Trade. For a very considerable reduction in hours 
 of daily labor, the workman now receives wages on an average 
 about 70 per cent higher than fifty years ago, as may be seen 
 by the following table : 
 
 1 " Leading Principles," pp. 278-280. 
 
 s " Progress of the Working-Classes in the Last Ilalf-Century " (1884), being 
 bis inaugural address as President of the London Statistical Society, November 
 20, 1883. 
 
(Jiving tfie actual jig 
 
 npiled front the 
 
 CHART XIX. 
 ■ -Hunts of two Cotton-Mitts 
 
 __j England by Edward Atkinson „f ir 
 Cost of Lutior, etc., from J8M to IS84, working on Standard Miedings, Xo. 14 yarn. ' 
 
 1830 
 1840 
 1860 
 1860 
 1870 
 1870 
 1880 
 1883 
 1884 
 
 I 000 c. gold. 
 
 1-832 gold. 
 
 1-556 gold. 
 
 •905 gold. 
 
 1-425 cur. 
 
 •240 gold. 
 
 ■930 gold. 
 
 •080 gold. 
 
 •070 gold. 
 
 1840 
 1860 
 1860 
 1870 
 1880 
 1883 
 1884 
 
 1830 
 1840 
 1860 
 1860 
 1870 
 1870 
 1880 
 1883 
 1884 
 
 4,321 
 9,607 
 12,164 
 21,760 
 19,293 
 28,000 
 26,641 
 28,032 
 
 Cost of Labor per Yard. 
 
 Yards per Operative per Year. 
 
 I Changes in the maehiDery affected nroeluctirn. 
 
 
 
 Wages per Operativ 
 
 e per Year. 
 
 
 
 |164 gold. 
 175 gold. 
 190 gold. 
 197 gold. 
 275 cur. 
 240 gold. 
 259 gold. 
 287 gold. 
 290 gold. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1870 
 
 
 
 
 1870 
 
 
 
 
 1880 
 
 
 
 
 1883 
 
 
 1884 
 
 
 Profit jjer Yard necessary to be set aside in order to pay 10 per cent, on Capital used. 
 
520 
 
 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 OCCUPATION. 
 
 Carpenters 
 
 u 
 
 Bricklayers 
 
 Masons 
 
 Miners 
 
 Pattern-weavers 
 
 Wool-scourers 
 
 Mule-spinners 
 
 Weavers 
 
 Warpers and beamers. 
 Winders and reelers . . 
 
 Weavers (men) 
 
 Reeling and warping. . 
 Spinning (children) . . . 
 
 PLACE. 
 
 Manchester . , 
 Glasgow. . . . 
 Manchester 1 , 
 Glasgow. . . . 
 Manchester 1 
 Glasgow. . . . 
 Staffordshire 
 Huddersfield 
 
 Bradford. 
 
 "Wages fifty 
 years ago, 
 per week. 
 
 6. d. 
 24 
 
 14 
 24 
 
 15 
 
 24 
 14 
 
 2 8 s 
 
 16 
 
 17 
 
 25 6 
 12 
 17 
 
 6 
 8 3 
 
 7 9 
 4 5 
 
 "Wages, pres- 
 ent time, 
 per week. 
 
 s. d. 
 
 34 
 
 26 
 36 
 
 27 
 
 29 10 
 23 8 
 
 4 s 
 
 25 
 22 
 
 30 
 
 26 
 
 27 
 11 
 20 6 
 15 6 
 11 6 
 
 Increase or de- 
 crease, amount 
 per cent. 
 
 s. d. 
 
 10 
 
 12 
 
 12 
 
 12 
 
 5 10 
 
 9 8 
 
 14 
 
 10 
 
 5 
 
 12 3 
 
 7 9 
 
 7 1 
 
 ( + ) 42 
 (+) 85 
 ( + ) 50 
 ( + ) 80 
 ( + ) 24 
 ( + ) 69 
 (+) 60 
 (+) 55 
 ( + ) 30 
 ( + ) 20 
 ( + )116 
 ( + ) 68 
 ( + ) 83 
 ( + ) 150 
 (+) 100 
 ( + )160 
 
 With increased wages, prices are not much higher than fifty- 
 years ago. But the clearest evidence as to their bettered ma- 
 terial condition is to be found in the following table, which 
 shows the amount of food consumed per head by the total popu- 
 lation of Great Britain : 
 
 ARTICLES. 
 
 1840. 
 
 1881. 
 
 
 Pounds. 
 
 a 
 
 (C 
 
 u 
 
 No. 
 
 Pounds . 
 
 « 
 
 « 
 a 
 u 
 
 001 
 1-05 
 0-92 
 1-45 
 3-63 
 
 o-oi 
 
 0-90 
 0-08 
 1-08 
 42-47 
 15-20 
 Nil. 
 1-22 
 0-86 
 0-25 
 0-97 
 1-59 
 
 1393 
 6-36 
 
 
 
 5-77 
 
 
 
 4-34 
 
 Corn, wheat, 
 
 and wheat-flour . 
 
 21-65 
 
 12-85 
 
 1632 
 
 0-31 
 
 0-89 
 
 216-92 
 
 58-92 
 
 Refined sugar - - 
 
 u 
 
 844 
 
 
 
 (i 
 
 u 
 
 4-58 
 1-41 
 
 Malt 
 
 
 u 
 
 045 
 1-08 
 1-91 3 
 
 The question then at once arises, whether capital has been 
 shown by the statistics to have gained accordingly, or whether 
 there has been a proportionally less increase than in wages. 
 
 1 1825. 
 
 Wages per day. 
 
 9 Year 1878. 
 
< 'ompariton 
 
 I. — Capital 
 
 II. — Fixed capital. . 
 
 III. — Active capital. . 
 
 IV.— Spindles 
 
 V. — Looms 
 
 VI. — $ Fixed capiti 
 spindle .... 
 
 VII. — Number of ope 
 employed. . . 
 
 VIII. — Operatives per 
 spindles. . 
 
 IX. — Pounds per spin 
 day 
 
 X. — Pounds per op 
 per day. . . . 
 
 XI. — Hours' work pei 
 
 XII. — Pounds per op 
 per hour. . . 
 
 XIII. — Wages per or. 
 per year . 
 
 XIV. — Wages per op 
 per hour. . . 
 
 XV. — Wages per van 
 
 XVI. — Profit per yard 
 cent on capita 
 
 XVII. — Price of goo< 
 cotton same 
 
 Note.— This compari&o 
 changes have been in pKIgm 
 that, while such changes ar< 
 
CHART XX. 
 Comparison of 1840 villi 1883-1884, of the Relations of Labor and Capital in the fame Mills 
 
 I.- 
 II.- 
 III.- 
 IV.- 
 V.- 
 VI.- 
 VII.- 
 VIII.- 
 IX.- 
 X.- 
 
 -Capital 
 
 -Fixed capital . 
 -Active capital. . 
 -Spindles 
 
 -$ Fixed capital per 
 spindle 
 
 -Number of operatives 
 employed 
 
 ■Operatives per 1,000 
 spindles 
 
 •Pounds per spindle pei 
 day 
 
 -Pounds per operative 
 per day 
 
 XI. — Hours' work per day . . 
 
 ■Pounds per operative 
 per hour 
 
 ■Wages per operative 
 per year 
 
 Wages per operative 
 per hour 
 
 -Wages per yard 
 
 XII.- 
 XIII.- 
 XIV.- 
 XV.- 
 XVI.- 
 XVII.- 
 
 Notk.— This comparison will not show the full reduction in the 
 changes have been in progress which, when completed, will increase th( 
 that, while such changes are being made, the current work of productic 
 
 -Profit per yard, 10 per 
 cent on capital 
 
 -Price of goods, ccst 
 cotton same 
 
 1840 
 1883 
 
 1840 
 1883 
 
 1840 
 1883 
 
 1840 
 1883 
 
 1840 
 1883 
 
 1840 
 1883 
 
 1840 
 1883 
 
 1840 
 1883 
 
 1840 
 1883 
 
 1840 
 1883 
 
 1840 
 1883 
 
 1840 
 1883 
 
 $600,000 
 $600,000 
 
 $310,000 
 $310,000 
 
 $290,000 
 $290,000 
 
 12,500 
 30,824 
 
 425 
 1,000 
 
 $23.20 
 $10.06 
 
 530 
 
 627 
 
 42 4-10 
 17 20-100 
 
 0-456 
 0-556 
 
 10 76-100 
 31 20-100 
 
 0-83 
 2-83 
 
 4-49 cts 
 8-80 cts, 
 
 1-82 cts 
 1-08 cts. 
 
 1-18 cts 
 43 cts. 
 
 9-04 cts. 
 7-04 cts. 
 
 tame. 
 
 Increase, 
 146 per cent. 
 
 Increase, 
 135 per cent. 
 
 Decrease, 
 67 per cent. 
 
 Same. 
 
 Decrease, 
 60 per cent. 
 
 Increase, 
 22 per cent. 
 
 Increase, 
 190 per cent. 
 
 Decrease, 
 15 per cent. 
 
 Increase, 
 240 per cent. 
 
 Increase, 
 64 per cent. 
 
 Increase, 
 96 per cent. 
 
 Decrease, 
 41 per cent. 
 
 Decrease, 
 63 per cent. 
 
 Decrease, 
 22 per cent. 
 
 out of labor per yard which may be expected i 
 apacity of the mill about 15 per cent, and it 16 a 
 is done at a disadvantage. 
 
PROBABLE FUTURITY OF THE LABORIXG-CLASSES. 521 
 
 Says Mr. Giffen : " If the return to capital had doubled, as the 
 wages of the working-classes appear to have doubled, the ag- 
 gregate income of the capitalist classes returned to the income- 
 tax would now be £800,000,000 instead of £400,000,000. . . . 
 The capitalist, as such, gets a low interest for his money, and 
 the aggregate returns to capital is not a third part of the aggre- 
 gate income of the country, which may be put at not less than 
 £1,200,000,000." It is found, moreover — as a suggestion that 
 property is more generally diffused — that while there were 
 25,368 estates entered to probate in 1838, of an average value 
 of £2,160 each, there were 55,359 estates in 1882 of an average 
 value of £2,500 each. 
 
 But yet the vast increase of wealth made possible by im- 
 provements and the growth of capital would have bettered the 
 condition of all still more had population been somewhat more 
 limited. As it is, the material gain has been large in spite of 
 an increase in the population from 16,500,000 in 1831 to nearly 
 30,000,000 in 1881. In other words, the landlords have been 
 great gainers, while the laborers have intercepted much more 
 than Mr. Cairnes supposed. 
 
 There is at hand some very striking data relating to the 
 United States which point in the same direction as those of Mr. 
 Giffen. Charts No. XIX and XX show vividly how far the 
 increased productiveness of an industry, arising from greater 
 skill and greater efficiency of labor in the connection of im- 
 proved machinery, has enabled manufacturers to steadily lower 
 the price of their goods, and yet increase the wages paid to 
 their operatives. What was true of these two cotton -mills 
 was true of others within New England ; for the rate of wages 
 paid by these mills was the rate current in the country in 1830 
 and in 1884. While each spindle and loom has become vastly 
 more effective, we see by Chart No. XIX that the average pro- 
 duction of each operative constantly increased from 4,321 yards 
 per year in 1830, to 28,032 yards in 1884 ; and this it was 
 which made possible the corresponding increase in the rate of 
 wages from $164 in 1830, to 6290 in 1884. The sum of $290 a 
 year as an average for each operative, is a stipend too small to 
 cause any general satisfaction ; but he must be gloomy indeed 
 who does not see that $290 is a cheerful possession as compared 
 with $164. There is, then, abundant ground for believing that 
 in the past fifty years the condition of the working-classes in 
 the United States has been materially improved. The dimin- 
 ishing proportion of the price which goes to the capital is a 
 significant fact, and illustrates the tendency of profits to fall 
 with the increase of capital. 1 The same truth seems to be 
 
 1 These mills have not been able to pay ten per cent regularly, as mentioned 
 
522 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 seen in the table given in a previous chapter, 1 where the wages 
 have been increased, but the hours have fallen per day from 
 thirteen to eleven since 1840. 
 
 § 2. So far we have considered the chances for improve- 
 ment in an industrial order in which the present separation of 
 capitalists from laborers is maintained. But this does not take 
 into account that future time when cultivation in the United 
 States shall be forced down upon inferior land, and no more 
 remains to be occupied, and when capital may no longer in- 
 crease as fast as population. "What must be the ultimate out- 
 look for wages-receivers? Or, more practically, what is the 
 outlook now for those who are wages-receivers, and for whom 
 a more equitable distribution of the product seems desirable ? 
 How can they escape the thralldom of dependence on the accu- 
 mulations of others ? 
 
 In this connection, and of primary importance, is the avenue 
 opened to all holders of small properties to share in the in- 
 crease which goes to owners of land. It has been seen that 
 owners of the soil constantly gain from the inevitable tenden- 
 cies of industrial progress. If one large owner gains, why should 
 not the increment be the same if ten owners held the property 
 instead of one ? The more the land is subdivided, the more 
 the vast increase arising from rent will be shared by a larger 
 number. This, in my opinion, is the strongest reason for the 
 encouragement of small holdings in every country. The greater 
 the extension of small properties among the working-class, the 
 more will they gain a share of that part of the product which goes 
 to the owner of land by the persistent increase of population. 
 If, then, the gain arising from improvements is largely passed 
 to the credit of land-owners, as Mr. Cairn es believes, it should 
 be absolutely necessary to spread among the working-classes 
 the doctrine that if they own their own homes, and buy the 
 land they live on, to that extent will they " grow rich while 
 they sleep," independently of their other exertions. Land worth 
 $500 to-day when bought by the savings of a laborer, besides 
 the self-respect a it gives him, will increase in value with the 
 
 in Chart No. XIX, but it has merely been supposed that ten per cent were de- 
 manded by capital, in order to show that, for such a dividend, it required a 
 diminishing proportion of the price to meet that estimate. 
 
 1 Book II, Chap. V, § 5 ; see also " North American Review," May, 1884, p- 
 517. 
 
 * For the influences of small properties in restraining an undue increase of 
 population, see supra, p. 119. For a more general account of the benefits aris- 
 ing from such holdings, consult Mill's original work, Book II, Chaps. VI and 
 VII, and T. E. Cliffe Leslie's " Land Systems." 
 
PROBABLE FUTURITY OF THE LABORING-CLASSES. 523 
 
 density of population, and become worth $600 or more without 
 other sacrifice of his. 
 
 § 3. It will be found, however, that, of the various indus- 
 trial rewards, profits tend to diminish, meaning by " profits " 
 only the interest and insurance given for abstinence and risk in 
 the use of capital ; but that the manager's wages (wages of su- 
 perintendence) are larger than is commonly supposed in relation 
 to other industrial rewards, owing to the position of monopoly 
 practically held by such executive ability as is competent to 
 successfully manage large business interests. To the laborer 
 this large payment to the manager seems to be paid for the 
 possession of capital. This we now know to be wrong. The 
 manager's wages are payments of exactly the same nature as 
 any laborer's wages. It makes no difference whether wages are 
 paid for manual or mental labor. The payment to capital, purely 
 as such, known as interest (with insurance for risk), is unmis- 
 takably decreasing, even in the United States. And yet we see 
 men gain by industrial operations enormous rewards ; but these 
 returns are in their essence solely manager's wages. For in 
 many instances,' as hitherto discussed, we have seen that the 
 manager is not the owner of the capital he employs. To what 
 does this lead us ? Inevitably to the conclusion that the la- 
 borer, if he would become something more than a receiver of 
 wages, in the ordinary sense, must himself move up in the 
 scale of laborers until he reaches the skill and power also to 
 command manager's wages. The importance of this principle 
 to the working-man can not be exaggerated, and there flows 
 from it important consequences to the whole social condition 
 of the lower classes. It leads us directly to the means by 
 which the lower classes may raise themselves to a higher po- 
 sition — the actual details of which, of course, are difficult, but, 
 as they are not included in political economy, they must be left 
 to sociology — and forms the essential basis of hope for any 
 proper extension of productive co-operation. In short, co-opera- 
 tion owes its existence to the possibility of dividing the man- 
 ager's wages, to a greater or less degree, among the so-called 
 wages-receivers, or the " laboring-class." And it is from this 
 point of view that co-operation is seen more truly and fitly 
 than in any other way. For it is to be said that in some of 
 its forms co-operation gives the most promising economic re- 
 sults as regards the condition of the laborer which have yet 
 been reached in the long discussion upon the relations of labor 
 and capital. 
 
 § 4. It will be my object, then, to describe the chief forms in 
 which the co-operative principle has manifested itself. These 
 may be said, in general, to be four : (1) distributive co-opera- 
 tion, by which goods already produced are bought and sold to 
 
524 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 members without the aid of retail dealers ; (2) productive co- 
 operation, by which associations are formed for producing and 
 manufacturing goods for the market ; (3) partial productive 
 co-operation in the form of industrial partnerships between la- 
 borers and employers, without dispensing with the latter ; and 
 (4) co-operative, or People's, banks. There are, of course, many 
 other forms in which the principle of co-operation has been 
 applied ; but these four are probably the most characteristic. 
 
 Distributive co-operation is at once the simplest and the 
 most successful form, not merely because it requires less capi- 
 capital than any other for its inception, but also because it calls 
 for less business and executive capacity. The number of per- 
 sons capable of managing a small retail store is vastly greater 
 than the class fit to assume control of the very complex duties 
 involved in the care of wholesale houses — or, at all events, of 
 mills and factories. Distributive co-operation has its origin in 
 the fact that the expenses of a middle-man between the pro- 
 ducer and consumer may be entirely dispensed with, and in 
 the fact that more capital had collected in the business of dis- 
 tribution than could economically be so employed. Its edu- 
 cating power on the men concerned in teaching them to save, 
 in showing the need of business methods, and in instilling the 
 elements of industrial management, is of no little importance. 
 It is, therefore, the best gateway to any further or more diffi- 
 cult co-operative experiments — such experiments as can be at- 
 tempted only after the proper capital is saved, and the neces- 
 sary executive capacity is discovered, or developed by train- 
 ing. In England co-operation began its history in distributive 
 stores, and has finally led to such a stimulus of self-help in the 
 laborer, that now co-operative gymnasiums, libraries, gardens, 
 and other results have proved the wisdom of calling upon the 
 laborers for their own exertions. Under the system which 
 separates employers and the employed, high wages are not 
 found to be the only boon which the receivers could wish ; for 
 it is sometimes found that the best-paid workmen are the most 
 unwise and intemperate. 1 For the most ignorant and unskilled 
 of the workmen in the lowest strata the object would seem to 
 be to give not merely more wages, but give more in such a way 
 as might excite new and better motives, a desire as well as a 
 possibility of improvement. Self-help must be stimulated, not 
 deadened by stifling dependence on a class of superiors, or on 
 the state. The extraordinary growth of co-operation is one of 
 the most cheering signs of modern times. Distributive co- 
 operation originated in Rochdale, in England, about 1844, with 
 a few laborers desirous of saving themselves from the high 
 prices paid for poor provisions. By uniting, they purchased 
 
 1 Cf. E. L. Godkin, " North American Review," 1868, p. 150. 
 
PROBABLE FUTURITY OF THE LABORING-CLASSES. 525 
 
 tea by the chest, sugar by the hogshead, which they sold to 
 each member at market prices. They were surprised to find 
 a large profit by the operation, which they divided proportion- 
 ally to the capital subscribed. Others soon joined them ; they 
 took a store-room, and in 1882 there were 10,894 members, with 
 a share capital of $1,576,215, and with realized profits in that 
 year of 8162,885. They have erected expensive steam flour- 
 mills, and the society occupies eighteen branch establishments 
 in Rochdale. Libraries containing more than 15,000 volumes, 
 and classes in science, language, and the technical arts, attended 
 by 500 students, have been maintained. The extension of the 
 Rochdale store led to the necessity of a wholesale establish- 
 ment of their own. It is now a large institution with branches 
 in London and Newcastle. " It owns manufactories in London, 
 Manchester, Newcastle. Leicester, Durham, and Crumpsall ; 
 and it has depots in Cork, Limerick, Kilmallock, "Waterford, 
 Tipperary, Tralee, and Armagh, for the purchase of butter, po- 
 tatoes, and eggs. It has buyers in New York and Copenhagen, 
 and it owns two steamships. It has a banking department 
 with a turn-over of more than £12,000,000 annually." ' 
 
 The following figures for England and Wales tell their own 
 story as to the progress of co-operation : s 
 
 Number of members 
 Capital. 
 
 Share 
 
 Loan 
 
 Sales 
 
 Net profit 
 
 1862. 
 
 90,000 
 
 £ 
 
 428,000 
 
 55,000 
 
 2,333,000 
 
 165,000 
 
 1S81. 
 
 525,000 
 
 £ 
 
 5,881,000 
 
 1,267,000 
 
 20,901,000 
 
 1,617,000 
 
 Several persons each subscribe a sum to make up the share 
 capital of a store, and a person is selected to take charge of the 
 purchase and care of the goods. The advantages of the plan 
 are : (1) A division among the co-operators of all the net profits 
 of the retail trade ; (2) a saving in advertisements, since mem- 
 bers are always purchasers without solicitation ; (3) no loss by 
 bad debts, since only cash sales are permitted ; and (4) security 
 against fraud as to the character of the goods, because there is 
 no inducement to make gains by adulterations. It is often 
 found that the capital is turned over ten times in the course of 
 a year ; while the cost of management in the wholesale Roch- 
 dale stores does not amount to one per cent on the returns. 
 
 1 Fawcett, " Manual of Political Economy " (last edition), chapter on Co- 
 operation. 
 
 8 Giffen, "Progress of the Working-Classes in the Last Half-Century," p. 19. 
 
526 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 The arrangement of obligations in due order of their pri- 
 ority, which has been recommended by Mr. Holyoake, 1 is as 
 follows : of funds in the store, payment should be made, (1) of 
 the expenses of management ; (2) of interest due on all loans ; 
 (3) of an amount equivalent to ten per cent of the value of the 
 fixed stock to cover the annual depreciation from wear and 
 tear ; (4) of dividends on the subscribed capital of the mem- 
 bers ; a (5) of such a sum as may be necessary for an extension 
 of the business ; (6) of two and a half per cent of the remain- 
 ing profit, after all the above items are provided for, for educa- 
 tional purposes ; (7) of the residue, and that only, among all 
 the persons employed, and members of the store, in proportion 
 to the amount of their wages, or of their respective purchases 
 during the quarter. 3 The payment of dividends to customers 
 on their purchases seems now to be considered an essential ele- 
 ment of success. 
 
 § 5. Productive co-operation presents many serious diffi- 
 culties, the chief of which is the need of managing ability. 
 Some one in the association must know the wholesale markets 
 well, the expectation of crops connected with his materials 
 used, the proper time to buy ; he must know the processes of 
 the special production thoroughly, the best machinery, the 
 best adaptation of labor to the given end ; he must know the 
 whims of purchasers, and be ready to change his products ac- 
 cordingly — in short, a man eminently fitted for success in his 
 own factory is essential to the profitable management of one 
 belonging to a body of co-operators. It has been already seen 
 how large a variation in profit is due to manager's wages ; and 
 it is very often only his skill, prudence, and experience that 
 make the difference between a failure and a success in busi- 
 ness. Unless co-operators are willing to pay as large a sum 
 for the services of a good manager as he could get in his own 
 
 1 " History of Co-operation in England " (2 vols., 1879), p. 105. 
 
 ' Mr. Holyoake (" History of Co-operation in England," p. 99) quotes as fol- 
 lows from another's experience : " My own pass-book shows that I paid on No- 
 vember 3d, of last year (1860), £1 to become a member of a co-operative store. 
 I have paid nothing since, and I am now credited with £3 1 6s. 6d, nearly three 
 hundred per cent on my capital in a single year. Of course, that arises from 
 my purchases having been large in proportion to my investment. In a co- 
 operative store you get five per cent upon the money which you invest as a 
 shareholder ; and, if the store be well conducted, you will get seven and a half 
 per cent addition." 
 
 3 For a full account of the proper steps to be taken in establishing a store, 
 with many practical details, see Charles Barnard's " Co-operation as a Business," 
 p. 119. 
 
PROBABLE FUTURITY OF THE LABORING-CLASSES. 527 
 
 establishment, they can not secure the talent which will make 
 their venture succeed. 1 
 
 In France the national workshops of Louis Blanc, estab- 
 lished in 1848, were a failure. Nowhere has it been more 
 clearly seen that state help has been disastrous than in France, 
 where the Constituent Assembly voted 3,000,000 francs for co- 
 operative experiments, all of which failed. Curiously enough, 
 distributive co-operation has not succeeded in France, because, 
 owing to a wide-spread dislike of the wages system, workmen 
 will try nothing less than productive schemes. And their suc- 
 cess in this has been no greater than might be expected, when 
 inexperience is put to a task beyond its powers." 
 
 In Great Britain and the United States there have been some 
 successful experiments in production ; and Mr. Holyoake 8 holds 
 that, although workmen certainly do begrudge the manager's 
 salary, productive associations are possible when managed by 
 a board of elected directors. He urges, moreover, that, as in 
 distributive co-operation, if profits are shared with customers, 
 there will be insured both popularity and continuity of custom 
 without the cost of advertising, and such expenses as those 
 of travelers and commissions. The plan of actual operations 
 upon which successes have been reached in England seems to 
 be briefly this : (1) To save capital, chiefly through co-opera- 
 tive associations ; (2) to purchase or lease premises ; (3) to 
 engage managers, accountants, and officers at the ordinary 
 salaries which such men can command in the market accord- 
 ing to their ability ; (4) to borrow capital on the credit of 
 the association ; (5) to pay upon capital subscribed by mem- 
 bers the same rate of interest as that upon borrowed capital ; 
 (6) to regard as profit only that which remains after making 
 payment for rent, materials, wages, all business outlays, and 
 interest on capital ; and (7) to divide the profits according to 
 the salaries of all officers, wages of workmen, and purchases of 
 customers. Those mills and factories which have sprung out 
 of the extension of distributive associations, as at Rochdale, 
 seem, and naturally so, to have been most successful. They 
 have gradually trained themselves somewhat for the work, and 
 their customers were beforehand secured. That is, where the 
 difficulties of the manager's function have been lessened, they 
 have a better chance of success. And yet it must be said that 
 productive associations will gain largely from the efficiency of 
 the labor when working for its own interest ; and this is an im- 
 portant consideration to be urged in favor of such associations. 
 
 1 Cf. Walker, " Wages Question," p. 276. 
 8 Godkin, " North American Review," 1868. 
 8 " History of Co-operation," vol. ii, chap. ix. 
 
528 INFLUENCE OE THE PROGRESS OF SOCIETY. 
 
 The Sun Mill, 1 at Oldham, England, was established for 
 spinning cotton in 1861 by the exertions of some co-operative 
 bodies. Beginning with a share capital of $250,000, and a loan 
 capital of a like amount, it set 80,000 spindles in operation. In 
 1874 they had a share capital of $375,000 (all subscribed ex- 
 cept $1,000), and an equal amount of loan capital, while the 
 whole plant was estimated as worth $615,000. Two and a half 
 per cent per annum has been set apart for the depreciation in 
 the value of the mill, and seven and. a half per cent for the ma- 
 chinery ; so that in the first ten years a total sum of $160,000 
 was set aside for depreciation of the property. The profits 
 have varied from two to forty per cent ; and, while only five 
 per cent interest was paid on the loan capital, large dividends 
 were made on the share capital. During the last few years the 
 Sun Mill has on an average realized a profit of 12^ per cent, 
 although it is known that the cotton trade has suffered during 
 this time from a serious depression. 
 
 Many experiments, however, have proved failures ; and some- 
 times, when they are successful (as in the case of the Hatters' 
 Association in Newark, New Jersey 2 ), the workmen have no de- 
 sire to share their benefits with others, and practically form a 
 corporation by themselves. The mere fact that they do some- 
 times succeed is an important thing. Then, too, they have an 
 opportunity of securing by salaries that executive ability in the 
 community which exists separate from the possession of capi- 
 tal. And in these days, in large corporations, the manager is 
 not necessarily (although he often is) a large owner of capital. 
 The last annual report of the Co-operative Congress (1882) 
 shows the existence in England and Scotland of productive 
 associations for the manufacture of cloth, flannel, fustian, 
 hosiery, quilts, worsted, nails, watches, linen, and silk, as well 
 as those for engineering, printing, and quarrying ; and these 
 were but a few of them. 3 
 
 In the United States there have been some successes as well 
 as failures. In January, 1872, a number of machinists and 
 other working-men organized in the town of Beaver Falls, Penn- 
 sylvania, a Co-operative Foundry Association for the manufact- 
 ure of stoves, hollow-ware, and fine castings. On a small capi- 
 tal of only $4,000 they have steadily prospered, paid the market 
 rate of wages, and also paid annual dividends, over and above 
 all expenses and interest on the plant, of from twelve to fifteen 
 per cent. In 1867 thirty workmen started a co-operative found- 
 ry in Somerset, Massachusetts, with a capital of about $14,000. 
 
 1 Holyoake, " History of Co-operation," p. 131. 
 
 2 Godkin, " North American Review," 1868. 
 
 3 Pp. 21, 31, 32. 
 
PROBABLE FUTURITY OF THE LABORING-CLASSES. 529 
 
 In the years 1874-1875 the company spent 85,400 for new 
 flasks and patterns, and yet showed a net gain of $11,914. In 
 1876 it had a capital of $30,000, and a surplus fund of 
 $28,924.' 
 
 § 6. The difficulties of productive co-operation arising from 
 the need of skilled management, together with the # existing un- 
 satisfactory relation between employers and laborers when 
 wholly separate from each other, have led to a most promising 
 plan of industrial partnership by which the manager retains 
 the control of the business operations, but shares his profits 
 with the workmen. The gain through increased efficiency, 
 greater economy, and superior workmanship, recoups the man- 
 ager for the voluntary subtraction from his share, and yet 
 the laborers receive an additional share ; but more than this, 
 it educates the laborer in industrial methods, discloses the dif- 
 ficulties of management, and stimulates him to saving habits 
 and greater regularity of work. This system is particularly 
 adapted to reaching those laborers who would not themselves 
 rise to the demands of productive co-operation. 
 
 The principle was tried on one of the Belgian railways. 
 "Ninety-five kilogrammes of coke were consumed for every 
 league of distance run, but this was known to be more than 
 necessary ; but how to remedy the evil was the problem. A 
 bonus of 3$d. on every hectolitre of coke saved on this average 
 of ninety-five to the league was offered to the men concerned, 
 and this trifling bonus worked the miracle. The work was 
 done equally well, or better, with forty-eight kilogrammes of 
 coke instead of ninety-five ; just one half, or nearly, saved by 
 careful work, at an expense of probably less than one tenth of 
 the saving." a 
 
 The experiment which has attracted most attention in the 
 past has been that of the Messrs. Briggs, at their collieries in 
 Yorkshire, England. 3 The relations between the owners and 
 the laborers were as bad as they could well be. "All coal- 
 masters is devils, and Briggs is the prince of devils," ran the 
 talk of the miners, when they did not choose to send letters 
 threatening to shoot the owners. In 1865 Messrs. Briggs tried 
 the plan of an industrial partnership with their men, purely 
 from business considerations. Seventy per cent of the cost of 
 raising coal consisted of wages, and fully fifteen per cent of 
 materials which were habitually wasted. The whole property 
 
 1 Barnard, "Co-operation as a Business," pp. 150-152. 
 
 * Holyoake, " History of Co-operation," p. 235. 
 
 s See Thornton, " On Labor," p. 370. Also see " Parliamentary Documents," 
 1868, 1869, xxxi ; " Trades-Unions of England," by the Count de Paris ; Brassey's 
 " Work and Wages," chap. xiii. 
 34 
 
530 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 was valued, and divided into shares of $50 each, of which the 
 owners retained two thirds, together with the control of the busi- 
 ness. The remaining one third of the shares was offered to 
 the employes. If any* subscriber was too poor to pay $50 for a 
 share, the subsequent dividends and payments were to be ap- 
 plied to purchasing the share. After reserving a fair allowance 
 for expenses, like the redemption of capital, whenever the re- 
 maining profits exceeded ten per cent on the capital, that ex- 
 cess was to be divided into two equal parts, one of which was 
 to be distributed among all persons employed by the company 
 in proportion to their wages, and the other was to be retained 
 by the capital. In previous years but once had they made ten 
 per cent profit on their capital, and twice only five per cent. 
 In the first year after the new system came into operation, the 
 total profits were fourteen per cent, and the four per cent of 
 excess was divided, two to the laborers' bonus, and two to the 
 capital, so that capital received twelve per cent. In the second 
 year the profits were sixteen per cent, in the third year seven- 
 teen per cent ; the first year the work-people received in addi- 
 tion to their wages $9,000, in the second $13,500, in the third 
 $15,750. The moral effect was striking. Work was done 
 regularly, forbearance was exercised, habits improved, and the 
 faces of the men were set toward improvement in life. The 
 scheme worked successfully for years, but was finally ended 
 by the pressure of the outside trades-unions, who compelled the 
 workmen to give up the arrangement. 
 
 A similar experiment was tried by the Messrs. Brewster, 
 carriage-manufacturers, of New York. They offered to their 
 workmen ten per cent of their profits, before any allowance 
 was made for interest on the capital invested, or before any 
 payment was made for the services of the firm as managers. 
 In one year as much as $11,000 was divided among the labor- 
 ers. Again, as in the case of the Briggs colliery, the experi- 
 ment was brought to an end by an unreasoning submission to 
 the pressure of outside workmen during a strike. 1 
 
 But, all in all, industrial partnership 3 offers a great field for 
 
 1 See Walker, "Wages Question," p. 283. Also see Mill, Book IV, Chap. 
 VII, § 5, for an account of M. Leclaire's experiments in France with house- 
 painters. 
 
 2 See also Von Bohmert, " Gewinnbetheiligung," second edition, 1878, and 
 Jevons's " Methods of Social Reform " (1883). Professor Jevons (" The State in 
 Relation to Labor," pp. 146, 147) has given a brief bibliography, which I re- 
 produce here : 
 
 Charles Babbage, " Economy of Manufactures," chap, xxvi ; H. C. Briggs, 
 "Social Science Association," 1869; H. C. and A. Briggs, "Evidence before 
 the Trades-Union Commission," March 4, 1868, Questions 12,485 to 12,753 [Par- 
 
PROBABLE FUTURITY OF THE LABORING-CLASSES. 531 
 
 that kind of improvement which is worth more than a mere 
 increase of wages, and seems to make it possible to reach the 
 heavy weight of sluggishness among the lower and more hope- 
 less strata of society. And it is possible that it may stir in 
 them the powers which may afterward find employment in 
 the harder problems of productive co-operation. 1 
 
 liamentary Documents] ; " The Industrial Partnerships Record " ; Pare, " Co- 
 operative Agriculture " (Longmans) 1870 ; Jean Billon, " Participation des Ou- 
 vricrs aux Benefices des Patrons," Geneve, 1877 ; Fougeroussc, " Patrons et 
 Ouvriers de Paris" (Chaix), 1880; Sedley Taylor, " Society of Arts Journal," 
 February 18, 1881, vol. xxix, pp. 260-270; also in "Nineteenth Century," May, 
 1881, pp. 802-811, "On Profit-Sharing"; J. C. Van Marken, "La Question 
 Ouvriere: Essai de Solution Pratique" (Chaix) 1881. 
 
 1 In his last edition of his " Manual," Professor Fawcett thus describes a 
 co-operative experiment in agriculture : " The one that has attracted the most 
 attention was made nearly forty years since by Mr. Gurdon, on his estate at 
 Assington, near Sudbury, in Suffolk. Mr. Gurdon was so much impressed with 
 the miserable condition of the agricultural laborers who were employed on his 
 estate, that he was prompted to do something on their behalf. When, there- 
 fore, one of his farms became vacant, he offered to let it at the ordinary rent, 
 £150 a year, to the laborers who worked upon it. As they, of course, had not 
 sufficient capital to cultivate it, he in the first instance loaned them the requisite 
 stock and implements. The laborers were, in fact, formed into a company in 
 which there were eleven shares, and no laborer was permitted to hold more 
 than one share. The plan was so eminently successful that in a few years suf- 
 ficient had been saved out of the profits to repay all that had been advanced, 
 and the stock and implements became the property of the laborers. Each 
 share greatly increased in value. Mr. Gurdon was so much encouraged, not 
 only by the pecuniary advantages secured to the laborers, but also by the gen. 
 eral improvement effected in their condition, that some years afterward he let 
 another and a larger farm on similar terms. Although no statement of ac- 
 counts has ever been published, the remarkable pecuniary advantages secured 
 to the laborers is proved by the fact that, after enjoying at least as high wages 
 as were paid in the district, they were able in a few years to become the owners 
 of a valuable property, consisting of the stock and implements on the farms. 
 One of the most significant and hopeful circumstances connected with the 
 experiment is, that it was not carried out by a picked body of men; and if so 
 much could be done by laborers who were probably among the worst educated 
 in the country, it may be fairly concluded, that when the intelligence of our rural 
 population has been better developed, co-operation may be applied in a more 
 complete form to agriculture, and with even more striking results than were 
 obtained at Assington. ... In the description which has been frequently given 
 of the system of peasant proprietorship, it is shown how powerfully the indus- 
 try of the laborer is stimulated by the feeling of property. When he cultivates 
 his own plot of ground, he exerts himself to the utmost, because he knows that 
 
532 INFLUENCE OF THE PROGRESS OF SOCIETY. 
 
 § 7. In Germany the struggle between the two theories — 
 self-help and state-help — was fought out by Schultze-Delitsch — 
 that is, Schultze of Delitsch, a town in Saxony — and Lasalle, and 
 the victory given to the former. Schultze-Delitsch, as a conse- 
 quence, was successful in directing the co-operative principle in 
 Germany to giving workmen credit in purchasing tools, etc., 
 when he had no security but his character. This form of co- 
 operation works to give the energetic and industrious workmen 
 a lever by which, through the possession of credit, they can 
 raise themselves to the position of small capitalists, and thus 
 widen the field of possible improvement. While the former 
 schemes of co-operation described above have given the wages- 
 receivers a share of the unearned increment from land, and 
 tend to give them a share of the manager's wages, the plan of 
 Schultze was to assist them to gain a share in the advantages 
 belonging to the possession of capital. The capital was to be 
 accumulated by their own exertions, and, in his scheme depend- 
 ed on the principle of self-help. The following is the plan of 
 banks adopted : 
 
 " Every member is obliged to make a certain weekly pay- 
 ment into the common stock. As soon as it reaches a certain 
 sum he is allowed to raise a loan exceeding his share in the in- 
 verse ratio of the amount of his deposit. For instance, after 
 he has deposited one dollar, he is allowed to borrow five or six ; 
 but, if he had deposited twenty dollars, he is allowed only to 
 borrow thirty. The security he is compelled to offer is his own 
 and that of two other members of the association, who become 
 jointly and severally liable. He may have no assets whatever 
 beyond the amount of his deposits, nor may his guarantors ; 
 the bank relies simply on the character of the three, and the 
 two securities rely on the character of their principal ; and the 
 remarkable fact is, that the security has been found sufficient, 
 that the interest of the men in the institutions and the fear of 
 the opinion of their fellows has produced a display of honesty 
 and punctuality such as perhaps is not to be found in the his- 
 tory of any other banking institutions. Such is the confidence 
 inspired by these institutions that they hold on deposit, or as 
 loans from third parties, an amount exceeding by more than 
 three fourths the total amount of their own capital. The 
 
 he will enjoy all that is yielded by his labor. Each year, with the extended use 
 of machinery in agriculture, it is becoming more advantageous to carry on farm- 
 ing on a large scale. When, therefore, co-operative agriculture becomes prac- 
 ticable, land may be cultivated by associations of laborers, and thus many of the 
 advantages associated with the system of peasant proprietorship may be secured, 
 while at the same time the disadvantages of small farming may be avoided. The 
 progress toward co-operative agriculture will no doubt be slow and gradual." 
 
PROBABLE FUTURITY OF THE LABORING-CLASSES. 533 
 
 monthly contributions of the members may be as low as ten 
 cents, but the amount which each member is allowed to have 
 in some banks is not more than seven or eight dollars, in none 
 more than three hundred dollars. He has a right to borrow to 
 the full amount of his deposit without giving security ; if he 
 desires to borrow a larger sum, he must furnish security in the 
 manner we have described. The liability of the members is 
 unlimited. The plan of limiting the liability to the amount 
 of the capital deposited was tried at first, but it inspired no 
 confidence, and the enterprise did not succeed till every mem- 
 ber was made generally liable. Each member, on entering, is 
 obliged to pay a small fee, which goes toward forming or 
 maintaining a reserve fund, apart from the active capital. The 
 profits are derived from the interest paid by borrowers, which 
 amounts to from eight to ten per cent, which may not sound 
 very large in our ears, but in Germany is very high. Not over 
 five per cent is paid on capital borrowed from outsiders. All 
 profits are distributed in dividends among the members of the 
 association, in the proportion of the amount of their deposits 
 — after the payment of the expenses of management, of course 
 — and the apportionment of a certain percentage to the reserve- 
 fund. Every member, as we have said, has a right to borrow 
 to the extent of his deposit without security ; but then, if he 
 seeks to borrow more, whether he shall obtain any loan, and, if 
 so, how large a one, is decided by the board of management, 
 who are guided in making their decision just as all bank offi- 
 cers are — by a consideration of the circumstances of the bank 
 as well as those of the borrower. All the affairs of the asso- 
 ciation are discussed and decided in the last resort by a general 
 assembly composed of all the members." ' The main part of 
 the capital loaned by the banks is obtained from outside sources 
 on the credit of the associations. In 1865 there were 961 
 of these institutions in Germany ; in 1877 there were 1,827, 
 with over 1,000,000 members, owning $40,000,000 of capital, 
 with $100,000,000 more on loan, and doing a business of 
 $550,000,000." 
 
 1 Godkin, " North American Review," 1868. Also see Hermann Schultze- 
 Delitsch, " Die Entwickelung des Genossenschaftswesens in Deutschland " (1870). 
 This eminent philanthropist died April 29, 1883. For other forms of co-opera- 
 tion, building associations, etc., see Barnard, "Co-operation as a Business"; 
 Pajot, "Du Progres par les Societes de Secours Mutuels " (1878). 
 
 8 See " Economics of Industry," by Mr. and Mrs. Marshall, p. 223. 
 
BOOK V. 
 
 ON THE INFLUENCE OF GOVERNMENT. 
 
BOOK V. 
 ON THE INFLUENCE OF GOVERNMENT. 
 
 CHAPTER I. 
 
 ON THE GENERAL PRINCIPLES OF TAXATION. 
 
 § 1. One of the most disputed questions, both in political 
 science and in practical statesmanship at this particular pe- 
 riod, relates to the proper limits of the functions and agency 
 of governments. 
 
 We shall first consider the economical effects arising from 
 the manner in which governments perform their necessary 
 and acknowledged functions. 
 
 We shall then pass to certain governmental interferences 
 of what I have termed the optional kind (i. e., overstepping 
 the boundaries of the universally acknowledged functions) 
 which have heretofore taken place, and in some cases still 
 take place, under the influence of false general theories. 
 
 The first of these divisions is of an extremely miscellane- 
 ous character : since the necessary functions of government, 
 and those which are so manifestly expedient that they have 
 never or very rarely been objected to, are too various to be 
 brought under any very simple classification. We com- 
 mence, [under] the first head, with the theory of Taxation. 
 
 The qualities desirable, economically speaking, in a 
 system of taxation, have been embodied by Adam Smith in 
 four maxims or principles, which, having been generally con- 
 curred in by subsequent writers, may be said to have become 
 
538 THE INFLUENCE OF GOVERNMENT. 
 
 classical, and this chapter can not be better commenced than 
 by quoting them : l 
 
 " 1. The subjects of every state ought to contribute to the 
 support of the government, as nearly as possible in propor- 
 tion to their respective abilities : that is, in proportion to the 
 revenue which they respectively enjoy under the protection of 
 the state. In the observation or neglect of this maxim con- 
 sists what is called the equality or inequality of taxation. 
 
 " 2. The tax which each individual is bound to pay ought 
 to be certain, and not arbitrary. The time of payment, the 
 manner of payment, the quantity to be paid, ought all to be 
 clear and plain to the contributor, and to every other person. 
 The certainty of what each individual ought to pay is, in taxa- 
 tion, a matter of so great importance, that a very consider- 
 able degree of inequality, it appears, I believe, from the ex- 
 perience of all nations, is not near so great an evil as a very 
 small degree of uncertainty. 
 
 " 3. Every tax ought to be levied at the time, or in the 
 manner, in which it is most likely to be convenient for the 
 contributor to pay it. Taxes upon such consumable goods as 
 are articles of luxury are all finally paid by the consumer, 
 and generally in a manner that is very convenient to him. 
 He pays them little by little, as he has occasion to buy the 
 goods. As he is at liberty, too, either to buy or not to buy, 
 as he pleases, it must be his own fault if he ever suffers any 
 considerable inconvenience from such taxes. 
 
 " 4. Every tax ought to be so contrived as both to take 
 out and to keep out of the pockets of the people as little as 
 possible over and above what it brings into the public treasury 
 of the state. A tax may either take out or keep out of the 
 pockets of the people a great deal more than it brings into 
 the public treasury in the four following ways : First, the 
 levying of it may require a great number of officers, whose 
 salaries may eat up the greater part of the produce of the tax, 
 and whose perquisites may impose another additional tax upon 
 
 1 " Wealth of Nations," Book V, chap. ii. 
 
GENERAL PRINCIPLES OF TAXATION. 539 
 
 the people." Secondly, it may divert a portion of the labor 
 and capital of the community from a more to a less produc- 
 tive employment. " Thirdly, by the forfeitures and other 
 penalties which those unfortunate individuals incur who 
 attempt unsuccessfully to evade the tax it may frequently 
 ruin them, and thereby put an end to the benefit which the 
 community might have derived from the employment of their 
 capitals. An injudicious tax offers a great temptation to 
 smuggling. Fourthly, by subjecting the people to the fre- 
 quent visits and the odious examination of the tax-gatherers it 
 may expose them to much unnecessary trouble, vexation, and 
 oppression " : to which may be added that the restrictive 
 regulations to which trades and manufactures are often sub- 
 jected, to prevent evasion of a tax, are not only in themselves 
 troublesome and expensive, but often oppose insuperable ob- 
 stacles to making improvements in the processes. 
 
 § 2. The first of the four points, equality of taxation, 
 requires to be more fully examined, being a thing often im- 
 perfectly understood, and on which many false notions have 
 become to a certain degree accredited, through the absence of 
 any definite principles of judgment in the popular mind. 
 
 For what reason ought equality to be the rule in mat- 
 ters of taxation ? For the reason that it ought to be so in 
 all affairs of government. A government ought to make no 
 distinction of persons or classes in the strength of their claims 
 on it. If any one bears less than his fair share of the bur- 
 den, some other person must suffer more than his share. 
 Equality of taxation, therefore, as a maxim of politics, means 
 equality of sacrifice. It means apportioning the contribution 
 of each person toward the expenses of government, so that 
 he shall feel neither more nor less inconvenience from his 
 share of the payment than every other person experiences 
 from his. There are persons, however, who regard the taxes 
 paid by each member of the community as an equivalent 
 for value received, in the shape of service to himself ; and 
 they prefer to rest the justice of making each contribute in 
 proportion to his means upon the ground that he who has 
 
540 THE INFLUENCE OF GOVERNMENT. 
 
 twice as much property to be protected receives, on an accu- 
 rate calculation, twice as much protection, and ought, on the 
 principles of bargain and sale, to pay twice as much for it. 
 Since, however, the assumption that government exists solely 
 for the protection of property is not one to be deliberately 
 adhered to, some consistent adherents of the quid pro quo 
 principle go on to observe that protection being required for 
 persons as well as property, and everybody's person receiving 
 the same amount of protection, a poll-tax of a fixed sum per 
 head is a proper equivalent for this part of the benefits of 
 government, while the remaining part, protection to property, 
 should be paid for in proportion to property. But, in the 
 first place, it is not admissible that the protection of persons 
 and that of property are the sole purposes of government. In 
 the second place, the practice of setting definite values on 
 things essentially indefinite, and making them a ground of 
 practical conclusions, is peculiarly fertile in the false views 
 of social questions. It can not be admitted that to be pro- 
 tected in the ownership of ten times as much property is to 
 be ten times as much protected. If we wanted to estimate 
 the degrees of benefit which different persons derive from 
 the protection of government, we should have to consider 
 who would suffer most if that protection were withdrawn : to 
 which question, if any answer could be made, it must be, that 
 those would suffer most who were weakest in mind or body, 
 either by nature or by position. 
 
 § 3. Setting out, then, from the maxim that equal sacri- 
 fices ought to be demanded from all, we have next to inquire 
 whether this is in fact done, by making each contribute the 
 same percentage on his pecuniary means. Many persons 
 maintain the negative, saying that a tenth part taken from a 
 small income is a heavier burden than the same fraction de- 
 ducted from one much larger ; and on this is grounded the 
 very popular scheme of what is called a graduated property- 
 tax, viz., an income-tax in which the percentage rises with 
 the amount of the income. 
 
 On the best consideration I am able to give to this ques- 
 
GENERAL PRINCIPLES OF TAXATION. 541 
 
 tion, it appears to me that the portion of truth which the 
 doctrine contains arises principally from the difference be- 
 tween a tax which can be saved from luxuries and one which 
 trenches, in ever so small a degree, upon the necessaries of 
 life. To take a thousand a year from the possessor of ten 
 thousand would not deprive him of anything really condu- 
 cive either to the support or to the comfort of existence ; and, 
 if such would be the effect of taking five pounds from one 
 whose income is fifty, the sacrifice required from the last is 
 not only greater than, but entirely incommensurable with, 
 that imposed upon the first. The mode of adjusting these 
 inequalities of pressure which seems to be the most equitable 
 is that recommended by Bentham, of leaving a certain mini- 
 mum of income, sufficient to provide the necessaries of life, 
 untaxed. Suppose [$250] a year to be sufficient to provide 
 the number of persons ordinarily supported from a single in- 
 come with the requisites of life and health, and with protec- 
 tion against habitual bodily suffering, but not with any indul- 
 gence. This then should be made the minimum, and incomes 
 exceeding it should pay taxes not upon their whole amount, 
 but upon the surplus. If the tax be ten per cent, an income 
 of [$300] should be considered as a net income of [$50], and 
 charged with [$5] a year, while an income of [$5,000] should 
 be charged as one of [$4,750]. An income not exceeding 
 [$250] should not be taxed at all, either directly or by taxes 
 on necessaries ; for, as by supposition this is the smallest 
 income which labor ought to be able to command, the gov- 
 ernment ought not to be a party to making it smaller. 
 
 Both in England and on the Continent a graduated prop- 
 erty-tax (Vimpdt progressif) has been advocated, on the 
 avowed ground that the state should use the instrument of 
 taxation as a means of mitigating the inequalities of wealth. 
 I am as desirous as any one that means should be taken to 
 diminish those inequalities, but not so as to relieve the prodi- 
 gal at the expense of the prudent. To tax the larger incomes 
 at a higher percentage than the smaller is to lay a tax on 
 industry and economy; to impose a penalty on people for 
 
542 TH E INFLUENCE OF GOVERNMENT. 
 
 having worked harder and saved more than their neighbors. 
 It is not the fortunes which are earned, but those which are 
 unearned, that it is for the public good to place under limita- 
 tion. With respect to the large fortunes acquired by gift or 
 inheritance, the power of bequeathing is one of those privi- 
 leges of property which are fit subjects for regulation on 
 grounds of general expediency; and I have already sug- 
 gested, 1 as the most eligible mode of restraining the accu- 
 mulation of large fortunes in the hands of those who have 
 not earned them by exertion, a limitation of the amount 
 which any one person should be permitted to acquire by gift, 
 bequest, or inheritance. I conceive that inheritances and 
 legacies, exceeding a certain amount, are highly proper sub- 
 jects for taxation ; and that the revenue from them should 
 be as great as it can be made without giving rise to evasions, 
 by donation inter vivos or concealment of property, such as 
 it would be impossible adequately to check. The principle 
 of graduation (as it is called), that is, of levying a larger per- 
 centage on a larger sum, though its application to general 
 taxation would be in my opinion objectionable, seems to me 
 both just and expedient as applied to legacy and inheritance 
 duties. 
 
 The objection to a graduated property-tax applies in an 
 aggravated degree to the proposition of an exclusive tax on 
 what is called "realized property," that is, property not 
 forming a part of any capital engaged in business, or rather 
 in business under the superintendence of the owner ; as land, 
 the public funds, money lent on mortgage, and shares in 
 stock companies. Except the proposal of applying a sponge 
 to the national debt, no such palpable violation of common 
 honesty has found sufficient support in this country, during 
 the present generation, to be regarded as within the domain 
 of discussion. It has not the palliation of a graduated prop- 
 erty-tax, that of laying the burden on those best able to bear 
 it ; for " realized property " includes the far larger portion of 
 
 1 Book II, Chap. I, § 6. 
 
GENERAL PRINCIPLES OF TAXATION. 543 
 
 the provision made for those who are unable to work, and 
 consists, in great part, of extremely small fractions. I can 
 hardly conceive a more shameless pretension than that the 
 major part of the property of the country, that of merchants, 
 manufacturers, farmers, and shopkeepers, should be exempted 
 from its share of taxation ; that these classes should only 
 begin to pay their proportion after retiring from business, 
 and if they never retire should be excused from it altogether. 
 But even this does not give an adequate idea of the injustice 
 of the proposition. The burden thus exclusively thrown on 
 the owners of the smaller portion of the wealth of the com- 
 munity would not even be a burden on that class of persons 
 in perpetual succession, but would fall exclusively on those 
 who happened to compose it when the tax was laid on. As 
 land and those particular securities would thenceforth yield 
 a smaller net income, relatively to the general interest of 
 capital and to the profits of trade, the balance would rectify 
 itself by a permanent depreciation of those kinds of property. 
 Future buyers would acquire land and securities at a reduc- 
 tion of price, equivalent to the peculiar tax, which tax they 
 would, therefore, escape from paying; while the original 
 possessors would remain burdened with it even after parting 
 with the property, since they would have sold their land or 
 securities at a loss of value equivalent to the fee-simple of 
 the tax. Its imposition would thus be tantamount to the 
 confiscation for public uses of a percentage of their property 
 equal to the percentage laid on their income by the tax. 
 
 The above proposition has been extended, by those in the 
 United States who appeal to class prejudice, to a proposal to 
 tax the incomes of those who hold government bonds. It so 
 happened that, for example, the six dollars income on a one- 
 hundred-dollar bond of the United States was not, in the war 
 period, deemed a sufficient equivalent for the risk of loaning 
 one hundred dollars to the state ; and Congress, therefore, 
 agreed to relieve them of taxation. It is the same thing to a 
 lender if he receive six per cent directly from the Govern- 
 ment, or if he receive seven per cent, and is obliged to pay back 
 one per cent to the treasury in the form of taxation ; but to the 
 Government it is another thing, because if it sell a taxed bond 
 
544 THE INFLUENCE OF GOVERNMENT. 
 
 at seven per cent interest, it does not receive back the whole of 
 the one per cent tax, but the one per cent tax less the expense 
 of levying it. In other words the Government, in the latter 
 case, pays six per cent interest plus the cost of levying the tax ; 
 and consequently borrowed more cheaply in the form of an un- 
 taxed bond, as was the hope when the provision was made. If, 
 then, a tax were now to be put upon the bonds, it would fall 
 exclusively on the present holders of them ; for, since it dimin- 
 ishes the net income from the bond, it lowers the selling price 
 of the bond itself, as before explained. 1 
 
 § 4. Whether the profits of trade may not rightfully be 
 taxed at a lower rate than incomes derived from interest or 
 rent is part of the more comprehensive question whether life- 
 incomes should be subjected to the same rate of taxation as 
 perpetual incomes; whether salaries, for example, or annui- 
 ties, or the gains of professions, should pay the same per cent- 
 age as the income from inheritable property. 
 
 The existing tax [in England] treats all kinds of incomes 
 exactly alike, taking its [fivepence] in the pound as well 
 from the person whose income dies with him as from the 
 landholder, stockholder, or mortgagee, who can transmit his 
 fortune undiminished to his descendants. This is a visible 
 injustice ; yet it does not arithmetically violate the rule that 
 taxation ought to be in proportion to means. When it is said 
 that a temporary income ought to be taxed less than a per- 
 manent one, the reply is irresistible that it is taxed less: for 
 the income which lasts only ten years pays the tax only ten 
 years, while that which lasts forever pays forever. The 
 claim in favor of terminable incomes does not rest on grounds 
 of arithmetic, but of human wants and feelings. It is not 
 because the temporary annuitant has smaller means, but be- 
 cause he has greater necessities, that he ought to be assessed 
 at a lower rate. 
 
 In spite of the nominal equality of income, A, an annui- 
 tant of £1,000 a year, can not so well afford to pay £100 out 
 of it as B, who derives the same annual sum from heritable 
 property ; A having usually a demand on his income which 
 
 1 Book III, Chap. XIX, § 5. 
 
GENERAL PRINCIPLES OF TAXATION. 545 
 
 B has not, namely, to provide by saving for children or 
 others ; to which, in the case of salaries or professional gains, 
 must generally be added a provision for his own later years ; 
 while B may expend his whole income without injury to his 
 old age, and still have it all to bestow on others after his 
 death. If A, in order to meet these exigencies, must lay by 
 £300 of his income, to take £100 from him as income-tax is 
 to take £100 from £700, since it must be retrenched from 
 that part only of his means which he can afford to spend 
 on his own consumption. Were he to throw it ratably on 
 what he spends and on what he saves, abating £70 from his 
 consumption and £30 from his annual saving, then indeed 
 his immediate sacrifice would be proportionally the same as 
 B's ; but then his children or his old age would be worse pro- 
 vided for in consequence of the tax. The capital sum which 
 would be accumulated for them would be one tenth less, and 
 on the reduced income afforded by this reduced capital they 
 would be a second time charged with income-tax ; while B's 
 heirs would only be charged once. 
 
 The principle, therefore, of equality of taxation, inter- 
 preted in its only just sense, equality of sacrifice, requires 
 that a person who has no means of providing for old age, or 
 for those in whom he is interested, except by saving from 
 income, should have the tax remitted on all that part of 
 his income which is really and hona fide applied to that 
 purpose. 
 
 If, indeed, reliance could be placed on the conscience of 
 the contributors, or sufficient security taken for the correct- 
 ness of their statements by collateral precautions, the proper 
 mode of assessing an income-tax would be to tax only the 
 part of income devoted to expenditure, exempting that 
 which is saved. For when saved and invested (and all sav- 
 ings, speaking generally, are invested) it thenceforth pays 
 income-tax on the interest or profit which it brings, notwith- 
 standing that it has already been taxed on the principal. 
 Unless, therefore, savings are exempted from income-tax, 
 the contributors are twice taxed on what they save, and only 
 
 35. 
 
546 THE INFLUENCE OF GOVERNMENT. 
 
 once on what they spend. To tax the sum invested, and 
 afterward tax also the proceeds of the investment, is to tax 
 the same portion of the contributor's means twice over. 
 
 No income-tax is really just from which savings are not 
 exempted ; and no income-tax ought to be voted without 
 that provision, if the form of the returns and the nature of 
 the evidence required could be so arranged as to prevent 
 the exemption from being taken fraudulent advantage of, 
 by saving with one hand and getting into debt with the other, 
 or by spending in the following year what had been passed 
 tax-free as saving in the year preceding. But, if no plan can 
 be devised for the exemption of actual savings, sufficiently 
 free from liability to fraud, it is necessary, as the next thing 
 in point of justice, to take into account, in assessing the tax, 
 what the different classes of contributors ought to save. In 
 fixing the proportion between the two rates, there must in- 
 evitably be something arbitrary ; perhaps a deduction of one 
 fourth in favor of life-incomes would be as little objection- 
 able as any which could be made. 
 
 Of the net profits of persons in business, a part, as before 
 observed, may be considered as interest on capital, and of a 
 perpetual character, and the remaining part as remuneration 
 for the skill and labor of superintendence. The surplus be- 
 yond interest depends on the life of the individual, and even 
 on his continuance in business, and is entitled to the full 
 amount of exemption allowed to terminable incomes. 
 
 § 5. Suppose that there is a kind of income which con- 
 stantly tends to increase, without any exertion or sacrifice on 
 the part of the owners : those owners constituting a class in 
 the community, whom the natural course of things progress- 
 ively enriches, consistently with complete passiveness on their 
 own part. In such a case it would be no violation of the 
 principles on which private property is grounded, if the state 
 should appropriate this increase of wealth, or part of it, as it 
 arises. This would not properly be taking anything from 
 anybody ; it would merely be applying an accession of wealth, 
 created by circumstances, to the benefit of society, instead of 
 
GENERAL PRINCIPLES OF TAXATION. 547 
 
 allowing it to become an unearned appendage to the riches 
 of a particular class. 
 
 Now, this is actually the case with rent. The ordinary- 
 progress of a society which increases in wealth is at all times 
 tending to augment the incomes of landlords ; to give them 
 both a greater amount and a greater proportion of the wealth 
 of the community, independently of any trouble or outlay 
 incurred by themselves. They grow richer, as it were, in 
 their sleep, without working, risking, or economizing. What 
 claim have they, on the general principle of social justice, 
 to this accession of riches ? In what would they have been 
 wronged if society had, from the beginning, reserved the 
 right of taxing the spontaneous increase of rent, to the high- 
 est amount required by financial exigencies ? The only ad- 
 missible mode of proceeding would be by a general measure. 
 The first step should be a valuation of all the land in the 
 country. The present value of all land should be exempt 
 from the tax ; but after an interval had elapsed, during 
 which society had increased in population and capital, a 
 rough estimate might be made of the spontaneous increase 
 which had accrued to rent since the valuation was made. 
 Of this the average price of produce would be some criterion : 
 if that had risen, it would be certain that rent had increased, 
 and (as already shown) even in a greater ratio than the rise 
 of price. On this and other data, an approximate estimate 
 might be made how much value had been added to the land 
 of the country by natural causes ; and in laying on a general 
 land-tax, which for fear of miscalculation should be consid- 
 erably within the amount thus indicated, there would be an 
 assurance of not touching any increase of income which might 
 be the result of capital expended or industry exerted by the 
 proprietor. 
 
 With reference to such a tax, perhaps a safer criterion 
 than either a rise of rents or a rise of the price of corn, 
 would be a general rise in the price of land. It would be 
 easy to keep the tax within the amount which would reduce 
 the market value of land below the original valuation ; and 
 
548 THE INFLUENCE OF GOVERNMENT. 
 
 up to that point, whatever the amount of the tax might be, 
 no injustice would be done to the proprietors. 
 
 In 1870 Mr. Mill became President of the Land Tenure As- 
 sociation, one of whose objects was : "To claim for the benefit 
 of the State the Interception by Taxation of the Future Un- 
 earned Increase of the Rent of Land (so far as the same can be 
 ascertained), or a great part of that increase, which is continu- 
 ally taking place, without any effort or outlay by the proprie- 
 tors, merely through the growth of population and wealth ; 
 reserving to owners the option of relinquishing their property 
 to the state at the market value which it may have acquired at 
 the time when this principle may be adopted by the Legisla- 
 ture." It is urged against this plan that, if the Government 
 take for itself the increase from rent, it should also make com- 
 pensation for loss arising from declining rents, whenever there 
 happens to be any readjustment of values in land. 1 
 
 § 6. In addition to the preceding rules, another general 
 rule of taxation is sometimes laid down — namely, that it 
 should fall on income and not on capital. 
 
 To provide that taxation shall fall entirely on income, 
 and not at all on capital, is beyond the power of any system 
 of fiscal arrangements. There is no tax which is not partly 
 paid from what would otherwise have been saved ; no tax, 
 the amount of which, if remitted, would be wholly employed 
 in increased expenditure, and no part whatever laid by as an 
 addition to capital. All taxes, therefore, are in some sense 
 partly paid out of capital ; and in a poor country it is impos- 
 sible to impose any tax which will not impede the increase of 
 the national wealth. But, in a country where capital abounds 
 and the spirit of accumulation is strong, this effect of taxa- 
 tion is scarcely felt. To take from capital by taxation what 
 emigration would remove, or a commercial crisis destroy, is 
 only to do what either of those causes would have done — 
 namely, to make a clear space for further saving. 
 
 I can not, therefore, attach any importance, in a wealthy 
 country, to the objection made against taxes on legacies and 
 inheritances, that they are taxes on capital. It is perfectly 
 true that they are so. As Ricardo observes, if £100 are taken 
 
 1 Cf. Walker, " Land and Rent," page 134. 
 
GENERAL PRINCIPLES OF TAXATION. 549 
 
 from any one in a tax on houses or on wine, he will probably 
 save it, or a part of it, by living in a cheaper house, consum- 
 ing less wine, or retrenching from some other of his ex- 
 penses ; but, if the same sum be taken from him because he 
 has received a legacy of £1,000, he considers the legacy as 
 only £900, and feels no more inducement than at any other 
 time (probably feels rather less inducement) to economize in 
 his expenditure. The tax, therefore, is wholly paid out of 
 capital ; and there are countries in which this would be a 
 serious objection. But, in the first place, the argument can 
 not apply to any country which has a national debt and de- 
 votes any portion of revenue to paying it off, since the prod- 
 uce of the tax, thus applied, still remains capital, and is 
 merely transferred from the tax-payer to the fund-holder. 
 But the objection is never applicable in a country which 
 increases rapidly in wealth. 
 
CHAPTER II. 
 
 OF DIRECT TAXES. 
 
 § 1. Taxes are either direct or indirect. A direct tax is 
 one which is demanded from the very persons who, it is in- 
 tended or desired, should pay it. Indirect taxes are those 
 which are demanded from one person in the expectation and 
 intention that he shall indemnify himself at the expense of 
 another : such as the excise or customs. The producer or 
 importer of a commodity is called upon to pay tax on it, not 
 with the intention to levy a peculiar contribution upon him, 
 but to tax through him the consumers of the commodity, 
 from whom it is supposed that he will recover the amount 
 by means of an advance in price. 
 
 Direct taxes are either on income or on expenditure. 
 Most taxes on expenditure are indirect, but some are direct, 
 being imposed, not on the producer or seller of an article, 
 but immediately on the consumer. A house-tax, for exam- 
 ple, is a direct tax on expenditure, if levied, as it usually is, 
 on the occupier of the house. If levied on the builder or 
 owner, it would be an indirect tax. A window-tax is a 
 direct tax on expenditure; so are the taxes on horses and 
 carriages. 
 
 The sources of income are rent, profits, and wages. This 
 includes every sort of income, except gift or plunder. Taxes 
 may be laid on any one of the three kinds of income, or a 
 uniform tax on all of them. "We will consider these in their 
 order. 
 
 § 2. A tax on rent falls wholly on the landlord. There 
 
DIRECT TAXES. 551 
 
 are no means by which he can shift the burden upon any 
 one else. It does not affect the value or price of agricultural 
 produce, for this is determined by the cost of production in 
 the most unfavorable circumstances, and in those circum- 
 stances, as we have so often demonstrated, no rent is paid. 
 
 This, however, is, in strict exactness, only true of the 
 rent which is the result either of natural causes, or of im- 
 provements made by tenants. When the landlord makes 
 improvements which increase the productive power of his 
 land, he is remunerated for them by an extra payment from 
 the tenant ; and this payment, which to the landlord is prop- 
 erly a profit on capital, is blended and confounded with rent, 
 A tax on rent, if extending to this portion of it, would dis- 
 courage landlords from making improvements; but what- 
 ever hinders improvements from being made in the manner 
 in which people prefer to make them, will often prevent 
 them from being made at all ; and on this account a tax on 
 rent would be inexpedient unless some means could be de- 
 vised of excluding from its operation that portion of the 
 nominal rent which may be regarded as landlord's profit. 
 
 § 3. A tax on profits, like a tax on rent, must, at least in 
 its immediate operation, fall wholly on the payer. All prof- 
 its being alike affected, no relief can be obtained by a change 
 of employment. If a tax were laid on the profits of any 
 one branch of productive employment, the tax would be 
 virtually an increase of the cost of production, and the value 
 and price of the article would rise accordingly; by which 
 the tax would be thrown upon the consumers of the com- 
 modity, and would not affect profits. But a general and 
 equal tax on all profits would not affect general prices, and 
 would fall, at least in the first instance, on capitalists alone. 
 
 There is, however, an ulterior effect, which, in a rich and 
 prosperous country, requires to be taken into account. It 
 may operate in two different ways : (1.) The curtailment of 
 profit, and the consequent increased difficulty in making a 
 fortune or obtaining a subsistence by the employment of 
 capital, may act as a stimulus to inventions, and to the use 
 
552 THE INFLUENCE OF GOVERNMENT. 
 
 of them when made. If improvements in production are 
 much accelerated, and if these improvements cheapen, di- 
 rectly or indirectly, any of the things habitually consumed 
 by the laborer, profits may rise, and rise sufficiently to make 
 up for all that is taken from them by the tax. In that case 
 the tax will have been realized without loss to any one, the 
 produce of the country being increased by an equal, or what 
 would in that case be a far greater, amount. The tax, how- 
 ever, must even in this case be considered as paid from prof- 
 its, because the receivers of profits are those who would be 
 benefited if it were taken off. 
 
 But (2) though the artificial abstraction of a portion of 
 profits would have a real tendency to accelerate improve- 
 ments in production, no considerable improvements might 
 actually result, or only of such a kind as not to raise general 
 profits at all, or not to raise them so much as the tax had 
 diminished them. If so, the rate of profit would be brought 
 closer to that practical minimum to which it is constantly ap- 
 proaching. At its first imposition the tax falls wholly on 
 profits ; but the amount of increase of capital, which the tax 
 prevents, would, if it had been allowed to continue, have 
 tended to reduce profits to the same level; and at every 
 period of ten or twenty years there will be found less differ- 
 ence between profits as they are and profits as they would 
 in that case have been, until at last there is no difference, 
 and the tax is thrown either upon the laborer or upon the 
 landlord. The real effect of a tax on profits is to make the 
 country possess at any given period a smaller capital and a 
 smaller aggregate production, and to make the stationary 
 state be attained earlier, and with a smaller sum of national 
 wealth. 
 
 Even in countries which do not accumulate so fast as to 
 be always within a short interval of the stationary state, it 
 seems impossible that, if capital is accumulating at all, its 
 accumulation should not be in some degree retarded by the 
 abstraction of a portion of its profit ; and, unless the effect 
 in stimulating improvements be a full counterbalance, it is 
 
DIRECT TAXES. 553 
 
 inevitable that a part of the burden will be thrown off the 
 capitalist, upon the laborer or the landlord. One or other 
 of these is always the loser by a diminished rate of accumu- 
 lation. If population continues to increase as before, the 
 laborer suffers ; if not, cultivation is checked in its advance, 
 and the landlords lose the accession of rent which would 
 have accrued to them. The only countries in which a tax on 
 profits seems likely to be permanently a burden on capital- 
 ists exclusively are those in which capital is stationary, be- 
 cause there is no new accumulation. In such countries the 
 tax might not prevent the old capital from being kept up 
 through habit, or from unwillingness to submit to impover- 
 ishment, and so the capitalists might continue to bear the 
 whole of the tax. 
 
 § 4. "We now turn to Taxes on Wages. The incidence of 
 these is very different, according as the wages taxed are those 
 of ordinary unskilled labor, or are the remuneration of such 
 skilled or privileged employments, whether manual or intel- 
 lectual, as are taken out of the sphere of competition by a 
 natural or conferred monopoly. 
 
 I have already remarked that, in the present low state of 
 popular education, all the higher grades of mental or edu- 
 cated labor are at a monopoly price, exceeding the wages of 
 common workmen in a degree very far beyond that which is 
 due to the expense, trouble, and loss of time required in 
 qualifying for the employment. Any tax levied on these 
 gains, which still leaves them above (or not below) their just 
 proportion, falls on those who pay it ; they have no means of 
 relieving themselves at the expense of any other class. The 
 same thing is true of ordinary wages, in cases like that of the 
 United States, or of a new colony, where, capital increasing 
 as rapidly as population can increase, wages are kept up by 
 the increase of capital, and not by the adherence of the labor- 
 ers to a fixed standard of comforts. In such a case, some 
 deterioration of their condition, whether by a tax or other- 
 wise, might possibly take place without checking the increase 
 of population. The tax would in that case fall on the labor- 
 
554 THE INFLUENCE OF GOVERNMENT. 
 
 ers themselves, and would reduce them prematurely to that 
 lower state to which, on the same supposition with regard to 
 their habits, they would in any case have been reduced ulti- 
 mately, by the inevitable diminution in the rate of increase 
 of capital, through the occupation of all the fertile land. 
 
 Some will object that, even in this case, a tax on wages 
 can not be detrimental to the laborers, since the money raised 
 by it, being expended in the country, comes back to the labor- 
 ers again through the demand for labor. Without, however, 
 reverting to general principles, we may rely on an obvious 
 reductio ad absurdum. If to take money from the laborers 
 and spend it in commodities is giving it back to the laborers, 
 then, to take money from other classes, and spend it in the 
 same manner, must be giving it to the laborers ; consequently, 
 the more a government takes in taxes, the greater will be the 
 demand for labor, and the more opulent the condition of the 
 laborers — a proposition the absurdity of which no one can 
 fail to see. 
 
 In the condition of most communities, wages are regu- 
 lated by the habitual standard of living to which the labor- 
 ers adhere, and on less than which they will not multiply. 
 Where there exists such a standard, a tax on wages will indeed 
 for a time be borne by the laborers themselves ; but, unless 
 this temporary depression has the effect of lowering the stand- 
 ard itself, the increase of population will receive a check, 
 which will raise wages, and restore the laborers to their pre- 
 vious condition. On whom, in this case, will the tax fall % 
 A rise of wages occasioned by a tax must, like any other in- 
 crease of the cost of labor, be defrayed from profits. To 
 attempt to tax day-laborers, in an old country, is merely to 
 impose an extra tax upon all employers of common labor ; 
 unless the tax has the much worse effect of permanently low- 
 ering the standard of comfortable subsistence in the minds 
 of the poorest class. 
 
 We find in the preceding considerations an additional 
 argument for the opinion, already expressed, that direct tax- 
 ation should stop short of the class of incomes which do not 
 
DIRECT TAXES. 555 
 
 exceed what is necessary for healthful existence. These 
 very small incomes are mostly derived from manual labor ; 
 and, as we now see, any tax imposed on these, either per- 
 manently degrades the habits of the laboring-class, or falls 
 on profits, and burdens capitalists with an indirect tax, in 
 addition to their share of the direct taxes ; which is doubly 
 objectionable, both as a violation of the fundamental rule of 
 equality, and for the reasons which, as already shown, render 
 a peculiar tax on profits detrimental to the public wealth, 
 and consequently to the means which society possesses of 
 paying any taxes whatever. 
 
 § 5. "We now pass, from taxes on the separate kinds of 
 income, to a tax attempted to be assessed fairly upon all 
 kinds ; in other words, an Income-Tax. The discussion of 
 the conditions necessary for making this tax consistent with 
 justice has been anticipated in the last chapter. "We shall 
 suppose, therefore, that these conditions are complied with. 
 They are, first, that incomes below a certain amount should 
 be altogether untaxed. This minimum should not be higher 
 than the amount which suffices for the necessaries of the ex- 
 isting population. The second condition is, that incomes 
 above the limit should be taxed only in proportion to the 
 surplus by which they exceed the limit. Thirdly, that all 
 sums saved from income and invested should be exempt 
 from the tax ; or, if this be found impracticable, that life-in- 
 comes and incomes from business and professions should be 
 less heavily taxed than inheritable incomes. 
 
 An income-tax, fairly assessed on these principles, would 
 be, in point of justice, the least exceptionable of all taxes. 
 The objection to it, in the present low state of public mo- 
 rality, is the impossibility of ascertaining the real incomes of 
 the contributors. Notwithstanding, too, what is called the 
 inquisitorial nature of the tax, no amount of inquisitorial 
 power which would be tolerated by a people the most dis- 
 posed to submit to it could enable the revenue officers to 
 assess the tax from actual knowledge of the circumstances 
 of contributors. Rents, salaries, annuities, and all fixed in- 
 
556 THE INFLUENCE OF GOVEPtNMENT. 
 
 comes, can be exactly ascertained. But the variable gains 
 of professions, and still more the profits of business, which 
 the person interested can not always himself exactly ascertain, 
 can still less be estimated with any approach to fairness by a 
 tax-collector. The main reliance must be placed, and al- 
 ways has been placed, on the returns made by the person 
 himself. The tax, therefore, on whatever principles of equal- 
 ity it may be imposed, is in practice unequal in one of the 
 worst ways, falling heaviest on the most conscientious. 
 
 It is to be feared, therefore, that the fairness which be- 
 longs to the principle of an income-tax can not be made to 
 attach to it in practice. This consideration would lead us to 
 concur in the opinion which, until of late, has usually pre- 
 vailed — that direct taxes on income should be reserved as 
 an extraordinary resource for great national emergencies, in 
 which the necessity of a large additional revenue overrules 
 all objections. 
 
 The difficulties of a fair income-tax have elicited a prop- 
 osition for a direct tax of so much per cent, not on income 
 but on expenditure ; the aggregate amount of each person's 
 expenditure being ascertained as the amount of income now 
 is, from statements furnished by the contributors them- 
 selves. The only security would still be the veracity of in- 
 dividuals, and there is no reason for supposing that their 
 statements would be more trustworthy on the subject of their 
 expenses than on that of their revenues. The taxes on ex- 
 penditure at present in force, either in this or in other coun- 
 tries, fall only on particular kinds of expenditure, and differ 
 no otherwise from taxes on commodities than in being paid 
 directly by the person who consumes or uses the article, 
 instead of being advanced by the producer or seller, and 
 reimbursed in the price. The taxes on horses and carriages, 
 on dogs, on servants, are of this nature. They evidently fall 
 on the persons from whom they are levied — those who use 
 the commodity taxed. A tax of a similar description, and 
 more important, is a house-tax, which must be considered at 
 somewhat greater length. 
 
DIRECT TAXES. 557 
 
 § 6. The rent of a house consists of two parts, the ground- 
 rent, and what Adam Smith calls the building-rent. The 
 first is determined by the ordinary principles of rent. It is 
 the remuneration given for the use of the portion of land 
 occupied by the house and its appurtenances; and varies 
 from a mere equivalent for the rent which the ground would 
 afford in agriculture to the monopoly rents paid for advan- 
 tageous situations in populous thoroughfares. The rent of 
 the house itself, as distinguished from the ground, is the 
 equivalent given for the labor and capital expended on the 
 building. The fact of its being received in quarterly or 
 half-yearly payments makes no difference in the principles 
 by which it is regulated. It comprises the ordinary profit 
 on the builder's capital, and an annuity, sufficient at the cur- 
 rent rate of interest, after paying for all repairs chargeable 
 on the proprietor, to replace the original capital by the time 
 the house is worn out, or by the expiration of the usual term 
 of a building-lease. 
 
 A tax of so much per cent on the gross rent falls on both 
 those portions alike. The more highly a house is rented, the 
 more it pays to the tax, whether the quality of the situation 
 or that of the house itself is the cause. The incidence, how- 
 ever, of these two portions of the tax must be considered 
 separately. 
 
 As much of it as is a tax on building-rent must ulti- 
 mately fall on the consumer, in other words, the occupier. 
 For, as the profits of building are already not above the ordi- 
 nary rate, they would, if the tax fell on the owner and not 
 on the occupier, become lower than the profits of untaxed 
 employments, and houses would not be built. It is proba- 
 ble, however, that for some time after the tax was first im- 
 posed, a great part of it would fall, not on the renter, but 
 on the owner of the house. A large proportion of the con- 
 sumers either could not afford, or would not choose, to pay 
 their former rent with the tax in addition, but would content 
 themselves with a lower scale of accommodation. Houses, 
 therefore, would be for a time in excess of the demand. The 
 
558 THE INFLUENCE OF GOVERNMENT. 
 
 consequence of such excess, in the case of most other articles, 
 would be an almost immediate diminution of the supply; 
 but so durable a commodity as houses does not rapidly di- 
 minish in amount. New buildings, indeed, of the class for 
 which the demand had decreased, would cease to be erected, 
 except for special reasons ; but in the mean time the tempo- 
 rary superfluity would lower rents, and the consumers would 
 obtain, perhaps, nearly the same accommodation as formerly, 
 for the same aggregate payment, rent and tax together. By 
 degrees, however, as the existing houses wore out, or as in- 
 crease of population demanded a greater supply, rents would 
 again rise ; until it became profitable to recommence build- 
 ing, which would not be until the tax was wholly transferred 
 to the occupier. In the end, therefore, the occupier bears 
 that portion of a tax on rent which falls on the payment 
 made for the house itself, exclusively of the ground it stands 
 on. 
 
 The case is partly different with the portion which is a 
 tax on ground-rent. As taxes on rent, properly so called, 
 fall on the landlord, a tax on ground-rent, one would sup- 
 pose, must fall on the ground-landlord,. at least after the ex- 
 piration of the building-lease. It will not, however, fall 
 wholly on the landlord, unless with the tax on ground-rent 
 there is combined an equivalent tax on agricultural rent. 
 The lowest rent of land let for building is very little above 
 the rent which the same ground would yield in agriculture : 
 since it is reasonable to suppose that land, unless in case of 
 exceptional circumstances, is let or sold for building as soon 
 as it is decidedly worth more for that purpose than for culti- 
 vation. If, therefore, a tax were laid on ground-rents with- 
 out being also laid on agricultural rents, it would, unless of 
 trifling amount, reduce the return from the lowest ground- 
 rents below the ordinary return from land, and would check 
 further building quite as effectually as if it were a tax on 
 building-rents, until either the increased demand of a grow- 
 ing population, or a diminution of supply by the ordinary 
 causes of destruction, had raised the rent by a full equivalent 
 
DIRECT TAXES. 559 
 
 for the tax. But whatever raises the lowest ground-rents 
 raises all others, since each exceeds the lowest by the market 
 value of its peculiar advantages. If, therefore, the tax on 
 ground-rents were a fixed sum per square foot, the more 
 valuable situations paying no more than those least in re- 
 quest, this fixed payment would ultimately fall on the occu- 
 pier. Suppose the lowest ground-rent to be $50 per acre, 
 and the highest $5,000, a tax of $5 per acre on ground-rents 
 would ultimately raise the former to $55, and the latter con- 
 sequently to $5,005, since the difference of value between 
 the two situations would be exactly what it was before : the 
 annual $5, therefore, would be paid by the occupier. But a 
 tax on ground-rent is supposed to be a portion of a house-tax 
 which is not a fixed payment, but a percentage on the rent. 
 The cheapest site, therefore, being supposed as before to pay 
 $5, the dearest would pay $500, of which only the $5 could 
 be thrown upon the occupier, since the rent would still be 
 only raised to $5,005. Consequently, $495 of the $500 levied 
 from the expensive site would fall on the ground-landlord. 1 
 A house-tax thus requires to be considered in a double aspect, 
 as a tax on all occupiers of houses, and a tax on ground-rents. 
 In the vast majority of houses the ground-rent forms 
 but a small proportion of the annual payment made for the 
 house, and nearly all the tax falls on the occupier. It is 
 only in exceptional cases, like that of the favorite situations 
 in large towns, that the predominant element in the rent of 
 the house is the ground-rent ; and, among the very few kinds 
 of income which are fit subjects for peculiar taxation, these 
 ground-rents hold the principal place, being the most gigan- 
 tic example extant of enormous accessions of riches acquired 
 rapidly, and in many cases unexpectedly, by a few families, 
 from the mere accident of their possessing certain tracts of 
 land without their having themselves aided in the acquisi- 
 tion by the smallest exertion, outlay, or risk. So far, there- 
 fore, as a house-tax falls on the ground-landlord, it is liable 
 to no valid objection. 
 
 1 I have changed the sums mentioned in this illustration into our own money. 
 
560 THE INFLUENCE OF GOVERNMENT. 
 
 In so far as it falls on the occupier, if justly proportioned 
 to the value of the house, it is one of the fairest and most 
 unobjectionable of all taxes. ISTo part of a person's expendi- 
 ture is a better criterion of his means, or bears, on the whole, 
 more nearly the same proportion to them. The equality of 
 this tax can only be seriously questioned on two grounds. 
 The first is, that a miser may escape it. This objection ap- 
 plies to all taxes on expenditure ; nothing but a direct tax 
 on income can reach a miser. The second objection is, that 
 a person may require a larger and more expensive house, not 
 from having greater means, but from having a larger family. 
 Of this, however, he is not entitled to complain, since hav- 
 ing a large family is at a person's own choice ; and, so far as 
 concerns the public interest, is a thing rather to be discour- 
 aged than promoted. 1 
 
 A valuation should be made of the house, not at what it 
 would sell for, but at what would be the cost of rebuilding 
 it, and this valuation might be periodically corrected by an 
 allowance for what it had lost in value by time, or gained by 
 repairs and improvements. The amount of the amended 
 valuation would form a principal sum, the interest of which, 
 at the current price of the public funds, would form the an- 
 nual value at which the building should be assessed to the tax. 
 
 1 Another common objection is that large and expensive accommodation is 
 often required, not as a residence, but for business. But it is an admitted prin- 
 ciple that buildings, or portions of buildings, occupied exclusively for business, 
 such as shops, warehouses, or manufactories, ought to be exempted from house- 
 tax. 
 
 It has been also objected that house-rent in the rural districts is much lower 
 than in towns, and lower in some towns and in some rural districts than in 
 others ; so that a tax proportioned to it would have a corresponding inequality 
 of pressure. To this, however, it may be answered that, in places where house- 
 rent is low, persons of the same amount of income usually live in larger and 
 better houses, and thus expend in house-rent more nearly the same proportion 
 of their incomes than might at first sight appear. Or, if not, the probability 
 will be that many of them live in those places precisely because they are too 
 poor to live elsewhere, and have, therefore, the strongest claim to be taxed 
 lightly. In some cases it is precisely because the people are poor that house- 
 rent remains low. — Mill. 
 
DIRECT TAXES. 561 
 
 As incomes below a certain amount ought to be exempt 
 from income-tax, so ought houses below a certain value from 
 house-tax, on the universal principle of sparing from all 
 taxation the absolute necessaries of healthful existence. In 
 order that the occupiers of lodgings, as well as of houses, 
 might benefit, as in justice they ought, by this exemption, it 
 might be optional with the owners to have every portion of 
 a house which is occupied by a separate tenant valued and 
 assessed separately. 
 
 36 
 
CHAPTER III. 
 
 OF TAXES ON COMMODITIES, OR INDIRECT TAXES. 
 
 § 1. By taxes on commodities are commonly meant those 
 which are levied either on the producers, or on the carriers 
 or dealers who intervene between them and the final pur- 
 chasers for consumption ; the phrase being, by custom, con- 
 fined to indirect taxes — those which are advanced by one 
 person, to be, as is expected and intended, reimbursed by 
 another. 
 
 Taxes on commodities are either on production within 
 the country, or on importation into it, or on conveyance or 
 sale within it, and are classed respectively as excise, customs, 
 or tolls and transit duties. To whichever class they belong, 
 and at whatever stage in the progress of the community 
 they may be imposed, they are equivalent to an increase of 
 the cost of production ; using that term in its most enlarged 
 sense, which includes the cost of transport and distribution, 
 or, in common phrase, of bringing the commodity to market. 
 
 When the cost of production is increased artificially by a 
 tax, the effect is the same as when it is increased by natural 
 causes. If only one or a few commodities are affected, their 
 value and price rise, so as to compensate the producer or 
 dealer for the peculiar burden ; but if there were a tax on all 
 commodities, exactly proportioned to their value, no such 
 compensation would be obtained ; there would neither be a 
 general rise of values, which is an absurdity, nor of prices, 
 which depend on causes entirely different. There would, 
 however, as Mr. McCulloch has pointed out, be a disturbance 
 
TAXES ON COMMODITIES, OR INDIRECT TAXES. 563 
 
 of values, some falling, others rising, owing to a circum- 
 stance, the effect of which on values and prices we formerly 
 discussed — the different durability of the capital employed 
 in different occupations. The gross produce of industry con- 
 sists of two parts ; one portion serving to replace the capital 
 consumed, while the other portion is profit. Now, equal 
 capital in two branches of production must have equal expec- 
 tations of profit ; but if a greater portion of the one than 
 of the other is fixed capital, or if that fixed capital is more 
 durable, there will be a less consumption of capital in the 
 year, and less will be required to replace it, so that the profit, 
 if absolutely the same, will form a greater proportion of the 
 annual returns. To derive from a capital of $1,000 a profit 
 of $100, the one producer may have to sell produce to the 
 value of $1,100, the other only to the value of $500. If on 
 these two branches of industry a tax be imposed of five per 
 cent ad valorem, the last will be charged only with $25, the 
 first with $55 ; leaving to the one $75 profit, to the other 
 only $45. To equalize, therefore, their expectation of profit, 
 the one commodity must rise in price, or the other must fall, 
 or both. 1 Commodities made chiefly by immediate labor 
 must rise in value, as compared with those which are chiefly 
 made by machinery. It is unnecessary to prosecute this 
 branch of the inquiry any further. 
 
 § 2. A tax on any one commodity, whether laid on its 
 production, its importation, its carriage from place to place, 
 or its sale, and whether the tax be a fixed sum of money for 
 a given quantity of the commodity, or an ad valorem duty, 
 will, as a general rule, raise the value and price of the com- 
 modity by at least the amount of the tax. There are few 
 cases in which it does not raise them by more than that 
 amount. In the first place, there are few taxes on produc- 
 tion on account of which it is not found or deemed neces- 
 sary to impose restrictive regulations on the manufacturers 
 or dealers, in order to check evasions of the tax. These 
 
 1 I have here also changed the amounts into our own money. 
 
564r THE INFLUENCE OF GOVERNMENT. 
 
 regulations are always sources of trouble and annoyance, and 
 generally of expense, for all of which, being peculiar disad- 
 vantages, the producers or dealers must have compensation 
 in the price of their commodity. These restrictions also fre- 
 quently interfere with the processes of manufacture, requir- 
 ing the producer to carry on his operations in the way most 
 convenient to the revenue, though not the cheapest or most 
 efficient for purposes of production. Any regulations what- 
 ever, enforced by law, make it difficult for the producer to 
 adopt new and improved processes. Further, the necessity 
 of advancing the tax obliges producers and dealers to carry 
 on their business with larger capitals than would otherwise 
 be necessary, on the whole of which they must receive the 
 ordinary rate of profit, though a part only is employed in 
 defraying the real expenses of production or importation. 
 The price of the article must be such as to afford a profit on 
 more than its natural value, instead of a profit on only its 
 natural value. Neither ought it to be forgotten that what- 
 ever renders a larger capital necessary in any trade or busi- 
 ness limits the competition in that business, and, by giving 
 something like a monopoly to a few dealers, may enable 
 them either to keep up the price beyond what would afford 
 the ordinary rate of profit, or to obtain the ordinary rate of 
 profit with a less degree of exertion for improving and cheap- 
 ening their commodity. In these several modes, taxes on 
 commodities often cost to the consumer, through the in- 
 creased price of the article, much more than they bring into 
 the treasury of the state. There is still another considera- 
 tion: the higher price necessitated by the tax almost al- 
 ways checks the demand for the commodity; and, since 
 there are many improvements in production which, to make 
 them practicable, require a certain extent of demand, such 
 improvements are obstructed, and many of them prevented 
 altogether. It is a well-known fact that the branches of 
 production in which fewest improvements are made are 
 those with which the revenue-officer interferes; and that 
 nothing, in general, gives a greater impulse to improvements 
 
TAXES ON COMMODITIES, OR INDIRECT TAXES. 565 
 
 in the production of a commodity than taking off a tax which 
 narrowed the market for it. 
 
 § 3. Such are the effects of taxes on commodities, consid- 
 ered generally ; but, as there are some commodities (those 
 composing the necessaries of the laborer) of which the values 
 have an influence on the distribution of wealth among dif- 
 ferent classes of the community, it is requisite to trace the 
 effects of taxes on those particular articles somewhat further. 
 If a tax be laid, say on corn, and the price rises in proportion 
 to the tax, the rise of price may operate in two ways : First, 
 it may lower the condition of the laboring-classes ; tempo- 
 rarily, indeed, it can scarcely fail to do so. If it diminishes 
 their consumption of the produce of the earth, or makes 
 them resort to a food which the soil produces more abun- 
 dantly, and therefore more cheaply, it to that extent contrib- 
 utes to throw back agriculture upon more fertile lands or less 
 costly processes, and to lower the value and price of corn ; 
 which therefore ultimately settles at a price, increased not 
 by the whole amount of the tax, but by only a part of its 
 amount. Secondly, however, it may happen that the dear- 
 ness of the taxed food does not lower the habitual standard 
 of the laborer's requirements, but that wages, on the contrary, 
 through an action on population, rise, in shorter or longer 
 periods, so as to compensate the laborers for their portion of 
 the tax, the compensation being of course at the expense of 
 profits. Taxes on necessaries must thus have one of two 
 effects : either they lower the condition of the laboring-classes, 
 or they exact from the owners of capital, in addition to the 
 amount due to the state on their own necessaries, the amount 
 due on those consumed by the laborers. In the last case, the 
 tax on necessaries, like a tax on wages, is equivalent to a pecul- 
 iar tax on profits ; which is, like all other partial taxation, un- 
 just, and is specially prejudicial to the increase of the national 
 wealth. 
 
 It remains to speak of the effect on rent. Assuming 
 (what is usually the fact) that the consumption of food is not 
 diminished, the same cultivation as before will be necessary 
 
566 THE INFLUENCE OF GOVERNMENT. 
 
 to supply the wants of the community ; the margin of culti- 
 vation, to use Dr. Chalmers's expression, remains where it 
 was ; and the same land or capital, which, as the least pro- 
 ductive, already regulated the value and price of the whole 
 produce, will continue to regulate them. The effect which a 
 tax on agricultural produce will have on rent depends on its 
 affecting or not affecting the difference between the return 
 to this least productive land or capital and the returns to 
 other lands and capitals. Now, this depends on the manner 
 in which the tax is imposed. If it is an ad valorem tax, or, 
 what is the same thing, a fixed proportion of the produce, 
 such as tithe for example, it evidently lowers corn-rents. For 
 it takes more corn from the better lands than from the worse, 
 and exactly in the degree in which they are better, land of 
 twice the productiveness paying twice as much to the tithe. 
 Whatever takes more from the greater of two quantities than 
 from the less, diminishes the difference between them. The 
 imposition of a tithe on corn would take a tithe also from 
 corn-rent : for, if we reduce a series of numbers by a tenth 
 each, the differences between them are reduced one tenth. 
 
 For example, let there be five qualities of land, which 
 severally yield, on the same extent of ground and with the 
 same expenditure, 100, 90, 80, 70, and 60 bushels of wheat, 
 the last of these being the lowest quality which the demand 
 for food renders it necessary to cultivate. The rent of these 
 lands will be as follows : 
 
 The land > 1QQ bughelg < will yield ) 100 _ 6Q) or 4Q bughe]s> 
 producing ) I a rent of J 
 
 That producing 90 " " 90—60, or 30 " 
 
 " " 80 " " 80—60, or 20 " 
 
 " " 10 " " 70-60, or 10 " 
 
 " " 60 " will yield no rent. 
 
 Now let a tithe be imposed, which takes from these five 
 pieces of land 10, 9, 8, 7, and 6 bushels respectively, the fifth 
 quality still being the one which regulates the price, but re- 
 turning to the farmer, after payment of tithe, no more than 
 54 bushels : 
 
TAXES ON COMMODITIES, OR INDIRECT TAXES. 567 
 
 The land ) m bushels reduced to 90 i will yield > 90 _ 54) or 36 bushel3i 
 producing | / a rent of ) 
 
 That i 90 " " 81 " 81-54, or 27 " 
 
 producing ) 
 
 " 80 " " 72 " 72-54, or 18 " 
 
 70 " " 63 " 63-54, or 9 " 
 
 and that producing 60 bushels, reduced to 54, will yield, as 
 before, no rent. So that the rent of the first quality of land 
 has lost four bushels; of the second, three; of the third, 
 two ; and of the fourth, one : that is, each has lost exactly 
 one tenth. A tax, therefore, of a fixed proportion of the 
 produce lowers, in the same proportion, corn-rent. 
 
 But it is only corn-rent that is lowered, and not rent esti- 
 mated in money, or in any other commodity. For, in the 
 same proportion as corn-rent is reduced in quantity, the corn 
 composing it is raised in value. Under the tithe, 54 bushels 
 will be worth in the market what 60 were before ; and nine 
 tenths will in all cases sell for as much as the whole ten tenths 
 previously sold for. The landlords will therefore be compen- 
 sated in value and price for what they lose in quantity, and 
 will suffer only so far as they consume their rent in kind, or, 
 after receiving it in money, expend it in agricultural produce ; 
 that is, they only suffer as consumers of agricultural produce, 
 and in common with all the other consumers. Considered as 
 landlords, they have the same income as before ; the tithe, 
 therefore, falls on the consumer, and not on the landlord. 
 
 The same effect would be produced on rent if the tax, 
 instead of being a fixed proportion of the produce, were a 
 fixed sum per quarter or per bushel. A tax which takes a 
 shilling for every bushel takes more shillings from one field 
 than from another, just in proportion as it produces more 
 bushels ; and operates exactly like tithe, except that tithe is 
 not only the same proportion on all lands, but is also the same 
 proportion at all times, while a fixed sum of money per 
 bushel will amount to a greater or less proportion, according 
 as corn is cheap or dear. 
 
 There are other modes of taxing agriculture, which would 
 affect rent differently. A tax proportioned to the rent would 
 
568 THE INFLUENCE OF GOVERNMENT. 
 
 fall wholly on the rent, and would not at all raise the price 
 of corn, which is regulated by the portion of the produce 
 that pays no rent. A fixed tax of so much per cultivated 
 acre, without distinction of value, would have effects directly 
 the reverse. Taking no more from the best qualities of land 
 than from the worst,* it would leave the differences the same 
 as before, and consequently the same corn-rents, and the 
 landlords would profit to the full extent of the rise of price. 
 To put the thing in another manner: the price must rise 
 sufficiently to enable the worst land to pay the tax, thus ena- 
 bling all lands which produce more than the worst to pay 
 not only the tax, but also an increased rent to the landlords. 
 These, however, are not so much taxes on the produce of 
 land as taxes on the land itself. Taxes on the produce, 
 properly so called, whether fixed or ad valorem, do not affect 
 rent, but fall on the consumer, profits, however, generally 
 bearing either the whole or the greatest part of the portion 
 which is levied on the consumption of the laboring-classes. 
 
 § 4. The preceding is, I apprehend, a correct statement of 
 the manner in which taxes on agricultural produce operate 
 when first laid on. "When, however, they are of old stand- 
 ing, their effect may be different. Now, the effect of accu- 
 mulation, when attended by its usual accompaniment, an in- 
 crease of population, is to increase the value and price of 
 food, to raise rent, and to lower profits ; that is, to do pre- 
 cisely what is done by a tax on agricultural produce, except 
 that this does not raise rent. The tax, therefore, merely 
 anticipates the rise of price and fall of profits which would 
 have taken place ultimately through the mere progress of 
 accumulation, while it at the same time prevents, or at least 
 retards, that progress. If the rate of profit was such that 
 the effect of the tithe reduces it to the practical minimum, 
 after a lapse of time which would have admitted of a rise of 
 one tenth from the natural progress of wealth, the consumer 
 will be paying no more than he would have paid if the tithe 
 had never existed ; he will have ceased to pay any portion 
 of it, and the person who will really pay it is the landlord, 
 
TAXES ON COMMODITIES, OR INDIRECT TAXES. 569 
 
 whom it deprives of the increase of rent which would by that 
 time have accrued to him. At every successive point in this 
 interval of time, less of the burden will rest on the consumer, 
 and more of it on the landlord ; and, in the ultimate result, 
 the minimum of profits will be reached with a smaller capi- 
 tal and population and a lower rental than if the course of 
 things had not been disturbed by the imposition of the tax. 
 If, on the other hand, the tithe or other tax on agricultural 
 produce does not reduce profits to the minimum, but to 
 something above the minimum, accumulation will not be 
 stopped, but only slackened ; and, if population also increases, 
 the twofold increase will continue to produce its effects — a 
 rise of the price of corn and an increase of rent. These con- 
 sequences, however, will not take place with the same rapid- 
 ity as if the higher rate of profit had continued. At the end 
 of twenty years the country will have a smaller population 
 and capital than, but for the tax, it would by that time have 
 had ; the landlords will have a smaller rent, and the price of 
 corn, having increased less rapidly than it would otherwise 
 have done, will not be so much as a tenth higher than what, 
 if there had been no tax, it would by that time have become. 
 A part of the tax, therefore, will already have ceased to fall 
 on the consumer and devolved upon the landlord, and the 
 proportion will become greater and greater by lapse of time. 
 But though tithes and other taxes on agricultural produce, 
 when of long standing, either do not raise the price of food 
 and lower profits at all, or, if at all, not in proportion to the 
 tax, yet the abrogation of such taxes, when they exist, does 
 not the less diminish price, and, in general, raise the rate of 
 profit. The abolition of a tithe takes one tenth from the 
 cost of production, and consequently from the price, of all 
 agricultural produce ; and, unless it permanently raises the 
 laborer's requirements, it lowers the cost of labor and raises 
 profits. Rent, estimated in money or in commodities, gener- 
 ally remains as before ; estimated in agricultural produce, it 
 is raised. The country adds as much, by the repeal of a tithe, 
 to the margin which intervenes between it and the stationary 
 
570 THE INFLUENCE OF GOVERNMENT. 
 
 state as was cut off from that margin by the tithe wheD first 
 imposed. Accumulation is greatly accelerated, and, if popu- 
 lation also increases, the price of corn immediately begins to 
 recover itself and rent to rise, thus gradually transferring 
 the benefit of the remission from the consumer to the land- 
 lord. 
 
 § 5. We have hitherto inquired into the effects of taxes 
 on commodities, on the assumption that they are levied im- 
 partially on every mode in which the commodity can be pro- 
 duced or brought to market. Another class of considerations 
 is opened, if we suppose that this impartiality is not main- 
 tained, and that the tax is imposed, not on the commodity, 
 but on some particular mode of obtaining it. 
 
 Suppose that a commodity is capable of being made by 
 two different processes — as a manufactured commodity may 
 be produced either by hand or by steam-power — sugar may 
 be made either from the sugar-cane or from beet-root, cattle 
 fattened either on hay and green crops or on oil-cake and 
 the refuse of breweries. It is the interest of the community 
 that, of the two methods, producers should adopt that which 
 produces the best article at the lowest price. This being also 
 the interest of the producers, unless protected against com- 
 petition, and shielded from the penalties of indolence, the 
 process most advantageous to the community is that which, 
 if not interfered with by Government, they ultimately find it 
 to their advantage to adopt. Suppose, however, that a tax is 
 laid on one of the processes, and no tax at all, or one of 
 smaller amount, on the other. If the taxed process is the 
 one which the producers would not have adopted, the meas- 
 ure is simply nugatory. But if the tax falls, as it is of 
 course intended to do, upon the one which they would have 
 adopted, it creates an artificial motive for preferring the un- 
 taxed process, though the inferior of the two. If, therefore, 
 it has any effect at all, it causes the commodity to be pro- 
 duced of worse quality, or at a greater expense of labor ; it 
 causes so much of the labor of the community to be wasted, 
 and the capital employed in supporting and remunerating 
 
TAXES ON COMMODITIES, OR INDIRECT TAXES. 571 
 
 that labor to be expended as uselessly as if it were spent in 
 hiring men to dig holes and fill them up again. This waste 
 of labor and capital constitutes an addition to the cost of 
 production of the commodity, which raises its value and price 
 in a corresponding ratio, and thus the owners of the capital 
 are indemnified. The loss falls on the consumers; though 
 the capital of the country is also eventually diminished, by 
 the diminution of their means of saving, and, in some degree, 
 of their inducements to save. 
 
 The kind of tax, therefore, which comes under the gen- 
 eral denomination of a discriminating duty, transgresses the 
 rule that taxes should take as little as possible from the tax- 
 payer beyond what they bring into the treasury of the state. 
 A discriminating duty makes the consumer pay two distinct 
 taxes, only one of which is paid to the Government, and that 
 frequently the less onerous of the two. If a tax were laid 
 on sugar produced from the cane, leaving the sugar from 
 beet-root untaxed, then in so far as cane-sugar continued to 
 be used, the tax on it would be paid to the treasury, and 
 might be as unobjectionable as most other taxes ; but if cane- 
 sugar, having previously been cheaper than beet-root sugar, 
 was now dearer, and beet-root sugar was to any considerable 
 amount substituted for it, and fields laid out and manufacto- 
 ries established in consequence, the Government would gain 
 no revenue from the beet-root sugar, while the consumers of 
 it would pay a real tax. They would pay for beet-root sugar 
 more than they had previously paid for cane-sugar, and the 
 difference would go to indemnify producers for a portion of 
 the labor of the country actually thrown away, in producing 
 by the labor of (say) three hundred men what could be ob- 
 tained by the other process with the labor of two hundred. 
 
 An interesting illustration, in late years, of the operation of 
 a discriminating duty is to be found in the case of different 
 grades of sugar imported into the United States. Our tariff 
 levied certain duties on different grades of sugar classified by 
 color, on the theory that color was a test of saccharine strength. 
 Cargoes were examined and compared with graded sugars her- 
 metically sealed in glass bottles and distributed by the Dutch 
 
572 THE INFLUENCE OF GOVERNMENT. 
 
 authorities, whence came the name of "Dutch standard." 
 Grades from No. 1 (melado) to No. 10 must go to the refiner 
 before consumption ; but the grades to No. 13, although 
 some might have gone into immediate consumption, were usu- 
 ally sent to be manufactured into the highest grades of soft 
 and hard sugars. So long as the sugar was secured by evapo- 
 ration in open coppers, or by passing the molasses through a 
 layer of clay, saccharine strength and color went fairly well 
 together. But with the invention of the vacuum-pan and 
 the centrifugal wheel, by which the sugar is reduced through a 
 shorter and more effective process, sugar of a certain grade of 
 color by the Dutch standard contained a much greater degree 
 of sweetness than that produced by the old methods. Cuban 
 planters, therefore, were permitted to send sugar into this coun- 
 try at a duty which was really levied on grades much inferior, 
 and so paid a less duty than other sugars. The products of 
 one country were discriminated against in favor of another. 
 The difficulty was settled by using the polariscope, which gave 
 an absolute chemical test of the sweetness, irrespective of color. 
 
 One of the commonest cases of discriminating duties is 
 that of a taxon the importation of a commodity capable of 
 being produced at home, unaccompanied by an equivalent 
 tax on the home production. A commodity is never perma- 
 nently imported, unless it can be obtained from abroad at a 
 smaller cost of labor and capital, on the whole, than is neces- 
 sary for producing it. If, therefore, by a duty on the impor- 
 tation, it is rendered cheaper to produce the article than to 
 import it, an extra quantity of labor and capital is expended, 
 without any extra result. The labor is useless, and the capi- 
 tal is spent in paying people for laboriously doing nothing. 
 All custom duties which operate as an encouragement to the 
 home production of the taxed article are thus an eminently 
 wasteful mode of raising a revenue. 
 
 This character belongs in a peculiar degree to custom 
 duties on the produce of land, unless countervailed by excise 
 duties on the home production. Such taxes bring less into 
 the public treasury, compared with what they take from the 
 consumers, than any other imposts to which civilized nations 
 are usually subject. If the wheat produced in a country is 
 twenty millions of quarters, and the consumption twenty-one 
 millions, a million being annually imported, and if on this 
 
TAXES ON COMMODITIES, OR INDIRECT TAXES. 573 
 
 million a duty is laid which raises the price ten shillings per 
 quarter, the price which is raised is not that of the million 
 only, but of the whole twenty-one millions. Taking the 
 most favorable but extremely improbable supposition, that 
 the importation is not at all checked, nor the home produc- 
 tion enlarged, the state gains a revenue of only half a mill- 
 ion, while the consumers are taxed ten millions and a half, 
 the ten millions being a contribution to the home growers, 
 who are forced by competition to resign it all to the land- 
 lords. The consumer thus pays to the owners of land an ad- 
 ditional tax, equal to twenty times that which he pays to the 
 state. Let us now suppose that the tax really checks impor- 
 tation. Suppose importation stopped altogether in ordinary 
 years ; it being found that the million of quarters can be ob- 
 tained, by a more elaborate cultivation, or by breaking up 
 inferior land, at a less advance than ten shillings upon the pre- 
 vious price — say, for instance, five shillings a quarter. The 
 revenue now obtains nothing, except from the extraordinary 
 imports which may happen to take place in a season of scar- 
 city. But the consumers pay every year a tax of five shillings 
 on the whole twenty-one millions of quarters, amounting to 
 £5,250,000 sterling. Of this the odd £250,000 goes to com- 
 pensate the growers of the last million of quarters for the labor 
 and capital wasted under the compulsion of the law. The 
 remaining £5,000,000 go to enrich the landlords as before. 
 
 Such is the operation of what are technically termed 
 corn laws, when first laid on ; and such continues to be their 
 operation so long as they have any effect at all in raising the 
 price of corn. The difference between a country without 
 corn laws and a country which has long had corn laws is not 
 so much that the last has a higher price or a larger rental, 
 but that it has the same price and the same rental with a 
 smaller aggregate capital and a smaller population. The im- 
 position of corn laws raises rents, but retards that progress 
 of accumulation which would in no long period have raised 
 them fully as much. The repeal of corn laws tends to lower 
 rents, but it unchains a force which, in a progressive state of 
 
574 THE INFLUENCE OF GOVERNMENT. 
 
 capital and population, restores and even increases the former 
 amount. 
 
 What we have said of duties on importation generally is 
 equally applicable to discriminating duties which favor im- 
 portation from one place, or in one particular manner, in 
 contradistinction to others ; such as the preference given to 
 the produce of a colony, or of a country with which there is 
 a commercial treaty ; or the higher duties formerly imposed 
 by our navigation laws on goods imported in other than 
 British shipping. Whatever else may be alleged in favor 
 of such distinctions, whenever they are not nugatory, they 
 are economically wasteful. They induce a resort to a more 
 costly mode of obtaining a commodity in lieu of one less 
 costly, and thus cause a portion of the labor which the coun- 
 try employs in providing itself with foreign commodities to 
 be sacrificed without return. 
 
 § 6. There is one more point, relating to the operation 
 of taxes on commodities conveyed from one country to 
 another, which requires notice : the influences which they 
 exert on international exchanges. Every tax on a commod- 
 ity tends to raise its price, and consequently to lessen the 
 demand for it in the market in which it is sold. All taxes 
 on international trade tend, therefore, to produce a disturb- 
 ance, and a readjustment of what we have termed the 
 equation of international demand. 
 
 Taxes on foreign trade are of two kinds — taxes on im- 
 ports and on exports. On the first aspect of the matter it 
 would seem that both these taxes are paid by the consumers 
 of the commodity ; that taxes on exports consequently fall 
 entirely on foreigners, taxes on imports wholly on the home 
 consumer. The true state of the case, however, is much 
 more complicated. 
 
 "By taxing exports we may, in certain circumstances, 
 produce a division of the advantage of the trade more favor- 
 able to ourselves. In some cases we may draw into our cof- 
 fers, at the expense of foreigners, not only the whole tax, 
 but more than the tax ; in other cases we should gain exactly 
 
TAXES ON COMMODITIES, OR INDIRECT TAXES. 575 
 
 the tax ; in others, less than the tax. In this last case a part 
 of the tax is borne by ourselves ; possibly the whole, possibly 
 even, as we shall show, more than the whole." 
 
 Reverting to the supposititious case employed of a trade 
 between England and the United States in iron and corn, 
 suppose that the United States taxes her export of corn, the 
 tax not being supposed high enough to induce England to 
 produce corn for herself. The price at which corn can be 
 sold in England is augmented by the tax. This will prob- 
 ably diminish the quantity consumed. It may diminish it 
 so much that, even at the increased price, there will not be 
 required so great a money value as before. Or it may not 
 diminish it at all, or so little that, in consequence of the 
 higher price, a greater money value will be purchased than 
 before. In this last case, the United States will gain, at the 
 expense of England, not only the whole amount of the duty, 
 but more ; for, the money value of her exports to England 
 being increased, while her imports remain the same, money 
 will flow into the United States from England. The price 
 of corn will rise in the United States, and consequently in 
 England ; but the price of iron will fall in England, and con- 
 sequently in the United States. "We shall export less corn 
 and import more iron, till the equilibrium is restored. It 
 thus appears (what is at first sight somewhat remarkable) 
 that, by taxing her exports, the United States would, in 
 some conceivable circumstances, not only gain from her 
 foreign customers the whole amount of the tax, but would 
 also get her imports cheaper. She would get them cheaper 
 in two ways, for she would obtain them for less money, and 
 would have more money to purchase them with. England, 
 on the other hand, would suffer doubly : she would have to 
 pay for her corn a price increased not only by the duty, but 
 by the influx of money into the United States, while the 
 same change in the distribution of the circulating medium 
 would leave her less money to purchase it with. 1 
 
 1 This illustration has also been changed, but only so far as to fit the trade 
 between England and the United States. 
 
576 THE INFLUENCE OF GOVERNMENT. 
 
 This, however, is only one of three possible cases. If, 
 after the imposition of the duty, England requires so dimin- 
 ished a quantity of corn that its total value is exactly the 
 same as before, the balance of trade would be undisturbed ; 
 the United States will gain the duty, England will lose 
 it, and nothing more. If, again, the imposition of the duty 
 occasions such a falling off in the demand that England re- 
 quires a less pecuniary value than before, our exports will 
 no longer pay for our imports ; money must pass from the 
 United States into England ; and England's share of the 
 advantage of the trade will be increased. By the change in 
 the distribution of money, corn will fall in the United States, 
 and therefore it will, of course, fall in England. Thus Eng- 
 land will not pay the whole of the tax. From the same 
 cause, iron will rise in England, and consequently in the 
 United States. "When this alteration of prices has so ad- 
 justed the demand that the corn and the iron again pay for 
 one another, the result is that England has paid only a part 
 of the tax, and the remainder of what has been received 
 into our treasury has come indirectly out of the pockets of 
 our own consumers of iron, who pay a higher price for that 
 imported commodity in consequence of the tax on our ex- 
 ports, while at the same time they, in consequence of the 
 efflux of money and the fall of prices, have smaller money 
 incomes wherewith to pay for the iron at that advanced price. 
 
 It is not an impossible supposition that by taxing our ex- 
 ports we might not only gain nothing from the foreigner, 
 the tax being paid out of our own pockets, but might even 
 compel our own people to pay a second tax to the foreigner. 
 Suppose, as before, that the demand of England for corn 
 falls off so much on the imposition of the duty that she re- 
 quires a smaller money value than before, but that the case 
 is so different with iron in the United States that when the 
 price rises the demand either does not fall off at all, or so 
 little that the money value required is greater than before. 
 The first effect of laying on the duty is, as before, that the 
 corn exported will no longer pay for the iron imported. 
 
TAXES ON COMMODITIES, OR INDIRECT TAXES. 577 
 
 Money "will therefore flow out of the United States into Eng- 
 land. One effect is to raise the price of iron in England, and 
 consequently in the United States. But this, by the suppo- 
 sition, instead of stopping the efflux of money, only makes 
 it greater ; because, the higher the price, the greater the 
 money value of the iron consumed. The balance, therefore, 
 can only be restored by the other effect, which is going on 
 at the same time, namely, the fall of corn in the American 
 and consequently in the English market. Even when corn 
 has fallen so low that its price with the duty is only equal to 
 what its price without the duty was at first, it is not a 
 necessary consequence that the fall will stop ; for the same 
 amount of exportation as before will not now suffice to pay 
 the increased money value of the imports; and although 
 the English consumers have now not only corn at the old 
 price, but likewise increased money incomes, it is not certain 
 that they will be inclined to employ the increase of their in- 
 comes in increasing their purchases of corn. The price of 
 corn, therefore, must perhaps fall, to restore the equilibrium, 
 more than the whole amount of the duty ; England may be 
 enabled to import corn at a lower price when it is taxed 
 than when it was untaxed ; and this gain she will acquire at 
 the expense of the American consumers of iron, who, in 
 addition, will be the real payers of the whole of what is re- 
 ceived at their own custom-house under the name of duties 
 on the export of corn. 
 
 In general, however, there could be little doubt that a 
 country which imposed such taxes would succeed in making 
 foreign countries contribute something to its revenue ; but, 
 unless the taxed article be one for which their demand is 
 extremely urgent, they will seldom pay the whole of the 
 amount which the tax brings in. 1 
 
 1 Probably the strongest known instance of a large revenue raised from for- 
 eigners by a tax on exports is the opium-trade with China. The high price 
 of the article under the Government monopoly (which is equivalent to a high 
 export duty) has so little effect in discouraging its consumption that it is said 
 to have been occasionally sold in China for as much as its weight in silver. — 
 Mill. 
 
 37 
 
578 THE INFLUENCE OF GOVERNMENT. 
 
 The result of this investigation may, then, be generally for- 
 mulated as follows : That country which has the strongest de- 
 mand for the commodities of other countries as compared with 
 the demand of other countries for its own commodities will 
 pay the burden of the export duty. 
 
 Thus far of duties on exports. We now proceed to the 
 more ordinary case of duties on imports : " We have had 
 an example of a tax on exports, that is, on foreigners, fall- 
 ing in part on ourselves. We shall therefore not be sur- 
 prised if we find a tax on imports, that is, on ourselves, part- 
 ly falling upon foreigners. 
 
 " Instead of taxing the corn which we export, suppose 
 that we tax the iron which we import. The duty which we 
 are now supposing must not be what is termed a protecting 
 duty, that is, a duty sufficiently high to induce us to produce 
 the article at home. If it had this effect, it would destroy 
 entirely the trade both in corn and in iron, and both coun- 
 tries would lose the whole of the advantage which they pre- 
 viously gained by exchanging those commodities with one 
 another. We suppose a duty which might diminish the 
 consumption of the article, but which would not prevent us 
 from continuing to import, as before, whatever iron we did 
 consume. 
 
 " The equilibrium of trade would be disturbed if the im- 
 position of the tax diminished, in the slightest degree, the 
 quantity of iron consumed. For, as the tax is levied at our 
 own custom-house, the English exporter only receives the 
 same price as formerly, though the American consumer pays 
 a higher one. If, therefore, there be any diminution of the 
 quantity bought, although a larger sum of money may be 
 actually laid out in the article, a smaller one will be due from 
 the United States to England : this sum will no longer be an 
 equivalent for the sum due from England to the United 
 States for corn, the balance therefore must be paid in money. 
 Prices will fall in England and rise in the United States ; 
 iron will fall in the English market; corn will rise in the 
 American. The English will pay a higher price for corn, 
 
TAXES ON COMMODITIES, OR INDIRECT TAXES. 579 
 
 and will have smaller money incomes to buy it with ; while 
 the Americans will obtain iron cheaper, that is, its price will 
 exceed what it previously was by less than the amount of the 
 duty, while their means of purchasing it will be increased by 
 the increase of their money incomes. 
 
 " If the imposition of the tax does not diminish the de- 
 mand, it will leave the trade exactly as it was before. We 
 shall import as much, and export as much ; the whole of the 
 tax will be paid out of our own pockets. 
 
 "But the imposition of a tax on a commodity almost 
 always diminishes the demand more or less ; and it can never, 
 or scarcely ever, increase the demand. It may, therefore, be 
 laid down as a principle that a tax on imported commodities, 
 when it really operates as a tax, and not as a prohibition 
 either total or partial, almost always falls in part upon the 
 foreigners who consume our goods ; and that this is a mode 
 in which a nation may appropriate to itself, at the expense 
 of foreigners, a larger share than would otherwise belong to 
 it of the increase in the general productiveness of the labor 
 and capital of the world, which results from the interchange 
 of commodities among nations." 
 
 Those are, therefore, in the right who maintain that 
 taxes on imports are partly paid by foreigners ; but they are 
 mistaken when they say that it is by the foreign producer. 
 It is not on the person from whom we buy, but on all those 
 who buy from us, that a portion of our custom duties sponta- 
 neously falls. It is the foreign consumer of our exported 
 commodities who is obliged to pay a higher price for them 
 because we maintain revenue duties on foreign goods. 
 
 There are but two cases in which duties on commodities 
 can in any degree, or in any manner, fall on the producer. 
 One is, when the article is a strict monopoly, and at a scarcity 
 price. The price in this case being only limited by the desires 
 of the buyer — the sum obtained for the restricted supply being 
 the utmost which the buyers would consent to give rather 
 than go without it — if the treasury intercepts a part of this, 
 the price can not be further raised to compensate for the tax, 
 
580 THE INFLUENCE OF GOVERNMENT. 
 
 and it must be paid from the monopoly profits. A tax on 
 rare and high-priced wines will fall wholly on the growers, or 
 rather, on the owners of the vineyards. The second case, in 
 which the producer sometimes bears a portion of the tax, is 
 more important : the case of duties on the produce of land 
 or of mines. These might be so high as to diminish materi- 
 ally the demand for the produce, and compel the abandonment 
 of some of the inferior qualities of land or mines. Suppos- 
 ing this to be the effect, the consumers, both in the country 
 itself and in those which dealt with it, would obtain the prod- 
 uce at smaller cost ; and a part only, instead of the whole, 
 of the duty would fall on the purchaser, who would be in- 
 demnified chiefly at the expense of the land-owners or mine- 
 owners in the producing country. 
 
 Duties on importation may, then, be divided "into two 
 classes : (1) those which have the effect of encouraging some 
 particular branch of domestic industry [protective duties], 
 (2) and those which have not [revenue duties]. The former 
 are purely mischievous, both to the country imposing them 
 and to those with whom it trades. They prevent a saving of 
 labor and capital, which, if permitted to be made, would be 
 divided in some proportion or other between the importing 
 country and the countries which buy what that country does 
 or might export. 
 
 " The other class of duties are those which do not en- 
 courage one mode of procuring an article at the expense of 
 another, but allow interchange to take place just as if the 
 duty did not exist, and to produce the saving of labor which 
 constitutes the motive to international as to all other com- 
 merce. Of this kind are duties on the importation of any 
 commodity which could not by any possibility be produced 
 at home, and duties not sufficiently high to counterbalance 
 the difference of expense between the production of the arti- 
 cle at home and its importation. Of the money which is 
 brought into the treasury of any country by taxes of this last 
 description, a part only is paid by the people of that country - 
 the remainder by the foreign consumers of their goods. 
 
TAXES ON COMMODITIES, OR INDIRECT TAXES. 581 
 
 " Nevertheless, this latter kind of taxes are in principle 
 as ineligible as the former, though not precisely on the same 
 ground. A protecting duty can never be a cause of gain, 
 but always and necessarily of loss, to the country imposing 
 it, just so far as it is efficacious to its end. A non-protecting 
 duty, on the contrary, would in most cases be a source of 
 gain to the country imposing it, in so far as throwing part 
 of the weight of its taxes upon other people is a gain ; but 
 it would be a means which it could seldom be advisable to 
 adopt, being so easily counteracted by a precisely similar 
 proceeding on the other side. 
 
 "If the United States, in the case already supposed, 
 sought to obtain for herself more than her natural share of 
 the advantage of the trade with England, by imposing a 
 duty upon iron, England would only have to impose a duty 
 upon corn sufficient to diminish the demand for that article 
 about as much as the demand for iron had been diminished 
 in the United States by the tax. Things would then be as 
 before, and each country would pay its own tax — unless, 
 indeed, the sum of the two duties exceeded the entire ad- 
 vantage of the trade, for in that case the trade and its 
 advantage would cease entirely. 
 
 " There would be no advantage, therefore, in imposing 
 duties of this kind with a view to gain by them in the man- 
 ner which has been pointed out. But, when any part of the 
 revenue is derived from taxes on commodities, these may 
 often be as little objectionable as the rest. It is evident, 
 too, that considerations of reciprocity, which are quite un- 
 essential when the matter in debate is a protecting duty, are 
 of material importance when the repeal of duties of this 
 other description is discussed. A country can not be ex- 
 pected to renounce the power of taxing foreigners unless 
 foreigners will in return practice toward itself the same for- 
 bearance. The only mode in which a country can save 
 itself from being a loser by the revenue duties imposed by 
 other countries on its commodities is, to impose correspond- 
 ing revenue duties on theirs. Only it must take care that 
 
582 THE INFLUENCE OF GOVERNMENT. 
 
 those duties be not so high as to exceed all that remains of 
 the advantage of the trade, and put an end to importation 
 altogether, causing the article to be either produced at home, 
 or imported from another and a dearer market." 
 
 By " reciprocity " is meant that, when one country admits 
 goods free of duty from a second country, this latter country 
 will also admit the commodities of the former free of duty ; 
 or, as is often the case, if not free of duty, at a less than the 
 usual rate. Until the last few years we have had a reciprocity 
 treaty with Canada, but it is not now in force ; and an arrange- 
 ment for closer commercial relations with Mexico is now under 
 consideration. 
 
CHAPTER IV. 
 
 COMPARISON BETWEEN DIRECT AND INDIRECT TAXATION. 
 
 § 1. Are direct or indirect taxes the most eligible ? A 
 man dislikes not so much the payment as the act of paying. 
 He dislikes seeing the face of the tax-collector, and being 
 subjected to his peremptory demand. Perhaps, too, the 
 money which he is required to pay directly out of his pocket 
 is the only taxation which he is quite sure that he pays- at 
 all. That a tax of two shillings per pound on tea, or of 
 three shillings per bottle on wine, raises the price of each 
 pound of tea and bottle of wine which he consumes, by that 
 and more than that amount, can not, indeed, be denied ; it is 
 the fact, and is intended to be so, and he himself, at times, is 
 perfectly aware of it ; but it makes hardly any impression on 
 his practical feelings and associations, serving to illustrate 
 the distinction between what is merely known to be true and 
 what is felt to be so. The unpopularity of direct taxation, 
 contrasted with the easy manner in which the public consent 
 to let themselves be fleeced in the prices of commodities, has 
 generated in many friends of improvement a directly oppo- 
 site mode of thinking to the foregoing. They contend that 
 the very reason which makes direct taxation disagreeable 
 makes it preferable. Under it every one knows how much 
 he really pays ; and, if he votes for a war, or any other ex- 
 pensive national luxury, he does so with his eyes open to 
 what it costs him. If all taxes were direct, taxation would 
 be much more perceived than at present, and there would be 
 a security, which now there is not, for economy in the pub- 
 lic expenditure. 
 
584 THE INFLUENCE OF GOVERNMENT. 
 
 Although this argument is not without force, its weight 
 is likely to be constantly diminishing. The real incidence 
 of indirect taxation is every day more generally understood 
 and more familiarly recognized. The mere distinction be- 
 tween paying money directly to the tax-collector and con- 
 tributing the same sum through the intervention of the tea- 
 dealer or the wine-merchant no longer makes the whole 
 difference between dislike or opposition and passive acqui- 
 escence. 
 
 If our present revenue [of $400,000,000 in 1883] were all 
 raised by direct taxes, an extreme dissatisfaction would cer- 
 tainly arise at having to pay so much ; but while men's 
 minds are so little guided by reason, as such a change of 
 feeling from so irrelevant a cause would imply, so great an 
 aversion to taxation might not be an unqualified good. Of 
 the [$400,000,000] in question, nearly [$60,000,000] are 
 pledged, under the most binding obligations, to those whose 
 property has been borrowed and spent by the state; and, 
 while this debt remains unredeemed, a greatly increased im- 
 patience of taxation would involve no little danger of a 
 breach of faith. That part, indeed, of the public expenditure 
 which is devoted to the maintenance of civil and military 
 establishments [$206,000,000] (that is, all except the interest 
 of the national debt), affords, in many of its details, ample 
 scope for retrenchment. If so great an addition were made 
 to the public dislike of taxation as might be the consequence 
 of confining it to the direct form, the classes who profit by 
 the misapplication of public money might probably succeed 
 in saving that by which they profit, at the expense of that 
 which would only be useful to the public. 
 
 There is, however, a frequent plea in support of indirect 
 taxation, which must be altogether rejected as grounded on 
 a fallacy. "We are often told that taxes on commodities are 
 less burdensome than other taxes, because the contributor 
 can escape from them by ceasing to use the taxed commodity. 
 He certainly can, if that be his object, deprive the Govern- 
 ment of the money ; but he does so by a sacrifice of his own 
 
COMPARISON BETWEEN DIRECT AND INDIRECT TAXATION. 585 
 
 indulgences, which (if he chose to undergo it) would equally 
 make up to him for the same amount taken from him by 
 direct taxation. Suppose a tax laid on wine, sufficient to add 
 [$25] to the price of the quantity of wine which he consumes 
 in a year. He has only (we are told) to diminish his consump- 
 tion of wine by [$25], and he escapes the burden. True, but 
 if the [$25], instead of being laid on wine, had been taken 
 from him by an income-tax, he could, by expending [$25] 
 less in wine, equally save the amount of the tax, so that the 
 difference between the two cases is really illusory. If the 
 Government takes from the contributor [$25] a year, whether 
 in one way or another, exactly that amount must be retrenched 
 from his consumption to leave him as well off as before ; and 
 in either way the same amount of sacrifice, neither more nor 
 less, is imposed on him. 
 
 On the other hand, it is some advantage on the side of 
 indirect taxes that what they exact from the contributor is 
 taken at a time and in a manner likely to be convenient to 
 him. It is paid at a time when he has at any rate a payment 
 to make ; it causes, therefore, no additional trouble, nor (un- 
 less the tax be on necessaries) any inconvenience but what is 
 inseparable from the payment of the amount. He can also, 
 except in the case of very perishable articles, select his own 
 time for laying in a stock of the commodity, and consequent- 
 ly for payment of the tax. The producer or dealer who ad- 
 vances these taxes is, indeed, sometimes subjected to incon- 
 venience ; but, in the case of imported goods, this inconven- 
 ience is reduced to a minimum by what is called the Ware- 
 housing System, under which, instead of paying the duty at 
 the time of importation, he is only required to do so when 
 he takes out the goods for consumption, which is seldom 
 done until he has either actually found, or has the prospect 
 of immediately finding, a purchaser. 
 
 The strongest objection, however, to raising the whole or 
 the greater part of a large revenue by direct taxes, is the im- 
 possibility of assessing them fairly without a conscientious 
 co-operation on the part of the contributors, not to be hoped 
 
586 THE INFLUENCE OF GOVERNMENT. 
 
 for in the present low state of public morality. In the case 
 of an income-tax, we have already seen that, unless it be found 
 practicable to exempt savings altogether from the tax, the 
 burden can not be apportioned with any tolerable approach 
 to fairness upon those whose incomes are derived from busi- 
 ness or professions ; and this is in fact admitted by most of 
 the advocates of direct taxation who, I am afraid, generally 
 get over the difficulty by leaving those classes untaxed, and 
 confining their projected income-tax to " realized property," 
 in which form it certainly has the merit of being a very easy 
 form of plunder. But enough has been said in condemna- 
 tion of this expedient. We have seen, however, that a house- 
 tax is a form of direct taxation not liable to the same objec- 
 tions as an income-tax, and indeed liable to as few objections 
 of any kind as perhaps any of our indirect taxes. But it 
 would be impossible to raise, by a house-tax alone, the great- 
 est part of the revenue, without producing a very objection- 
 able overcrowding of the population, through the strong 
 motive which all persons would have to avoid the tax by re- 
 stricting their house accommodation. 
 
 A certain amount of revenue may, as we have seen, be 
 obtained without injustice by a peculiar tax on rent. Be- 
 sides (1) the land-tax, 1 and (2) an equivalent for the revenue 
 derived from stamp duties on the conveyance of land, some 
 further taxation might, I have contended, at some future 
 period be imposed, (3) to enable the state to participate in 
 the progressive increase of the incomes of landlords from 
 natural causes. (1) Legacies and inheritances, we have also 
 seen, ought to be subjected to taxation sufficient to yield a 
 considerable revenue. "With these taxes, and (5) a house-tax 
 of suitable amount, we should, I think, have reached the 
 prudent limits of direct taxation. The remainder of the 
 revenue would have to be provided by taxes on consump- 
 
 1 A land-tax is, to its extent, an evidence that the state claims a certain 
 right in the soil, and that it stands to the contributor, as it were, in the place of 
 a landlord. This tax, however, is generally so small that it does not materially 
 diminish the rent of land. So far as it goes, it is a tax on rent. 
 
COMPARISON BETWEEN DIRECT AND INDIRECT TAXATION. 587 
 
 tion, and the question is, which of these are the least objec- 
 tionable. 
 
 § 2. There are some forms of indirect taxation which 
 must be peremptorily excluded. (1.) Taxes on commodities, 
 for revenue purposes, must not operate as protecting duties, 
 but must be levied impartially on every mode in which the 
 articles can be obtained, whether produced in the country 
 itself, or imported. (2.) An exclusion must also be put upon 
 all taxes on the necessaries of life, or on the materials or in- 
 struments employed in producing those necessaries. Such 
 taxes are always liable to encroach on what should be left 
 untaxed, the incomes barely sufficient for healthful exist- 
 ence ; and on the most favorable supposition, namely, that 
 wages rise to compensate the laborers for the tax, it oper- 
 ates as a peculiar tax on profits, which is at once unjust and 
 detrimental to national wealth. 1 "What remain are taxes on 
 luxuries. And these have some properties which strongly 
 recommend them. In the first place, they can never, by 
 any possibility, touch those whose whole income is expended 
 on necessaries ; while they do reach those by whom what 
 is required for necessaries is expended on indulgences. In 
 the next place, they operate in some cases as a useful, and 
 the only useful, kind of sumptuary law. A great portion of 
 the expense of the higher and middle classes in most coun- 
 tries is not incurred for the sake of the pleasure afforded by 
 the things on which the money is spent, but from regard to 
 opinion, and an idea that certain expenses are expected from 
 them, as an appendage of station ; and I can not but think 
 that expenditure of this sort is a most desirable subject of 
 
 1 Some argue that the materials and instruments of all production should be 
 exempt from taxation ; but these, when they do not enter into the production 
 of necessaries, seem as proper subjects of taxation as the finished article. It is 
 chiefly with reference to foreign trade that such taxes have been considered in- 
 jurious. Internationally speaking, they may be looked upon as export duties, 
 and, unless in cases in which an export duty is advisable, they should be accom- 
 panied with an equivalent drawback on exportation. But there is no sufficient 
 reason against taxing the materials and instruments used in the production of 
 anything which is itself a fit object of taxation. — Mill. 
 
588 THE INFLUENCE OF GOVERNMENT. 
 
 taxation. "When a thing is bought, not for its use but for 
 its costliness, cheapness is no recommendation. 
 
 § 3. In order to reduce as much as possible the incon- 
 veniences, and increase the advantages, incident to taxes 
 on commodities, the following are the practical rules which 
 suggest themselves : 1. To raise as large a revenue as con- 
 veniently may be, from those classes of luxuries which have 
 most connection with vanity, and least with positive enjoy- 
 ment ; such as the more costly qualities of all kinds of per- 
 sonal equipment and ornament. But with regard to horses 
 and carriages, as there are many persons to whom, from health 
 or constitution, these are not so much luxuries as necessaries, 
 the tax paid by those who have but one riding-horse, or but 
 one carriage, especially of the cheaper descriptions, should 
 be low; while taxation should rise very rapidly with the 
 number of horses and carriages, and with their costliness. 
 2. Whenever possible, to demand the tax, not from the pro- 
 ducer, but directly from the consumer, since, when levied on 
 the producer, it raises the price always by more, and often 
 by much more, than the mere amount of the tax. 3. But 
 as the only indirect taxes which yield a large revenue are 
 those which fall on articles of universal or very general con- 
 sumption, and as it is therefore necessary to have some taxes 
 on real luxuries, that is, on things which afford pleasure in 
 themselves, and are valued on that account rather than for 
 their cost, these taxes should, if possible, be so adjusted as 
 to fall with the same proportional weight on small, on moder- 
 ate, and on large incomes. This is not an easy matter ; since 
 the things which are the subjects of the more productive 
 taxes are in proportion more largely consumed by the poorer 
 members of the community than by the rich. Tea, coffee, 
 sugar, tobacco, fermented drinks, can hardly be so taxed 
 that the poor shall not bear more than their due share of the 
 burden. Something might be done by making the duty on 
 the superior qualities, which are used by the richer consum- 
 ers, much higher in proportion to the value ; but in some 
 cases the difficulty of at all adjusting the duty to the value, 
 
COMPARISON BETWEEN DIRECT AND INDIRECT TAXATION. 589 
 
 60 as to prevent evasion, is said, with what truth I know not, 
 to be insuperable ; so that it is thought necessary to levy the 
 same fixed duty on all the qualities alike. 4. As far as is 
 consistent with the preceding rules, taxation should rather 
 be concentrated on a few articles than diffused over many, 
 in order that the expenses of collection may be smaller, and 
 that as few employments as possible may be burdensomely 
 and vexatiously interfered with. 5. Among luxuries of gen- 
 eral consumption, taxation should by preference attach itself 
 to stimulants, because these, though in themselves as legiti- 
 mate indulgences as any others, are more liable than most 
 others to be used in excess, so that the check to consump- 
 tion, naturally arising from taxation, is on the whole better 
 applied to them than to other things. 6. As far as other 
 considerations permit, taxation should be confined to import- 
 ed articles, since these can be taxed with a less degree of 
 vexatious interference, and with fewer incidental bad effects, 
 than when a tax is levied on the field or on the workshop. 
 Custom duties are, cceteris paribus, much less objectionable 
 than excise : but they must be laid only on things which 
 either can not, or at least will not, be produced iu the coun- 
 try itself ; or else their production there must be prohibited 
 (as in England is the case with tobacco), or subjected to an 
 excise duty of equivalent amount. 7. No tax ought to be 
 kept so high as to furnish a motive to its evasion, too strong 
 to be counteracted by ordinary means of prevention ; and 
 especially no commodity should be taxed so highly as to raise 
 up a class of lawless characters — smugglers, illicit distillers, 
 and the like. 
 
 The experience of the United States is pregnant with les- 
 sons in this direction. During the war we imposed an internal- 
 revenue tax on distilled spirits of so large an amount that it not 
 only produced less revenue than a smaller tax would have done, 
 but it created gigantic frauds, public corruption, and infinite 
 devices to escape the payment. The following table will show 
 how the production, as indicated by the tax, fell off when the 
 tax was excessive. It forced evasions by distillers. It has been 
 found by various experiences that with a less rate the revenue 
 is largely increased. 
 
590 
 
 THE INFLUENCE OF GOVERNMENT. 
 
 TEAE. 
 
 Eevenue. 
 
 Production 
 
 indicated by 
 
 the tax. 
 
 Amount of tax. 
 
 1862-1863 
 
 1868-1869 
 
 $3,200,000 
 14,200,000 
 34,200,000 
 39,200,000 
 
 Gallons. 
 16,000,000 
 
 7,000,000 
 16,000,000 
 18,000,000 
 
 July, 1862, 20 c. per gallon. 
 Jan., 1865, $2 per gallon. 
 July, 1868, 50 c. per gallon. 
 
 The actual amount reached by taxation is very much less 
 than that known to be actually used by from ten to fifteen 
 millions of gallons, or nearly one half the product. The open- 
 ness of the frauds can be judged by the fact that proof spir- 
 its were " openly sold in the market, and even quoted in price- 
 currents, at from five to fifteen cents less per gallon than the 
 rate of tax and the average cost of manufacture." ' 
 
 Tn what manner the finer articles of manufacture, con- 
 sumed by the rich, might most advantageously be taxed, I 
 must leave to be decided by those who have the requisite 
 practical knowledge. The difficulty would be, to effect it 
 without an inadmissible degree of interference with produc- 
 tion. In countries which, like the United States, import 
 the principal part of the finer manufactures which they con- 
 sume, there is little difficulty in the matter ; and, even where 
 nothing is imported but the raw material, that may be taxed, 
 especially the qualities of it which are exclusively employed 
 for the fabrics used by the richer class of consumers. Thus, 
 in England a high custom duty on raw silk would be con- 
 sistent with principle ; and it might perhaps be practicable 
 to tax the finer qualities of cotton or linen yarn, whether 
 spun in the country itself or imported. 
 
 § 4. It will now well repay study to examine Chart No. 
 XXI, which shows in what manner the United States have 
 raised their revenues, and to consider how far the right rules 
 of taxation have been followed. 
 
 I. For means of comparison, I shall give the last annual 
 budget of the United States in order to make clear from what 
 sources the country derives its revenues : 
 
 1 See Lalor's " Cyclopaedia," article " Distilled Spirits," by David A. Wells. 
 
. 
 
 
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 5 r» cc © o ^ m « ■* 1/5 ?© *" oo 
 
 INNMM«MM«M»«« 
 
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COMPARISON BETWEEN DIRECT AND INDIRECT TAXATION. 591 
 
 UNITED STATES BUDGET, TEAR ENDING JUNE 30, 1883. 
 
 [In millions and tenths of millions.] 
 Receipts : 
 
 Customs $214.7 
 
 Ioternal revenue 144.7 
 
 Direct tax 1 
 
 Sale of public lands 7.9 
 
 Miscellaneous 30 8 
 
 Net ordinary receipts $398.2 
 
 Expenditures : 
 
 War Department $48.9 
 
 Navy Department 15.3 
 
 Indians 7.3 
 
 Pensions 66.0 
 
 Miscellaneous 68.7 
 
 Net ordinary expenditures $206.2 
 
 Interest on public debt 59.2 
 
 Total $265.4 
 
 This leaves a surplus of $132,839,444 above all expenditures, 
 and our problem is now where to reduce taxation. The annual 
 interest charge is lessening with the payment of the public 
 debt, having fallen from its highest figure of $143,781,591 in 
 1867, to $59,160,131 in 1883. 1 Our national taxation is prac- 
 tically all indirect, that of internal taxation being chiefly levied 
 on tobacco and distilled spirits, and our customs falling on 
 almost all articles which can be imported, materials as well as 
 manufactures. 
 
 In the United States direct taxation on real and personal 
 property is very generally levied for State, county, and munici- 
 pal purposes. In fact, nearly all the perceptible taxation is 
 the property tax, and, inasmuch as the State and county tax is 
 very light, the burden is almost always owing to municipal and 
 town expenditures. People do not seem to be aware of the 
 enormous national burden, because the taxes are indirect, and 
 only increase the prices of commodities. Other countries, it 
 will be seen, make a greater use of direct taxation than the 
 United States. In fact, the comparison of the ways by which 
 different countries collect their revenues may naturally show 
 us where we may gain by their experience. 
 
 II. The English system is especially interesting, because, 
 after having had an extended scheme of customs duties, they 
 abandoned it, and raised their revenue, some on imported arti- 
 
 1 "United States Statistical Abstract," 1883, pp. 2, 3. 
 
592 THE INFLUENCE OF GOVERNMENT. 
 
 cles, it is true (but only on those which could not he pro- 
 duced in England), but by the income-tax, and other forms. 1 
 
 In 1842 Sir Robert Peel found 1,200 articles subject to cus- 
 toms-duties. He began (1) by removing all prohibitions ; (2) 
 by reducing duties on raw materials to 5 per cent or less ; (3) 
 by limiting the rates on partially manufactured goods to 12 
 per cent ; and (4) those on wholly manufactured goods to 20 
 per cent. Now customs-duties are levied only on beer, cards, 
 chiccory, chocolate, cocoa, coffee, dried fruit, plate, spirits, tea, 
 tobacco, and wine. The following budget gives the sources of 
 revenue for Great Britain : a 
 
 BUDGET OF GREAT BRITAIN, 1883. 
 
 [In millions and tenths of millions.] 
 Receipts : 
 
 Customs $98.4 
 
 Excise (such as on tobacco and spirits) 134.9 
 
 Stamps 58.5 
 
 Land tax 5.2 
 
 House duty 8.9 
 
 Income tax 60'9 
 
 Post-Office 36.5 
 
 Telegraph 8.6 
 
 Crown lands 2.0 
 
 Interest (on loans, Suez Canal, etc.) 6.1 
 
 Miscellaneous 26.4 
 
 Total $446.4 
 
 1 The old condition of things was well described by Sydney Smith : " We 
 must pay taxes upon every article which enters into the mouth or covers the 
 back, or is placed under the foot. Taxes upon everything which is pleasant to 
 see, hear, feel, smell, and taste. Taxes upon warmth, light, and locomotion. 
 Taxes upon everything upon earth and the waters under the earth. On every- 
 thing that comes from abroad or is grown at home. Taxes on raw material. 
 Taxes on every value that is added to it by the industry of man. Taxes on the 
 sauce which pampers man's appetite and the drug which restores him to health. 
 On the ermine which decorates the judge and the rope which hangs the criminal. 
 On the brass nails of the coffin and on the ribbons of the bride. At bed or at 
 board, couchant or levant, we must pay. The beardless youth manages his 
 taxed horse with a taxed bridle on a taxed road, and the dying Englishman, 
 pouring his medicine (which has paid V per cent) into a spoon (which has paid 
 30 per cent), throws himself back upon his chintz bed (which has paid 22 per 
 cent), makes his will, and expires in the arms of the apothecary (who has paid 
 £100 for the privilege of putting him to death). His whole property is then 
 taxed from 2 to 10 per cent ; besides the probate, large fees are demanded for 
 burying him in the chancel : his virtues are handed down to posterity on taxed 
 marble, and he is then gathered to his fathers to be taxed no more." 
 
 9 " Financial Reform Almanac," 1883, pp. 107-109. 
 
COMPARISON BETWEEN DIRECT AND INDIRECT TAXATION. 593 
 
 Expenditures : 
 
 Interest on national debt $148.4 
 
 Army, navy, etc 157.1 
 
 Cost of revenue departments 45.1 
 
 Public works 9. 1 
 
 Public departments, salaries, etc 12"5 
 
 Law and justice 35.7 
 
 Education, science, and art 22.9 
 
 Colonial and consular 3.4 
 
 Civil list 2.0 
 
 Pensions 2.0 
 
 Miscellaneous 6.8 
 
 Total expenditures $445.0 
 
 From this it will be seen that in the land, income, and 
 house taxes, Great Britain raises by direct taxation about 
 $75,000,000, and in customs and excise, by indirect taxation, 
 about $233,000,000. 
 
 III. The following is the system adopted by Germany 
 (Prussia) : 
 
 GERMAN BUDGET, 1881-1882. 
 
 [In millions and tenths of millions] 
 Receipts : 
 
 (1.) Property income from domains and forests. . . . $11.7 
 
 From mines and salt-works .... 2.5 
 
 From railways 22.5 
 
 Miscellaneous 5.0 
 
 $41.7 
 
 (2.) Royal Lottery 1.0 
 
 (3.) Bureau of Justice $12.7 
 
 Harbors and bridges .5 
 
 13.2 
 
 (4.) Direct taxes $35.5 
 
 (5.) Indirect taxes (for Prussia) 12-3 
 
 47.8 
 
 Total receipts $103--6 
 
 Expenditures : 
 
 (1.) Civil list 3.0 
 
 (2.) Debt 25.0 
 
 (3.) Various ministries, schools, etc 49.5 
 
 (4.) Pensions 4.0 
 
 (5.) Miscellaneous 19.5 
 
 Total expenditures • $101.0 
 
 It will be noted that Prussia has given up the income-tax, 
 and now raises more than one third of her total revenue by 
 direct taxes on property. 
 
 1 " Handbuch dcr Verfassung und Vcrsvaltung in Preussen und dem Deutschen 
 Reich," by Graf Hue de Grais (second edition, 1882), p. 138. 
 38 
 
594 THE INFLUENCE OF GOVERNMENT. 
 
 IV. How the French supply themselves may be seen by the 
 following statement : ' 
 
 FRENCH BUDGET, 1881. 
 
 [In millions and tenths of millions.] 
 Receipts : 
 
 Direct taxes $75.9 
 
 Similar taxes 4.7 
 
 Registry, stamps, etc 135.1 
 
 Forests 7.6 
 
 Customs (and salt duty $3.5) 65.4 
 
 Indirect taxes (including tobacco) 209.7 
 
 Post-Office and telegraph 27.2 
 
 Miscellaneous 29.8 
 
 Total receipts $555.4 
 
 Expenditures : 
 
 Public debt, etc $249.0 
 
 General functions of the ministries 243.7 
 
 Administrative expenses, cost of revenue collections, etc. . 58.5 
 Miscellaneous 3.5 
 
 Total expenditures $554.7 
 
 The direct taxes are (1) on property ; (2) one nearly like 
 our poll-tax together with a species of income-tax ; (3) a tax 
 on doors and windows ; and (4) one on licenses. 
 
 § 5. After the manner of our classification and resumk, of 
 the subject of value and money, it may be convenient to here 
 insert a recapitulation of the various principals under the treat- 
 ment of taxation. 5 
 
 1 " Le Budget. Revenus et Depenses de la France," by M. Block (1881), pp. 
 57, 82. 
 
 s Taken, with modifications, from Milnes's " Problems in Political Economy," 
 p. 377. 
 
COMPARISON BETWEEN DIRECT AND INDIRECT TAXATION. 595 
 
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CHAPTER V. 
 
 OF A NATIONAL DEBT. 
 
 § 1. The question must now be considered, how far it is 
 right or expedient to raise money for the purposes of gov- 
 ernment, not bj laying on taxes to the amount required, but 
 by taking a portion of the capital of the country in the form 
 of a loan, and charging the public revenue with only the 
 interest. 
 
 This question has already been touched upon in the First 
 Book. 1 We remarked, that if the capital taken in loans is 
 abstracted from funds either engaged in production, or des- 
 tined to be employed in it, their diversion from that purpose 
 is equivalent to taking the amount from the wages of the 
 laboring-classes. Borrowing, in this case, is not a substitute 
 for raising the supplies within the year. A government 
 which borrows does actually take the amount within the 
 year, and that too by a tax exclusively on the laboring- 
 classes, than which it could have done nothing worse, if it 
 had supplied its wants by avowed taxation ; and in that case 
 the transaction, and its evils, would have ended with the 
 emergency ; while, by the circuitous mode adopted, the value 
 exacted from the laborers is gained, not by the state, but by 
 the employers of labor, the state remaining charged with the 
 debt besides, and with its interest in perpetuity. The sys- 
 tem of public loans, in such circumstances, may be pro- 
 nounced the very worst which, in the present state of civili- 
 
 ' Book I, Chap. IV, § 5. 
 
A NATIONAL DEBT. 597 
 
 zation, is still included in the catalogue of financial expe- 
 dients. 
 
 We, however, remarked that there are other circum- 
 stances in which loans are not chargeable with these perni- 
 cious consequences : namely, first, when what is borrowed is 
 foreign capital, the overflowings of the general accumulation 
 of the world ; or, secondly, when it is capital which either 
 would not have been saved at all, unless this mode of invest- 
 ment had been open to it, or, after being saved, would have 
 been wasted in unproductive enterprises, or sent to seek em- 
 ployment in foreign countries. "When the progress of accu- 
 mulation has reduced profits either to the ultimate or to the 
 practical minimum — to the rate less than which would either 
 put a stop to the increase of capital, or send the whole of 
 the new accumulations abroad — government may annually 
 intercept these new accumulations, without trenching on the 
 employment or wages of the laboring-classes in the country 
 itself, or perhaps in any other country. To this extent, 
 therefore, the loan system may be carried, without being lia- 
 ble to the utter and peremptory condemnation which is due 
 to it when it overpasses this limit. What is wanted is an 
 index to determine whether, in any given series of years, as 
 during the last great war, for example, the limit has been 
 exceeded or not. 
 
 Such an index exists, at once a certain and an obvious 
 one. Did the Government, by its loan operations, augment 
 the rate of interest ? If it only opened a channel for capital 
 which would not otherwise have been accumulated, or which, 
 if accumulated, would not have been employed within the 
 country, this implies that the capital, which the Govern- 
 ment took and expended, could not have found employment 
 at the existing rate of interest. So long as the loans do no 
 more than absorb this surplus, they prevent any tendency 
 to a fall of the rate of interest, but they can not occasion 
 any rise. [But] To the full extent to which the loans of 
 government, during the war, caused the rate of interest to 
 exceed what it was before, and what it has been since, those 
 
598 THE INFLUENCE OF GOVERNMENT. 
 
 loans are chargeable with all the evils which have been de- 
 scribed. If it be objected that interest only rose because 
 profits rose, I reply that this does not weaken, but strength- 
 ens, the argument. If the Government loans produced the 
 rise of profits by the great amount of capital which they ab- 
 sorbed, by what means can they have had this effect, unless 
 by lowering the wages of labor ? It will, perhaps, be said 
 that what kept profits high during the war was not the drafts 
 made on the national capital by the loans, but the rapid prog- 
 ress of industrial improvements. This, in a great measure, 
 was the fact ; and it, no doubt, alleviated the hardship to the 
 laboring-classes, and made the financial system which was 
 pursued less actively mischievous, but not less contrary to 
 principle. These very improvements in industry made room 
 for a larger amount of capital; and the Government, by 
 draining away a great part of the annual accumulations, did 
 not indeed prevent that capital from existing ultimately (for 
 it started into existence with great rapidity after the peace), 
 but prevented it from existing at the time, and subtracted 
 just so much, while the war lasted, from distribution among 
 productive laborers. If the Government had abstained from 
 taking this capital by loan, and had allowed it to reach the 
 laborers, but had raised the supplies which it required by a 
 direct tax on the laboring-classes, it would have produced (in 
 every respect but the expense and inconvenience of collect- 
 ing the tax) the very same economical effects which it did 
 produce, except that we should not now have had the debt. 
 The course it actually took was therefore worse than the 
 very worst mode which it could possibly have adopted of 
 raising the supplies within the year ; and the only excuse, or 
 justification, which it admits of (so far as that excuse could be 
 truly pleaded) was hard necessity ; the impossibility of raising 
 so enormous an annual sum by taxation, without resorting 
 to taxes which from their odiousness, or from the facility of 
 evasion, it would have been found impracticable to enforce. 1 
 
 1 Although Mr. Mill had reference to the French wars in the beginning of this 
 century, his words apply also to the circumstances of our own late war, 1861-1865. 
 
A NATIONAL DEBT. 599 
 
 When government loans are limited to the overflowings 
 of the national capital, or to those accumulations which would 
 not take place at all unless suffered to overflow, they are at 
 least not liable to this grave condemnation. In this case, 
 therefore, the question really is, what it is commonly sup- 
 posed to be in all cases — namely, a choice between a great 
 sacrifice at once, and a small one indefinitely prolonged. On 
 this matter it seems rational to think that the prudence of a 
 nation will dictate the same conduct as the prudence of an 
 individual ; to submit to as much of the privation immedi- 
 ately as can easily be borne, and, only when any further bur- 
 den would distress or cripple them too much, to provide for 
 the remainder by mortgaging their future income. It is an 
 excellent maxim to make present resources suffice for present 
 wants ; the future will have its own wants to provide for. 
 On the other hand, it may reasonably be taken into consid- 
 eration that, in a country increasing in wealth, the necessary 
 expenses of government do not increase in the same ratio as 
 capital or population ; any burden, therefore, is always less 
 and less felt ; and, since those extraordinary expenses of gov- 
 ernment which are fit to be incurred at all are mostly bene- 
 ficial beyond the existing generation, there is no injustice in 
 making posterity pay a part of the price, if the inconven- 
 ience would be extreme of defraying the whole of it by 
 the exertions and sacrifices of the generation which first 
 incurred it. 
 
 § 2. When a country, wisely or unwisely, has burdened 
 itself with a debt, is it expedient to take steps for redeem- 
 ing that debt % In principle it is impossible not to maintain 
 the affirmative. 
 
 Two modes have been contemplated of paying off a na- 
 tional debt: either at once by a general contribution, or 
 gradually by a surplus revenue. The first would be incom- 
 parably the best, if it were practicable; and it would be 
 practicable if it could justly be done by assessment on prop- 
 erty alone. If property bore the whole interest of the debt, 
 property might, with great advantage to itself, pay it off ; 
 
600 THE INFLUENCE OF GOVERNMENT. 
 
 since this would be merely surrendering to a creditor the 
 principal sum, the whole annual proceeds of which were 
 already his by law, and would be equivalent to what a 
 land-owner does when he sells part of his estate, to free the 
 remainder from a mortgage. But property, it need hardly 
 be said, does not pay, and can not justly be required to pay, 
 the whole interest of the debt. Whatever is the fitting con- 
 tribution from property to the general expenses of the state, 
 in the same, and in no greater proportion, should it con- 
 tribute toward either the interest or the repayment of the 
 national debt. This, however, if admitted, is fatal to any 
 scheme for the extinction of the debt by a general assess- 
 ment on the community. Persons of property could pay 
 their share of the amount by a sacrifice of property, and 
 have the same net income as before. 
 
 If a person owns a property, A B, which returns him 
 $1,000 income, and if he pays $10 a year in taxes as his share 
 of interest on the public debt, suppose that part of his estate 
 represented by X, which returns him 
 annually $10 (and which return he 
 has annually handed over to the state), 
 to be carved out of it, and that he is 
 . to be hereafter relieved of his share 
 of taxes. He would then, after hav- 
 ing paid the capitalized value (X) of that which was his share 
 of the annual tax to the state on account of the public debt, 
 have the same net income as before ; for he was never able to 
 enjoy the income of X. 
 
 If those wbo have no accumulations, but only incomes, 
 were required to make up by a single payment the equiva- 
 lent of the annual charge laid on them by the taxes main- 
 tained to pay the interest of the debt, they could only do so 
 by incurring a private debt equal to their share of the pub- 
 lic debt ; while, from the insufficiency, in most cases, of the 
 security which they could give, the interest would amount 
 to a much larger annual sum than their share of that now 
 paid by the state. Besides, a collective debt defrayed by 
 taxes has, over the same debt parceled out among individu- 
 als, the immense advantage that it is virtually a mutual in- 
 
A NATIONAL DEBT. 601 
 
 surance among the contributors. If the fortune of a con- 
 tributor diminishes, his taxes diminish ; if he is ruined, they 
 cease altogether, and his portion of the debt is wholly trans- 
 ferred to the solvent members of the community. If it 
 were laid on him as a private obligation, he would still be 
 liable to it, even when penniless. 
 
 "When the state possesses property, in land or otherwise, 
 which there are not strong reasons of public utility for its 
 retaining at its disposal, this should be employed, as far as 
 it will go, in extinguishing debt. Any casual gain, or god- 
 send, is naturally devoted to the same purpose. Beyond this, 
 the only mode which is both just and feasible, of extinguish- 
 ing or reducing a national debt, is by means of a surplus 
 revenue. 
 
 § 3. The desirableness, per se, of maintaining a surplus 
 for this purpose does not, I think, admit of a doubt. 
 
 It is not, however, advisable in all cases to maintain a 
 surplus revenue for the extinction of debt. The advantage 
 of paying off the national debt is, that it would enable us 
 to get rid of the worst half of our taxation. But of this 
 worst half some portions must be worse than others, and to 
 get rid of those would be a greater benefit proportionally 
 than to get rid of the rest. If renouncing a surplus reve- 
 nue would enable us to dispense with a tax, we ought to con- 
 sider the very worst of all our taxes as precisely the one 
 which we are keeping up for the sake of ultimately abolish- 
 ing taxes not so bad as itself. In a country advancing in 
 wealth, whose increasing revenue gives it the power of rid- 
 ding itself from time to time of the most inconvenient por- 
 tions of its taxation, I conceive that the increase of revenue 
 should rather be disposed of by taking off taxes, than by 
 liquidating debt, as long as any very objectionable imposts 
 remain. In the present state of England, therefore, I hold 
 it to be good policy in the Government, when it has a sur- 
 plus of an apparently permanent character, to take off taxes, 
 provided these are rightly selected. Even when no taxes 
 remain but such as are not unfit to form part of a perma- 
 
602 THE INFLUENCE OF GOVERNMENT. 
 
 nent system, it is wise to continue the same policy by ex- 
 perimental reductions of those taxes, until the point is dis- 
 covered at which a given amount of revenue can be raised 
 with the smallest pressure on the contributors. After this, 
 such surplus revenue as might arise from any further in- 
 crease of the produce of the taxes should not, I conceive, 
 be remitted, but applied to the redemption of debt. Eventu- 
 ally, it might be expedient to appropriate the entire produce 
 of particular taxes to this purpose; since there would be 
 more assurance that the liquidation would be persisted in, if 
 the fund destined to it were kept apart, and not blended 
 with the general revenues of the state. The succession du- 
 ties would be peculiarly suited to such a purpose, since taxes 
 paid as they are, out of capital, would be better employed in 
 reimbursing capital than in defraying current expenditure. 
 If this separate appropriation were made, any surplus after- 
 ward arising from the increasing produce of the other taxes, 
 and from the saving of interest on the successive portions 
 of debt paid ofi, might form a ground for a remission of 
 taxation. 
 
 The relative amount of the United States public debt may 
 be seen, by Chart No. XXII, from an early date down to 1880. 
 Since the war, the surplus revenue of the United States has 
 been constantly appropriated for the payment of the public 
 debt incurred during the late war, until, what with the reduc- 
 tion of debt and the fall in the interest charge, our income is 
 now so much greater than expenditure that we are (1884) actu- 
 ally in difficulties owing to the surplus. To the present time 
 the Treasury has been able to use its excess of receipts in re- 
 deeming matured debt ; but the rapidity of the payment has 
 been such that in two years or more no matured debt will exist 
 to be redeemed : $250,000,000 of 4£ per cent bonds remain, but 
 they do not fall due until 1891 ; and the 4 per cent bonds to 
 the amount of $737,620,700 do not mature until 1907. Having 
 once raised a large revenue under war pressure, it seems very 
 difficult for people to understand now why heavy duties were 
 originally levied, and the extraordinary suggestion is often 
 made that the surplus should remain, and new channels of ex- 
 penditure should be made (such as enormous pensions), simply 
 in order to keep up the heavy taxation. The difficulty is, how- 
 ever, that the unnecessary surplus exists because of customs 
 
CHART XXII. 
 
 OUTSTANDING PRINCIPAL 
 
 OF THE 
 
 PUBLIC DEBT 
 
 FROM 1791 TO 1881. 
 
 1=370 MILLIONS. 
 
 Amount* aregivcnin millions 
 
 anil tenths of millions. 
 
 037 . 
 
 037 
 
 336 
 
 I 62 
 
 ~5"» 
 
 1 64 
 
 1815 
 
 7 
 
 1 
 
 1 65 
 
 2880 
 
 6 
 
 1 
 
 66 
 
 2773 
 
 2 
 
 1 
 
 1 67 
 
 2678 
 
 
 1 
 
 68 
 
 2611 
 
 6 
 
 1 
 
 I 69 
 
 2588 
 
 4 
 
 , J 
 
 | 1870 
 
 2 480 
 
 6 
 
 1 
 
 1 
 
 2353 
 
 2 
 
 1 
 
 1 72 
 
 2253 
 
 2 
 
 1 
 
 1 73 
 
 2234 
 
 
 1 
 
 1 74 
 
 2251 
 
 6 
 
 1 
 
 75 
 
 2 2 3 2 
 
 a 
 
 1 
 
 70 
 
 2180 
 
 3 
 
 1 
 
 77 
 
 2205 
 
 3 
 
 1 
 
 78 
 
 2256 
 
 2 
 
 1 
 
 1 78 
 
 ; 7 j i . 
 
 5 
 
 1 
 
 1880 
 
 2120 
 
 
 i 
 
 1 
 
 2053 
 
 3 
 
 
A NATIONAL DEBT. 603 
 
 duties levied for war purposes. But the heavy burden of war 
 taxation ought not to be continued, adding to the cost of pro- 
 duction in all industries, without doing a greater wrong than 
 would be done by the passing — and only possible — trouble of a 
 redistribution of capital in a few cases ; especially since that 
 distribution of capital will be one from less productive to more 
 productive industries ; otherwise, no change would be made. 
 
 The condition of foreign debts, and the progress made in 
 their reduction, may be studied in Chart No. XXIII. That 
 of the United States is exceptional. The interest-bearing debt, 
 as given by the last report of the Secretary of the Treasury, 
 1883, has been reduced to $1,312,446,050, and the reduction is 
 more striking than is indicated in the chart for the year 1880. 
 
604 
 
 THE INFLUENCE OF GOVERNMENT. 
 
 X 
 X 
 
 h 
 
 < 
 o 
 
CHAPTER VI. 
 
 OF AN INTERFERENCE OF GOVERNMENT GROUNDED ON ERRO- 
 NEOUS THEORIES. 
 
 § 1. We proceed to the functions of government which 
 belong to what I have termed, for want of a better designa- 
 tion, the optional class ; those which are sometimes assumed 
 by governments and sometimes not, and which it is not 
 unanimously admitted that they ought to exercise. "We will 
 begin by passing in review false theories which have from 
 time to time formed the ground of acts of government more 
 or less economically injurious. 
 
 Of these false theories, the most notable is the doctrine 
 of Protection to Native Industry — a phrase meaning the 
 prohibition, or the discouragement by heavy duties, of such 
 foreign commodities as are capable of being produced at 
 home. If the theory involved in this system had been cor- 
 rect, the practical conclusions grounded on it would not 
 have been unreasonable. The theory was that, to buy things 
 produced at home was a national benefit, and the introduc- 
 tion of foreign commodities generally a national loss. It 
 being at the same time evident that the interest of the con- 
 sumer is to buy foreign commodities in preference to domes- 
 tic whenever they are either cheaper or better, the interest 
 of the consumer appeared in this respect to be contrary to 
 the public interest ; he was certain, if left to his own incli- 
 nations, to do what according to the theory was injurious to 
 the public. 
 
 It was shown, however, in our analysis of the effects of 
 international trade, as it had been often shown by former 
 
606 THE INFLUENCE OF GOVERNMENT. 
 
 writers, that the importation of foreign commodities, in the 
 common course of traffic, never takes place except when it 
 is, economically speaking, a national good, by causing the 
 same amount of commodities to be obtained at a smaller 
 cost of labor and capital to the country. To prohibit, there- 
 fore, this importation, or impose duties which prevent it, is 
 to render the labor and capital of the country less efficient 
 in production than they would otherwise be, and compel a 
 waste of the difference between the labor and capital neces- 
 sary for the home production of the commodity and that 
 which is required for producing the things with which it 
 can be purchased from abroad. The amount of national 
 loss thus occasioned is measured by the excess of the price 
 at which the commodity is produced over that at which it 
 could be imported. In the case of manufactured goods the 
 whole difference between the two prices is absorbed in in- 
 demnifying the producers for waste of labor, or of the capi- 
 tal which supports that labor. Those who are supposed to 
 be benefited, namely, the makers of the protected articles 
 (unless they form an exclusive company, and have a monop- 
 oly against their own countrymen as well as against foreign- 
 ers), do not obtain higher profits than other people. All is 
 sheer loss to the country as well as to the consumer. 
 
 Of the industries in a country some are said to " need pro- 
 tection " and others not — that is, those industries which are 
 carried on at a relative disadvantage are the only ones which 
 need protection in order that they may continue in operation. 
 By relative disadvantage is meant- a greater relative cost, or 
 sacrifice, to the same amount of labor and capital. Those in- 
 dustries which can not yield so great a value for the labor and 
 capital engaged in them as other more profitable industries are 
 those which are said to " need protection." Wherever protect- 
 ive duties exist it is implied by those who lay them on that 
 there production is carried on under more onerous conditions 
 than in other competing places or occupations. After duties 
 are thus supposed to have protected the less advantageously 
 situated occupations, it may be said that all industries will then 
 have an equal chance. " No doubt," as Mr. Cairnes says, " they 
 would be equalized just as by compelling every one to move 
 about with a weight attached to his leg. The weight would, 
 
INTERFERENCE OF GOVERNMENT. 607 
 
 indeed, be an impediment to locomotion, but, provided it were 
 in each case exactly proportioned to the strength of the limb 
 which drew it, no one . . . would have any reason to com- 
 plain. No one would walk as fast as if his limbs were free, 
 but then his neighbor would be equally fettered, and, if it took 
 him twice as long to reach his destination as before, he would 
 at least have company on his journey." ' 
 
 § 2. The restrictive and prohibitory policy was originally 
 grounded on what is called the Mercantile System, which, 
 representing the advantage of foreign trade to consist solely 
 in bringing money into the country, gave artificial encour- 
 agement to exportation of goods, and discountenanced their 
 importation. The only exceptions to the system were those 
 required by the system itself. The materials and instru- 
 ments of production were the subject of a contrary policy, 
 directed, however, to the same end ; they were freely im- 
 ported, and not permitted to be exported, in order that manu- 
 facturers, being more cheaply supplied with the requisites 
 of manufacture, might be able to sell cheaper, and therefore 
 to export more largely. For a similar reason importation 
 was allowed and even favored, when confined to the produc- 
 tions of countries which were supposed to take from the 
 country still more than it took from them, thus enriching it 
 by a favorable balance of trade. As part of the same sys- 
 tem colonies were founded, for the supposed advantage of 
 compelling them to buy our commodities, or at all events 
 not to buy those of any other country : in return for which 
 restriction we were generally willing to come under an 
 equivalent obligation with respect to the staple productions 
 of the colonists. The consequences of the theory were 
 pushed so far that it was not unusual even to give bounties 
 on exportation, and induce foreigners to buy from [England] 
 rather than from other countries by a cheapness which [Eng- 
 land] artificially produced, by paying part of the price for 
 them out of [their] own taxes. This is a stretch beyond the 
 point yet reached by any private tradesman in his compe- 
 
 1 Cairnes, " Leading Principles," pp. 381, 382. 
 
608 THE INFLUENCE OF GOVERNMENT. 
 
 tition for business. No shopkeeper, I should think, ever 
 made a practice of bribing customers by selling goods to 
 them at a permanent loss, making it up to himself from 
 other funds in his possession. 
 
 The principle of the Mercantile Theory is now given up 
 even by writers and governments who still cling to the 
 restrictive system. Whatever hold that system has over 
 men's minds, independently of the private interests exposed 
 to real or apprehended loss by its abandonment, is derived 
 from fallacies other than the old notion of the benefits of 
 heaping up money in the country. The most effective of 
 these is the specious plea of employing our own countrymen 
 and our national industry, instead of feeding and supporting 
 the industry of foreigners. The answer to this, from the 
 principles laid down in former chapters, is evident. With- 
 out reverting to the fundamental theorem discussed in an 
 early part of the present treatise, 1 respecting the nature and 
 sources of employment for labor, it is sufficient to say, what 
 has usually been said by the advocates of free trade, that the 
 alternative is not between employing our own people and 
 foreigners, but between employing one class and another of 
 our own people. The imported commodity is always paid 
 for, directly or indirectly, with the produce of our own in- 
 dustry : that industry being, at the same time, rendered more 
 productive, since, with the same labor and outlay, we are 
 enabled to possess ourselves of a greater quantity of the arti- 
 cle. Those who have not well considered the subject are apt 
 to suppose that our exporting an equivalent in our own prod- 
 uce, for the foreign articles we consume, depends on contin- 
 gencies — on the consent of foreign countries to make some 
 corresponding relaxation of their own restrictions, or on the 
 question whether those from whom we buy are induced by 
 that circumstance to buy more from us ; and that, if these 
 things, or things equivalent to them, do not happen, the pay- 
 ment must be made in money. Now, in the first place, there 
 
 1 Book I, Chap. IV. 
 
INTERFERENCE OF GOVERNMENT. 609 
 
 is nothing more objectionable in a money payment than in 
 payment by any other medium, if the 6tate of the market 
 makes it the most advantageous remittance ; and the money 
 itself was first acquired, and would again be replenished, by 
 the export of an equivalent value of our own products. 
 But, in the next place, a very short interval of paying in 
 money would so lower prices as either to stop a part of the 
 importation, or raise up a foreign demand for our produce, 
 sufficient to pay for the imports. I grant that this disturb- 
 ance of the equation of international demand would be in 
 some degree to our disadvantage, in the purchase of other 
 imported articles ; and that a country which prohibits some 
 foreign commodities, does, caster is paribus, obtain those which 
 it does not prohibit at a less price than it would other- 
 wise have to pay. To express the same thing in other words : 
 a country which destroys or prevents altogether certain 
 branches of foreign trade, thereby annihilating a general 
 gain to the world, which would be shared in some proportion 
 between itself and other countries, does, in some circum- 
 stances, draw to itself, at the expense of foreigners, a larger 
 share than would else belong to it of the gain arising from 
 that portion of its foreign trade which it suffers to subsist. 
 But even this it can only be enabled to do, if foreigners do 
 not maintain equivalent prohibitions or restrictions against its 
 commodities. In any case, the justice or expediency of destroy- 
 ing one of two gains, in order to engross a rather larger share 
 of the other, does not require much discussion ; the gain, 
 too, which is destroyed, being, in proportion to the magnitude 
 of the transactions, the larger of the two, since it is the one 
 which capital, left to itself, is supposed to seek by preference. 
 § 3. Defeated as a general theory, the Protectionist doc- 
 trine finds support in some particular cases from considera- 
 tions which, when really in point, involve greater interests 
 than mere savins of labor — the interests of national subsist- 
 ence and of national defense. 1 The discussions on the Corn 
 
 1 Mr. Mill here takes up political considerations, which are not properly to be 
 included in a purely economic treatment. (See the beginning of § 6.) 
 39 
 
610 THE INFLUENCE OF GOVERNMENT. 
 
 Laws have familiarized everybody with the plea that we 
 ought to be independent of foreigners for the food of the 
 people ; and the Navigation Laws were grounded, in theory 
 and profession, on the necessity of keeping up a " nursery of 
 seamen " for the navy. On this last subject I at once admit 
 that the object is worth the sacrifice ; and that a country ex- 
 posed to invasion by sea, if it can not otherwise have suffi- 
 cient ships and sailors of its own to secure the means of 
 manning on an emergency an adequate fleet, is quite right in 
 obtaining those means, even at an economical sacrifice in point 
 of cheapness of transport. When the English navigation 
 laws were enacted, the Dutch, from their maritime skill and 
 their low rate of profit at home, were able to carry for other 
 nations, England included, at cheaper rates than those nations 
 could carry for themselves : which placed all other countries 
 at a great comparative disadvantage in obtaining experienced 
 seamen for their ships of war. The navigation laws, by 
 which this deficiency was remedied, and at the same time a 
 blow struck against the maritime power of a nation with 
 which England was then frequently engaged in hostilities, 
 were probably, though economically disadvantageous, politi- 
 cally expedient. But English ships and sailors can now 
 navigate as cheaply as those of any other country, maintain- 
 ing at least an equal competition with the other maritime 
 nations even in their own trade. The ends which may once 
 have justified navigation laws require them no longer, and 
 afford no reason for maintaining this invidious exception 
 to the general rule of free trade. 
 
 Since the introduction of steamships and the advance of in- 
 vention in naval contrivances, the plea for navigation laws on 
 the ground that they keep up a " nursery of seamen " for the 
 navy is practically obsolete. The " seaman " employed on the 
 modern naval ships more nearly resembles the artisan in a 
 manufacturing establishment ; he need have but comparatively 
 little knowledge of the sea, since the days of sailing-vessels 
 have passed by, so far as naval warfare is concerned. Steam 
 and mechanical appliances now do what was before done by 
 wind and sail. 
 
 While Mr. Mill thinks navigation laws were economically 
 
INTERFERENCE OF GOVERNMENT. 611 
 
 — that is, so far as increase of wealth is concerned — disadvan- 
 tageous, yet he believes that they may have been " politically 
 expedient." It is possible, for example, that retaliation by the 
 United States and other countries against England early in this 
 century brought about the remission of the English restrictions 
 on foreign shipping. But it is quite another thing to say that 
 such laws produced an ability to sail ships more cheaply. 
 That the English navigation acts of 1651 built up English ship- 
 ping is not supported by many proofs ; whereas it is very 
 distinctly shown that English shipping languished and suffered 
 under them. 1 Moreover, under the regime of steam and iron 
 (which drew out England's peculiar advantages in iron and 
 coal), in all its history English shipping never prospered more 
 than it has since the abolition in 1849 of the navigation laws — 
 events which have taken place since Mr. Mill wrote. 
 
 The United States is still weighed down by navigation laws 
 adapted to mediaeval conditions, and the relics of a time when 
 retaliation was the cause of their enactment. So long as 
 wooden vessels did the carrying-trade, the natural advantages of 
 the United States gave us a proud position on the ocean. Now, 
 however, when it is a question of cheaper iron, steel, and coal for 
 vessels of iron and steel, we are at a possible disadvantage, and 
 the bulk of navigation laws proposed in these days are intend- 
 ed to draw capital either by raising prices through duties on 
 ships and materials, or by outright bounties and subsidies from 
 industries in which we have advantages, to building ships. 
 And until of late no distinction has been made between ship- 
 building and ship-owning (or ship-sailing). Within the last 
 year (1884) many burdens on ship-sailing have been removed ; 
 but even when we are permitted to sail ships on equal terms 
 with foreigners, we can not yet build them with as small a 
 cost as England (which is proved by the very demand of the 
 builders of "iron vessels for the retention of protective duties), 
 and our laws do not as yet allow us to buy ships abroad and 
 sail them under our own flag. 1 
 
 With regard to subsistence, the plea of the Protectionists 
 has been so often and so triumphantly met, that it requires 
 little notice here. That country is the most steadily as well 
 as the most abundantly supplied with food which draws its 
 supplies from the largest surface. It is ridiculous to found a 
 general system of policy on so improbable a danger as that of 
 being at war with all the nations of the world at once ; or to 
 
 1 See " Sketch of the History of Political Economy," supra, p. 6, note 1. 
 
 2 For bibliography of the United States shipping question, sec Appendix I. 
 
Q12 THE INFLUENCE OF GOVERNMENT. 
 
 suppose that, even if inferior at sea, a whole country could 
 be blockaded like a town, or that the growers of food in 
 other countries would not be as anxious not to lose an advan- 
 tageous market as we should be not to be deprived of their 
 corn. 
 
 In countries in which the system of Protection is declin- 
 ing, but not yet wholly given up, such as the United States, 
 a doctrine has come into notice which is a sort of compro- 
 mise between free trade and restriction, namely, that protec- 
 tion for protection's sake is improper, but that there is noth- 
 ing objectionable in having as much protection as may inci- 
 dentally result from a tariff framed solely for revenue. Even 
 in England regret is sometimes expressed that a " moderate 
 fixed duty " was not preserved on corn, on account of the 
 revenue it would yield. Independently, however, of the 
 general impolicy of taxes on the necessaries of life, this doc- 
 trine overlooks the fact that revenue is received only on the 
 quantity imported, but that the tax is paid on the entire 
 quantity consumed. To make the public pay much, that the 
 treasury may receive a little, is no eligible mode of obtaining 
 a revenue. In the case of manufactured articles the doctrine 
 involves a palpable inconsistency. The object of the duty 
 as a means of revenue is inconsistent with its affording, even 
 incidentally, any protection. It can only operate as protec- 
 tion in so far as it prevents importation, and to whatever 
 degree it prevents importation it affords no revenue. 
 
 § 4. The only case in which, on mere principles of politi- 
 cal economy, protecting duties can be defensible, is when 
 they are imposed temporarily (especially in a young and 
 rising nation) in hopes of naturalizing a foreign industry, in 
 itself perfectly suitable to the circumstances of the country. 
 The superiority of one country over another in a branch of 
 production often arises only from having begun it sooner. 
 There may be no inherent advantage on one part, or disad- 
 vantage on the other, but only a present superiority of ac- 
 quired skill and experience. A country which has this skill 
 and experience yet to acquire may in other respects be better 
 
INTERFERENCE OP GOVERNMENT. 613 
 
 adapted to the production than those which were earlier in 
 the field ; and, besides, it is a just remark of Mr. Rae that 
 nothing has a greater tendency to promote improvements in 
 any branch of production than its trial under a new set of 
 conditions. But it can not be expected that individuals 
 should, at their own risk, or rather to their certain loss, in- 
 troduce a new manufacture, and bear the burden of carrying 
 it on, until the producers have been educated up to the level 
 of those with whom the processes are traditional. A protect- 
 ing duty, continued for a reasonable time, will sometimes be 
 the least inconvenient mode in which the nation can tax itself 
 for the support of such an experiment. But the protection 
 should be confined to cases in which there is good ground of 
 assurance that the industry which it fosters will after a time 
 be able to dispense with it ; nor should the domestic pro- 
 ducers ever be allowed to expect that it will be continued to 
 them beyond the time necessary for a fair trial of what they 
 are capable of accomplishing. 
 
 The great difficulty with this proposal is that it introduces 
 (what is inconsistent with Mr. Mill's general system) the So- 
 cialistic basis of state-help, instead of self-help. If industries 
 will never support themselves, then, of course, it is a misap- 
 propriation of the property of its citizens whenever a govern- 
 ment takes a slice by taxation from productive industries and 
 gives it to a less productive one to make up its deficiencies. The 
 only possible theory of protection to young industries is that, 
 if protected for a season, the industries may soon grow strong 
 and stand alone. Mr. Mill never contemplated anything else. 
 But the difficulty is constantly met with, in putting this theory 
 into practice, that the industry, once that it has learned to de- 
 pend on the help of the state, never reaches a stage when it is 
 willing to give up the assistance of the duties. Dependence on 
 legislation begets a want of self-reliance, and destroys the stim- 
 ulus to progress and good management. It is said : " There 
 has never been an instance in the history of the country where 
 the representatives of such industries, who have enjoyed pro- 
 tection for a lcng series of years, have been willing to submit 
 to a reduction of the tariff, or have proposed it. But, on the 
 contrary, their demands for still higher and higher duties are 
 insatiable, and never intermitted." l The question of fact, as 
 
 1 D. A. Wells, " Cobden Club Essays," second scries, p. 533. 
 
614: THE INFLUENCE OF GOVERNMENT. 
 
 to whether or not the United States is indebted for its present 
 manufacturing position to protection when our industries were 
 young, seems to be capable of answer, and an answer which 
 shows that protection was imposed generally after the indus- 
 tries got a foothold, and that very little assistance was derived 
 from the duties on imports. 1 
 
 The following explanation by Mr. Mill 2 of the meaning put 
 upon his argument of protection to young industries by those 
 who have applied it to the United States will be of no slight 
 interest : 
 
 " The passage has been made use of to show the inappli- 
 cability of free trade to the United States, and for similar 
 purpose in the Australian colonies, erroneously in my opin- 
 ion, but certainly with more plausibility than can be the case 
 in the United States, for Australia really is a new country 
 whose capabilities for carrying on manufactures can not yet 
 be said to have been tested ; but the manufacturing parts of 
 the United States — New England and Pennsylvania — are no 
 longer new countries ; they have carried on manufactures on 
 a large scale, and with the benefit of high protecting duties, 
 for at least two generations ; their operatives have had full 
 time to acquire the manufacturing skill in which those of 
 England had preceded them ; there has been ample experi- 
 ence to prove that the alleged inability of their manufactures 
 to compete in the American market with those of Great 
 Britain does not arise merely from the more recent date of 
 their establishment, but from the fact that American labor 
 and capital can, in the present circumstances of America, be 
 employed with greater return, and greater advantage to the 
 national wealth, in the production of other articles. I have 
 never for a moment recommended or countenanced any pro- 
 tecting industry except for the purpose of enabling the pro- 
 tected branch of industry, in a very moderate time, to be- 
 come independent of protection. That moderate time in the 
 
 1 See F. W. Taussig's " Protection to Young Industries as applied in the 
 United States " (1883). 
 
 2 In a letter written February 26, 1866, to Mr. Horace White, published in 
 the Chicago " Tribune," and reprinted in the New York " Nation," May 29, 
 18*73. 
 
INTERFERENCE OF GOVERNMENT. 615 
 
 United States has been exceeded, and if the cotton and iron 
 of America still need protection against those of the other 
 hemisphere, it is in my eyes a complete proof that they ought 
 not to have it, and that the longer it is continued the greater 
 the injustice and the waste of national resources will be." 
 
 There is only one part of the protectionist scheme which 
 requires any further notice : its policy toward colonies and 
 foreign dependencies ; that of compelling them to trade ex- 
 clusively with the dominant country. A country which thus 
 secures to itself an extra foreign demand for its commodities, 
 undoubtedly gives itself some advantage in the distribution 
 of the general gains of the commercial world. Since, how- 
 ever, it causes the industry and capital of the colony to be 
 diverted from channels which are proved to be the most pro- 
 ductive, inasmuch as they are those into which industry and 
 capital spontaneously tend to flow, there is a loss, on the 
 whole, to the productive powers of the world, and the mother- 
 country does not gain so much as she makes the colony lose. 
 If, therefore, the mother-country refuses to acknowledge any 
 reciprocity of obligations, she imposes a tribute on the colony 
 in an indirect mode, greatly more oppressive and injurious 
 than the direct. 
 
 § 5. The discussion by Mr. Cairnes on the question of wages 
 as affected by the tariff is such that I have quoted it as fully as 
 possible : " The position taken in the United States is that pro- 
 tection is only needed and only asked for where American in- 
 dustry is placed under a disadvantage, as compared with the 
 industry of foreign countries. . . . The rates of wages meas- 
 ured in money are higher in the United States than in Europe, 
 and, therefore, it is argued, the cost of producing commodities 
 is higher. . . . The high rates of wages in the United States 
 are not peculiar to any branch of industry, but are universal 
 throughout its whole range. If, therefore, a high rate of 
 wages proves a high cost of production, and a high cost of pro- 
 duction proves a need of protection, it follows that the farmers 
 of Illinois and the cotton-planters of the Southern States stand 
 in as much need of fostering legislation as the cotton-spinners 
 of New England or the iron-masters of Pennsylvania ! A cri- 
 terion which leads to such results must, I think, be regarded as 
 sufficiently condemned. The fallacy is, in truth, . . . that all 
 
616 THE INFLUENCE OF GOVERNMENT. 
 
 industries are not in each country equally favored or disfavored 
 by nature, and have not, therefore, equal need of this protect- 
 ing care. If American protectionists are not prepared to de- 
 mand protective duties in favor of the Illinois farmer against 
 the competition of his English rival, they are bound to admit 
 either that a high cost of production is not incompatible with 
 effective competition, or else that a high rate of wages does not 
 prove a high cost of production ; and if this is not so in Illi- 
 nois, then I wish to know why the case should be different in 
 Pennsylvania or in New England. If a high rate of wages in 
 the first of these States be consistent with a low cost of pro- 
 duction, why may not a high rate of wages in Pennsylvania be 
 consistent with a low cost of producing coal and iron ? 
 
 " The rate of wages, whether measured in money or in the 
 real remuneration of the laborer, affords an approximate crite- 
 rion of the cost of production, 1 either of money, or of the com- 
 modities that enter into the laborer's real remuneration, but in 
 a sense the inverse of that in which it is understood in the 
 argument under consideration : in other words, a high rate of 
 wages indicates not a high but a low cost of production. 8 . . . 
 Thus in the United States the rate of wages is high, whether 
 measured in gold or in the most important articles of the labor- 
 er's consumption — a fact which proves that the cost of produc- 
 ing gold, as well as that of producing those other commodities, 
 is low in the United States. ... I would ask [objectors] to 
 consider what are the true causes of the high remuneration of 
 American industry. It will surely be admitted that, in the last 
 resort, these resolve themselves into the one great fact of its 
 high productive power. ... I must, therefore, contend that 
 the high scale of industrial remuneration in America, instead 
 of being evidence of a high cost of production in that country, 
 is distinctly evidence of a low cost of production — of a low 
 cost of production, that is to say, in the H lace, of gold, and, 
 in the next, of the commodities which mainly constitute the 
 real wages of labor — a description which embraces at once the 
 most important raw materials of industry and the most impor- 
 tant articles of general consumption. As regards commodities 
 not included in this description, the criterion of wages stands 
 in no constant relation of any kind to their cost, and is, there- 
 
 1 Business men constantly use the term " cost of production " when in reality 
 they mean that which to the economist is expressed by " cost of labor." If cost of 
 labor becomes higher, it takes from profits — the place where they feel the difficul- 
 ties of competition — but they say that the cost of production has risen : the cost, 
 to them, only has risen, that is, the " cost of labor," not " cost of production." 
 
 8 Cf. Cairnes, " Leading Principles," pp. 324-341 ; and supra, Book III, 
 Chap. II, § 4. 
 
INTERFERENCE OF GOVERNMENT. 617 
 
 fore, simply irrelevant to the point at issue. And now we 
 may see what this claim for protection to American industry, 
 founded on the high scale of American remuneration, really 
 comes to : it is a demand for special legislative aid in consid- 
 eration of the possession of special industrial facilities — a com- 
 plaint, in short, against the exceptional bounty of nature. 
 
 " Perhaps I shall here be asked, How, if the case be so — if 
 the high rate of industrial remuneration in America be only 
 evidence of a low cost of production — the fact is to be ex- 
 plained, since fact it undoubtedly is, that the people of the 
 United States are unable to compete in neutral markets, in the 
 sale of certain important wares, with England and other Euro- 
 pean countries ? ' No one will say that the people of New Eng- 
 land, New York, and Pennsylvania, are deficient in any indus- 
 trial qualities possessed by the workmen of any country in the 
 world. How happens it, then, that, enjoying industrial advan- 
 tages superior to other countries, they are yet unable to hold 
 their own against them in the general markets of commerce ? I 
 shall endeavor to meet this objection fairly, and, in the first 
 place, let me state what my contention is with regard to the cost 
 of production in America. I do not contend that it is low in the 
 case of all commodities capable of being produced in the coun- 
 try, but only in that of a large, very important, but still limited 
 group. With regard to commodities lying outside this group, 
 I hold that the rate of wages is simply no evidence as to the 
 cost of their production, one way or the other. But, secondly, 
 I beg the reader to consider what is meant by the alleged ' in- 
 ability ' of New England and Pennsylvania to compete, let us 
 say, with Manchester and Sheffield, in the manufacture of calico 
 and cutlery. What it means, and what it only can mean, is 
 that they are unable to do so consistently with obtaining that 
 rate of remuneration on their industry which is current in the 
 United States. If. American laborers and capitalists would 
 be content with the wages and profits current in Great Britain, 
 there is nothing that I know of to prevent them from holding 
 their own in any markets to which Manchester and Sheffield 
 can send their wares. And this brings us to the heart of the 
 question. Over a large portion of the great field of industry 
 the people of the United States enjoy, as compared with those 
 of Europe, (1) advantages of a very exceptional kind ; over 
 the rest (2) the advantage is less decided, or (3) they stand on 
 a par with Europeans, or (4) possibly they are, in some in- 
 
 1 The fact (sufficiently established by Mr. Brassey) i3 not considered also that 
 England gives higher wages to operatives than the Continent, and yet England is 
 able to undersell France and Germany in neutral markets. It is evident, however, 
 that England can undersell only in occupations in which she has advantages. 
 
618 THE INFLUENCE OF GOVERNMENT. 
 
 stances, at a disadvantage. Engaging in the branches of in- 
 dustry in which their advantage over Europe is great, they reap 
 industrial returns proportionally great ; and, so long as they 
 confine themselves to these occupations, they can compete in 
 neutral markets against all the world, and still secure the high 
 rewards accruing from their exceptionally rich resources. But 
 the people of the Union decline to confine themselves within 
 these liberal bounds. They would cover the whole domain of 
 industrial activity, and think it hard that they should not reap 
 the same rich harvests from every part of the field. They 
 must descend into the arena with Sheffield and Manchester, 
 and yet secure the rewards of Chicago and St. Louis. They 
 must employ European conditions of production, and obtain 
 American results. What is this but to quarrel with the laws 
 of nature ? These laws have assigned to an extensive range 
 of industries carried on in the United States a high scale of 
 return, far in excess of what Europe can command, to a few 
 others a return on a scale not exceeding the European propor- 
 tion. American enterprise would engage in all departments 
 alike, and obtain upon all the high rewards which nature has 
 assigned only to some. Here we find the real meaning of the 
 ' inability ' of Americans to compete with the ' pauper labor ' 
 of Europe. They can not do so, and at the same time secure 
 the American rate of return on their work. The inability no 
 doubt exists, but it is one created, not by the drawbacks, but 
 by the exceptional advantages of their position. It is as if a 
 skilled artisan should complain that he could not compete with 
 the hedger and ditcher. Let him only be content with the 
 hedger and ditcher's rate of pay, and there will be nothing to 
 prevent him from entering the lists even against this rival." ' 
 
 It is often said that wages are kept at a high rate in the 
 United States by the existence of protected industries. On the 
 other hand, the truth is that the protected industries must pay 
 the current high rate of wages fixed by the general productive- 
 ness of all industries in the country. When the facts are in- 
 vestigated, it is surprising how small a portion of the laborers 
 of the United States are employed in occupations which owe 
 their existence to the tariff. A general view of the relative 
 numbers engaged in different occupations may be seen by 
 reference to Chart No. XXIV, based on the returns for the 
 census of 1880. The data are well worth examination : 2 
 
 (1.) Agriculture 7,6*70,493 
 
 (2.) Manufacturing, mechanical, and mining 3,837,112 
 
 (3.) Trade and transportation 1,810,256 
 
 (4.) Professional and personal services 4,074,238 
 
 All occupations 17,392,099 
 
 1 Cairnes, " Leading Principles," pp. 382-388. 
 8 "Compendium," 1880, pp. 1343-1377. 
 
INTERFERENCE OF GOVERNMENT. 
 
 619 
 
 CHART XXIV. 
 Chart showing for the United States, in 1880, the ratio between the total popu- 
 lation over ten years of age and the number of persons reported as engaged 
 in each principal class of gainful occupations. Compiled from the returns 
 of the Tenth Census, by the Editor. 
 
 Note. — The interior square represents the proportion of the population which 
 is accounted for as engaged in gainful occupations. The unshaded space between 
 the inner and outer squares represents the proportion of the population not so 
 accounted for. 
 
 (1.) Engaged in agriculture 7,670,493 
 
 (2.) " manufactures and mining 3,837,112 
 
 (3.) " trade and transportation 1,S10,256 
 
 (4.) " professional and personal services 4,074,238 
 
 17,392,099 
 Not so engaged 19,319,508 
 
 Total population over ten years of age 86,761,607 
 
 n 
 
(520 THE INFLUENCE OF GOVERNMENT. 
 
 Of the second class, less than 450,000 work-people are en- 
 gaged in the chief protected industries — cotton, woolen, and 
 iron and steel, combined. This class, it is to be noted, in the 
 census returns, includes bakers, blacksmiths, brick-makers, build- 
 ers, butchers, cabinet-makers, carpenters, carriage-makers, and 
 so on through the whole list of similar occupations practically- 
 unaffected by the tariff (so far as protection to them is con- 
 cerned). So that, at the most, there are less than a million 
 laborers engaged in industries directly dependent on the tariff, 
 and the number is undoubtedly very much less than a million. 
 When some writers assert, therefore, that the existence of cus- 
 toms-duties allows industries (even including all those employed 
 in producing cotton, wool, iron, and steel) to employ less than a 
 million laborers in such a way that the remuneration is fixed 
 for the remaining 16,000,000 laborers in the United States, 
 keeping wages high for 16,000,000 by paying current wages 
 for less than a million, the extravagance and ignorance of 
 the statement are at once apparent ; while, on the other hand, 
 it is distinctly seen that the causes fixing the generally high 
 rates of wages for the 16,000,000 are those governing the ma- 
 jority of occupations, and that the less than one million must 
 be paid the wages which can be obtained elsewhere in the more 
 productive industries. The facts thus strikingly bear out the 
 principles as stated above. 
 
 Confirmation — if confirmation now seems necessary — may 
 be found in a study 1 by our ablest statistician, Francis A. 
 Walker, upon the causes which have operated on the growth 
 of American manufactures. This growth has not been com- 
 mensurate, he finds, with the remarkable inventive and indus- 
 trial capacity of our people, and with the richness of our 
 national resources : " I answer that the cause of that compara- 
 tive failure is found, primarily and principally, in the extraor- 
 dinary success of our agriculture, as already intimated in what 
 has been said of the investment of capital. The enormous 
 profits of cultivating a virgin soil without the need of artificial 
 fertilization ; the advantages which a sparse population derives 
 from the privilege of selecting for tillage only the choicest 
 spots, 2 those most accessible, most fertile, most easily brought 
 under the plow ; and the consequent abundance of food and 
 other necessaries enjoyed by the agricultural class, have tended 
 continually to disparage mechanical industries, in the eyes 
 alike of the capitalist, looking to the most remunerative invest- 
 
 1 " Princeton Review," 1883, p. 222. 
 
 2 The United States have at the present time but five persons engaged in 
 agriculture for each square mile of settled area. 
 
INTERFERENCE OF GOVERNMENT. G21 
 
 ment of his savings, and of the laborer, seeking that avocation 
 which should promise the most liberal and constant support. 
 
 "It has been the competition of the farm with the shop 
 which, throughout the entire century of our national independ- 
 ence, has most effectually hindered the growth of manufact- 
 ures. A people who are privileged to cultivate a reasonably 
 fertile soil, under the conditions indicated above, can secure for 
 themselves subsistence up to the highest limit of physical well- 
 being. If that people possess the added advantage of great 
 skill in the use of tools, and great adroitness in meeting the 
 large and the little exigencies of the occupation and cultivation 
 of the soil, the fruits of their labor will include not only every- 
 thing which is essential to health and comfort, but much that 
 is of the nature of luxury." 
 
 It remains to be said in this connection that workmen are 
 already discerning the practical and real causes at work affecting 
 their wages — affecting them more directly than any tariff sys- 
 tem possibly could — by showing no small alarm at the immigra- 
 tion of foreigners, such as the Hungarian miners and Italian la- 
 borers, who willingly underbid them. In other words, they are 
 beginning to realize, in a practical way, the truth that increas- 
 ing numbers are far more potent than anything else in re- 
 ducing wages. So long as immigration is free to any race or 
 nationality, there is no such thing as "protection to home 
 laborers " ; the only protection to them — not that I am urging 
 the desirability of such measures — can come solely from forces 
 which limit the number of workmen who enter into competi- 
 tion with them. Any other protection to laboring-men than 
 the prohibition of immigration — which no one thinks of (ex- 
 cept for the Chinese) — is an economic delusion. Instead of 
 "protecting" them to the extent of affording higher wages, 
 the tariff increases the cost of woolen clothing and other arti- 
 cles of their consumption, in addition to forcing capital into 
 employments which yield a less return, and so insure lower 
 wages. 
 
 § 6. It must be kept in mind that Political Economy deals 
 only with the phenomena of material wealth ; it does not sup- 
 ply ethical or political grounds of action. It is quite conceiv- 
 able that a legislator, in coming to a decision, may have to bal- 
 ance economic gains against moral or political losses, and may 
 choose to give up the former to prevent the latter. But the 
 economic truth remains unchanged. Political economy, for in- 
 stance, to the question, Is there any gain in international trade ? 
 answers, unequivocally, yes. Would it be a loss of wealth to 
 the community to have the goods formerly bought abroad now 
 produced at home ? The answer is, certainly it would. But 
 here it has been ably urged by intelligent writers that a state 
 
622 THE INFLUENCE OF GOVERNMENT. 
 
 has other ends to gain than the accumulation of mere riches ; that 
 it must aim to secure the greatest moral, social, and elevating 
 influences possible for the working-classes ; and that while free 
 exchange of goods may add to wealth, it may injure the social 
 and political well-being of a nation. So far as these are social 
 and political questions they do not belong to Political Economy. 
 But the commonest form of argument is that, under free ex- 
 change, the United States would become purely an " agricult- 
 ural " country, its social horizon would become narrowed, and 
 a lower standard of industrial activity would then ensue ; in- 
 stead of which, it is said, we should, by protection, keep in 
 existence diversified industries by which the national mind may 
 be better stimulated, and greater enterprise may be encouraged 
 in all branches of industry. This argument for " diversity of 
 industries," however, is not merely a sociological question ; it 
 can only be fully discussed from an economic stand-point, and 
 deserves even more than the brief attention we can give it here. 
 
 In the first place, as soon as any purely agricultural country 
 gains even a slight density of population — a density only such 
 as to warrant the introduction of the principle of division of 
 labor — there comes an inevitable differentiation of pursuits, 
 wholly outside of legislation, and through the operation of nat- 
 ural causes. Not all of any population is required in agriculture 
 to provide the whole with food. By a division of labor, one 
 man in agriculture can produce the sustenance of himself and 
 many others. " The United States have at the present time 
 but five persons engaged in agriculture for each square mile of 
 settled area." By the side of the farm must early spring up a 
 wide circle of industries — the shoemaker, the carpenter, the 
 blacksmith, the wagon-maker, the painter, the builder, the 
 mason, and all the ordinary employments which arise in any 
 small community from the earliest division of labor. More- 
 over, " agriculture " is often used in a too limited sense as con- 
 fined to producing food alone (although even in that limited 
 sense employing nearly one half of the total number of our la- 
 borers). In a new country the natural field of employment is 
 found in the " extractive industries," which include the prepa- 
 ration for the market not only of food, bat also of all ores, coal, 
 minerals, oils, hides, leather, wool, lumber, and the industries 
 intimately connected with them ; all the employments which 
 transport these from one part of the country to another (em- 
 ploying at present over one ninth of all our laborers) ; and pro- 
 fessional and personal services of an extended variety. Even, 
 therefore, if we were obliged to forego manufactures entirely, 
 the " extractive industries " would necessarily involve a very 
 extensive diversity of employments. 
 
 The real question, however, for most persons, centers in the 
 
INTERFERENCE OF GOVERNMENT. 623 
 
 next stage of the industrial evolution — that of the manufactures 
 of these above-mentioned products of the "extractive indus- 
 tries." It will be remembered, here, that a country does not 
 possess an equal ability in producing each of these or any com- 
 modities : the timber formerly near great rivers may vanish 
 into the interior ; the oil-sources may be more or less fertile ; or 
 the ore-deposits may be more or less rich, more or less accessi- 
 ble, than those of other countries. This being understood, then, 
 as soon as the demand in the country calls for an increased 
 quantity of a particular article, the cost may increase under 
 the law of diminishing returns until a foreign country — hav- 
 ing inferior agents of production as compared with our best — 
 may be able to send supplies into our markets. It all depends 
 on whether the United States wants more articles than can be 
 produced on grades of natural agents superior to those pos- 
 sessed by foreigners, taking cost of carriage to this country 
 into consideration. Even though foreign competition appears 
 when we reach poorer grades of natural agents, it does not 
 follow that some of the particular articles will not be pro- 
 duced. What ought to be clear is, that untrammeled exchange 
 between countries will not prevent the existence of various 
 industries, but only limit production to those grades of agents 
 which are its best. This may be better seen by a simple dia- 
 
 „ , , 7 6 5 4 3 2 1 
 
 England 1 j 1 \ 1 j 1 j Iron 
 
 4 3 2 1 Vand 
 
 United States. j j | ( ) coal. 
 
 England ; ; ; i i 
 
 7 a «; a. S 2 I r Wheat 
 
 United States : : I 1 1 I 1 » 
 
 gram : England may have seven different grades of productive- 
 ness in her iron and coal supplies, of which her grades 1, 2, and 
 3 are superior to the best grade of the United States, while 
 grades 1, 2, 3, and 4 in the United States may compare only 
 with grades 4, 5, 6, 7 of England. So long as England can 
 supply herself and the United States also with coal and iron 
 from the three superior grades, the United States can not work 
 grade 1 at home. But if the supply for England and the world 
 requires grade 5 to be worked, then the United States can begin 
 the industry on her best grade, although that is far inferior to 
 the best grade in England. Likewise, if the United States has 
 three grades of wheat-land superior to England's best grade, 
 the ability of England to grow wheat depends on whether the 
 United States can, or can not, supply both herself and England 
 from grades 1, 2, and 3. If we must resort to grade 4, then 
 England can begin to grow wheat as well as we. In short, 
 
624 THE INFLUENCE OF GOVERNMENT. 
 
 under a system of free exchange, as great a diversity as under 
 protection is probably possible, but only in such a way that the 
 best possible advantages in each particular industry are em- 
 ployed. Smaller amounts in some branches, and greater amounts 
 in others, may be produced under a free than under a restrict- 
 ive system, but with all the greater gain which arises from a 
 proper and healthy adjustment of trade. The most poorly en- 
 dowed enterprises in each occupation would be given up, but 
 not the whole industry itself. No class of persons feel the 
 competition of rivals more than English farmers since American 
 wheat has come into English markets, and yet it does not fol- 
 low that England can not grow a bushel of wheat. The fact 
 is, merely, that some kinds of lands were thrown out of cultiva- 
 tion, and a readjustment made, to the benefit of those wanting 
 cheaper food. So with us : we should not, by the free ex- 
 change, be forced to give up the iron and coal industries en- 
 tirely ; for the best mines would still keep that occupation in 
 existence to " diversify " the others. 
 
 So far the explanation covers the " extractive industries " 
 only, or those industries affected by the law of diminishing 
 returns when a larger quantity is demanded. The real ques- 
 tion arises as to the manufactures of these materials. But we 
 count upon larger industrial rewards, in the form of wages, and 
 profits, here than in England ; we must get more from an in- 
 dustry than England in order to satisfy us. Our grades of 
 occupations, therefore, must be more productive to a certain 
 extent, grade for grade, than English grades, in order to allow 
 of their remaining free from competition. But we have this 
 superiority, as regards our home market, owing to natural 
 causes : (1) cheap raw materials (if we except wool and other 
 commodities whose price is raised by the tariff); (2) advantage 
 over England in cost of transportation of raw products ; and 
 (3) in the cost of transportation, again, of the finished goods 
 in reaching our markets. Now, the processes of manufacture 
 which do not put much labor upon the materials, especially 
 where the articles are bulky, are conducted in this country 
 without fear of foreign competition. And the range of this 
 class of manufactures is surprisingly large. It includes the 
 manufactures of iron, such as stoves, and the common uten- 
 sils of e very-day life ; of hides, such as leather, harnesses, etc. ; 
 and of wood, such as all the furniture of common use. The 
 list is too long to be fully stated here. These industries are 
 not kept in existence by the tariff ; and a diversity as wide as 
 this would arise under a system of free exchange, as well as 
 of restriction. Indeed, if duties were removed from so-called 
 " raw materials," it is altogether probable that a wider diver- 
 sity would exist than ever before. 
 
INTERFERENCE OF GOVERNMENT. 625 
 
 And yet, it will be said, there are some things we can not 
 produce in free competition with England. Of course there 
 are ; and it is to be hoped it will long continue so. If there 
 are not some kinds of commodities which foreigners can pro- 
 duce to better advantage than we, then there will be no possi- 
 bility of any foreign trade whatever ; since, if they can send 
 us nothing, they can take nothing from us. To deny this posi- 
 tion, is to say that the export and import trade of the United 
 States (amounting in 1883 to more than $1,500,000,000) is of 
 no profit, and had best be entirely destroyed, in order that a 
 few industries in which we have no natural advantages (and 
 which employ less than one seventeenth of the laborers in the 
 United States) should be continued at a loss to the general pro- 
 ductiveness of our labor and capital, and so to a general dimi- 
 nution of wages and profits. 
 
 § 7. The argument — heard less frequently now than for- 
 merly — has been advanced, drawn inductively from statistics, 
 that protection does not raise prices ; because, after duties are 
 put on, a larger quantity is produced, the advantages of large 
 production are reaped, and then the price of the manufactured 
 commodity falls lower here than it was before the duty was 
 imposed. The position is then held that protection does not 
 raise prices. It is, of course, understood to mean the prices of 
 protected commodities — a necessary precaution, because we find 
 our own agricultural (unprotected) commodities cited to show 
 that prices are lower here than in England. 
 
 No one, however, will deny that there has been a fall in the 
 prices of textile fabrics and manufactured goods. That is the 
 result of a general law of value, and of the tendencies of a 
 progressive state of industry. 1 The causes of this acknowl- 
 edged fall would be at work, no matter whether tariffs existed 
 or not. It is the result of the general forward march of im- 
 provements, as evidenced in the application of new inventions 
 and the display of skill and ingenuity in new processes. To 
 say that it comes because of a tariff, is a complete non seqidtur. 
 How true this is may be seen by observing that a country like 
 England, without tariffs, shares in the general fall of prices of 
 manufactured goods equally with the country which has heavy 
 customs-duties. The causes must be wider than tariffs, if they 
 are seen working alike in tariff and non-tariff countries. 
 
 But the fact itself can not be gainsaid that protection does 
 raise the prices of the protected goods in the home market. The 
 comparison is not to be made between prices as they now are in 
 this country and as they were twenty or forty years ago also in 
 this country, for this would show only the general march of 
 
 1 Book IV, Chap. I, § 2 ; and see Chart No. XX. 
 40 
 
626 
 
 THE INFLUENCE OF GOVERNMENT. 
 
 improvements in this country ; but a comparison is to be made 
 between prices in this country to-day and present prices in 
 foreign countries. Does, for instance, the tariff increase the 
 price of woolen goods and clothing to every consumer far be- 
 yond what the price would be if the duty on imported woolens 
 were removed ? The very existence of a protecting duty is 
 the answer to this. If the duty does not raise the price, then 
 why does the woolen industry wish a continuance of the duties ? 
 If goods can be sold as cheaply here as the foreign goods, why 
 do protectionists want any duties ? The duties are intended 
 to keep foreign goods out of our markets ; and they would be 
 unnecessary if our goods could be sold as cheaply as the foreign 
 wares. 
 
 The facts, however, are at hand to show that the statement 
 of principle as made above is corroborated by the statistics. In 
 1883, although average weekly wages in Massachusetts were 
 over 77 per cent higher than in England, the American laborer 
 had to pay -more for the articles entering into his real wages ; 
 and to that extent lost the advantage of his higher reward in 
 this country. This is to be seen in the following figures, 1 which 
 show, in percentages, whether prices are higher or lower here 
 than in England : 
 
 CLASSES OF ARTICLES. 
 
 Higher. 
 
 Lower. 
 
 
 Per cent. 
 16 
 
 13 
 
 62 
 45 
 
 Per cent. 
 
 Provisions, including meat, eggs, butter, and pota- 
 
 23 
 
 
 
 
 
 
 
 
 
 And yet, in spite of the high prices, 31 per cent of the 
 Massachusetts workman's expenditure represents more comfort 
 and better home surroundings than is enjoyed by the English 
 workman. If the American could purchase at English prices, 
 he would have no less than 37 per cent of a surplus for addi- 
 tional enjoyments (after making due allowance for the higher 
 rents paid here than in England). In other words, higher 
 prices cut off the American laborer from reaping all the supe- 
 riority in comfort which might be expected from knowing that 
 he had an advantage over the English laborer of 77 per cent 
 in the money wages received. 
 
 1 "Fifteenth Annual Report of the Massachusetts Bureau of Statistics, 1884," 
 by Carroll D. Wright. 
 
INTERFERENCE OF GOVERNMENT. (J27 
 
 In order that the reader may easily find the arguments of the pro- 
 tectionists, he is referred to the following books: 
 
 Carey's " Principles of Social Science " (3 vols.). The form of argu- 
 ment is, briefly, that all industries should be kept going within the 
 bounds of a country so as to avoid -foreign trade. The change of form 
 into the finished commodity should, he holds, take place near the spot 
 where the raw materials are produced, so that not so great a share 
 should go to the mere middle-men, or transporters. 
 
 Bowen's "Political Economy," Chap. XX, advocates protection on 
 the ground that it is needed to secure diversity of industries, and that 
 it lowers the prices of imported goods. 
 
 Sir J. B. Bylea's " Sophisms of Free Trade " is an answer to Basti- 
 at's " Sophisms of Protection, 1 ' the latter having been translated into 
 English by Horace White. 
 
 Erastus B. Bigelow's " The Tariff Question." This is one of the 
 ablest discussions, from the protectionist point of view, based on statis- 
 tical tables and comparisons of the policy of England and the United 
 States. 
 
 Stebbins's " Protectionists' Manual " is a brief and handy statement. 
 
 Ellis H. Roberts's " Government Revenue " is the form into which 
 he has thrown his lectures at Cornell University (1884) on protection, 
 and is the latest statement emanating from that side of the discussion. 
 He goes at length into the history of taxes in various countries; holds 
 that wages are higher here than in England because of protection; that 
 our manufactures are more flourishing than our agriculture, etc. 
 
 Frederick List's "National Economy" is the German statement of 
 protection, much on Carey's own grounds. 
 
 "The Congressional Globe" contains numerous speeches of mem- 
 bers of Congress on the tariff; and the Iron and Steel Association of 
 Philadelphia send out pampldets explaining the protectionist position. 
 
 The free-trade arguments may be found also in "W. M. Grosvenor's 
 "Does Protection Protect?" ne studies the results of the various 
 tariffs of the United States, and gives many very valuable tables and 
 collections of statistics bearing upon this question. 
 
 W. G. Sumner's "History of Protection in the United States" is a 
 very vigorous account of the evils of the various tariffs and the protect- 
 ive system. 
 
 D. A. Wells's " Reports " as Special Commissioner of the Revenue, 
 and his numerous pamphlets (see Putnams' publisher's catalogue), are 
 
628 THE INFLUENCE OF GOVERNMENT. 
 
 full of facts, and give the results of special study of the subject as affect- 
 ing the United States. 
 
 A. L. Perry's " Political Economy" gives a radical free-trade view. 
 
 Henry Fawcett's " Free Trade and Protection " explains the causes 
 which have retarded the more general adoption of free trade. 
 
 J. E. Cairn es's "Leading Principles of Political Economy " gives the 
 ablest discussion of the economic principles involved in the question 
 which has yet been offered to the reader. Moreover, almost all our 
 systematic writers on political economy (excepting, perhaps, Bowen 
 and R. E. Thompson) give the system of free exchange their support on 
 economic grounds. 
 
APPENDICES. 
 
APPENDIX I. 
 
 A BRIEF BIBLIOGRAPHY OF THE TARIFFS OF THE 
 UNITED STATES. 
 
 I. General Works. — Young's "Special Report on the Customs-Tariff 
 Legislation of the United States " contains useful extracts from debates 
 of Congress, and also valuable tables of duties; in the Index, p. cciii, 
 under "Tariff Act," will be found references to, and dates of, all acts 
 
 . to 1870. See, also, Sumner's "History of American Currency," and his 
 """Lectures on Protection in the United States";*" A. L. Perry's "Politi- 
 cal Economy," chap, xiii ; ''Grosvenor's "Does Protection Protect?" 
 A valuable study isvE. J. James's " Studien uber den Amerikaniscben 
 Zoll-tariff." For different views, see Carey's " Social Science " ;" Bolles's 
 "Financial History pf the United States," vol. ii, Bk. i, chap, v, Bk. iii, 
 chaps, iii to x ; and Stebbins's " American Protectionists' Manual." 
 
 II. Earlier Periods. — H. C. Adams's " Taxation in the United States, 
 1789-1816 ";*F. W. Taussig's "Protection to Young Industries"; the 
 works of Hamilton, Madison, Jefferson, "Webster, and Clay; "The 
 Statesman's Manual " ; and of course the Debates in Congress, etc. 
 See, also, Bristed's " Resources of the United States " ; Pitkin's " Sta- 
 tistical View of the Commerce of the United States " ; Seyberfs " Sta- 
 tistical Annals" (1818) ; and the "American Almanac." 
 
 III. Noteworthy Documents. -^Hamilton's Reports: "Report on 
 Manufactures," "Works, ii, pp. 192-284, or American State Papers, Fi- 
 nance, i, 123-144. ^Dallas, Treasury Report of 1816, American State 
 Papers, Finance, iii, 87-91. 
 
 A report which is of the greatest importance and weight is Albert 
 Gallatin's " Memorial in Favor of Tariff Reform " (1832). Printed sepa- 
 rately. Unfortunately, not in his collected works. 
 
 "Walker's Report, see Finance Report, December 3, 1845. 
 
 J. Q. Adams's Report of 1832, Congressional Documents, 1831-1832, 
 H. R. No. 481. 
 
 D. A. "Wells's " Reports as Special Commissioner of the Revenue," 
 1866, Senate Documents, second session, Thirty-ninth Congress, vol. i, 
 No. 2 ; 1868, House Executive Documents, second session, Fortieth Con- 
 
632 APPENDIX I. 
 
 gress, vol. ix, No. 81 ; 1869, House Executive Documents, third session, 
 Fortieth Congress, vol. vii, No. 16 ; 1869, House Executive Documents, 
 second session, Forty-first Congress, vol. v, No. 27 ; and his paper in 
 the Cobden Club Essays (second series). 
 //W. D. Kelley's " Speeches, Addresses, and Letters." 
 / " Report of the Tariff Commission," 1882 (two vols). H. R. Miscella- 
 neous Documents, No. 6, Part I, Forty-seventh Congress, second session. 
 
 IV. Pauper- Labor Argument. — See^aussig, "Protection to Young 
 Industries," p. 69, note 1; Calhoun's speech, "Works, iv, pp. 201-212; 
 Greeley's speech of 1843; Cooper's " Politics," pp. 99-109; Webster's 
 Works, v, pp. 161-235; Cairnes, "Leading Principles," pp. 382-388. 
 Fifteenth Annual Report of the Massachusetts Bureau of Statistics 
 (1884), by Carroll D. Wright. 1/ D. A. Wells, "Princeton Review," No- 
 vember, 1883, p. 261 j^choenhof, " Wages and Trade." 
 
 V. View of Early Manufactures.— -Bishop, " History of American 
 Manufactures " ; Batchelder's " Introduction and Early Progress of the 
 Cotton Manufacture in the United States "; V N. Appleton, "Origin of 
 Lowell"; G. S. White, "Memoir of Samuel Slater » / B. F. French, 
 " History of the Rise and Progress of the Iron Trade of the United 
 States for 1621-1857" 5^11. Scrivenor, "History of the Iron Trade"; 
 " Bulletin of the National Association of Woolen Manufactures," ii, pp. 
 479-488. VTench Coxe, " Statement of the Arts and Manufactures of 
 the United States for 1810 " (1814). 
 
 VI. Later View of Manufactures : 
 
 (1.) The Ikon Manufacture. — See Swank's "Reports of Iron and 
 Steel Association," 1882; ibid., "Census Report," 1880; ibid., "Iron 
 Trade," 1876 ;^f. S. Newberry, for an excellent article in " International 
 Review," i, pp. 768-780. 
 
 For Bessemer steel, Swank, " Census Report," 1880, pp. 149-153 ; 
 and^Schoenhof, "Destructive Influences of the Tariff," chap. v'i. A. 
 S. Hewett, Speech in Congress, May 16, 1882. Separately printed. 
 
 (2.) Wool, Woolens, and Cottons.— Production and importation 
 of wool, see "United States Statistical Abstract"; " Tariff Commission 
 Report," i, pp. 1782-1785 ; ii, p. 2432. 
 
 Production and importation of woolens, see " Bulletin of Woolen 
 Manufacturers," vii, p. 359 ; " Commerce and Navigation Reports." 
 
 Prosperity of woolen manufacturers after 1867, see "Wells, "Wool 
 and the Tariff" (a letter to the "New York Tribune," March 20, 1873) ; 
 R. W. Robinson, article of December, 1872, in " Bulletin of Woolen 
 Manufacturers," iii, p. 354. "Edward Harris, " Memorial of the Manu- 
 facturers of Woolen Goods to the Committee of Ways and Means," 
 Washington, 1872. ^ohn L. Hayes, "The Fleece and the Loom." 
 
 Production and importation of cottons, see " Commerce and Navi- 
 gation Reports " ; Census Report of 1880. 
 
BRIEF BIBLIOGRAPHY OF BIMETALLISM. 633 
 
 (3.) Silk. — Manufacture since 1860, see " Silk Association Reports"; 
 Wyckoff, " Silk Manufacture in the United States " (1883) for recent 
 history, pp. 42-51. Wyckoff, " The Silk Goods of America " (1880), 
 on methods of manufacture, chaps, ii, iv, vi. 
 
 (4.) Sugar Duties.— D- A. Wells, "Princeton Review," vi (Novem- 
 ber, 1880), pp. 319-335; ^and "The Sugar Industry of the United States 
 and the Tariff " (1878). 
 
 VII. Present Tariff. -^Heyl's "United States Duties on Imports" 
 (1881) contains all acts in force to date of publication, and gives all acts 
 since the year 1861 in full. It is used by the United States officials. 
 )/ " Imports Duties from 1867 to 1883 inclusive " (House of Represent- 
 atives, Miscellaneous Documents, No. 49, Forty-eighth Congress, first 
 session) gives duties on each article by years, and reduces specific to 
 ad valorem rates. 
 
 "The Existing Tariff on Imports into the United States," 1884 
 (Senate Document, Report, No. 12, Forty-eighth Congress, first session). 
 
 A BRIEF BIBLIOGRAPHY OF BIMETALLISM. 
 
 " The Report of the International Monetary Conference, 1878 " (p. 
 754), contains an extended bibliography on money, by S. Dana Horton. 
 Chevalier's third volume of his " Cours d'Economie politique," entitled 
 "Monnaie," also gives a bibliography. 
 
 I. Standards of Value. — See Jevons, " Money and the Mechanism of 
 Exchange," chaps iii, xxv ; S. Dana Horton, " Gold and Silver," chap, 
 iv, p. 86 ; F. A. Walker, " Political Economy," pp. 363-368, " Money, 
 Trade, and Industry," pp. 56-77; Wolowski, "L'Or et l'Argent," pp.7, 
 22, 207; Mill, "Principles of Political Economy," book iii, chap, xv; 
 Walra: "Journal des Economistes," October, 1882, pp. 5-13. 
 
 II. Bimetallic Theory.— Horton, " Gold and Silver," p. 29 ; F. A. 
 Walker, " Money, Trade, and Industry," p. 157, "Political Economy," p. 
 408; Giff en, "Fortnightly Review," vol. xxxii (1879), p. 279; Wolowski, 
 "L'Or et l'Argent," p. 35 ; Jevons, ibid., chap, xii; A. J. Wilson, "Re- 
 ciprocity, Bimetallism, and Land Reform," p. 107; S. Bourne, "Trade, 
 Population, and Food," p. 227; Seyd, "The Decline of Prosperity," and 
 the various pamphlets of Cernuschi. 
 
 III. Operation of Gresham's Late. — Macaulay, chap, xxi for clipped 
 coin of 1695 ; Jevons, ibid., pp. 80-85, also gives an example taken 
 from the Japanese currency ; for the case of France, see " Report of the 
 Select Committee of the House of Commons on the Depreciation of Sil- 
 ver, 1876," p. xlii, and Appendix, pp. 86, 148 ; for the United States, 
 see supra, book iii, ohap. vii, § 3. See, also, Lord Liverpool's " Treatise 
 on the Coins of the Realm," chap, xii, for changes in the coin of England. 
 
634 APPENDIX I. 
 
 IV. Compensatory Effect of Two Standards. — Jevons, ibid., pp. 139, 
 140; F. A. Walker, "Political Economy," pp. 411-416; Wolowski, 
 "L'Or et 1' Argent," p. 28; Mannequin, "Journal des Economistes," 
 August, 1878, p. 202. 
 
 V. Effect of a League of States, or Law, on the Relative Value of Gold 
 and Silver. — Giffen, ''Fortnightly Review," vol. xxxii (1879), pp. 285- 
 290 ; Wolowski, "L'Or et 1' Argent," pp. 23, 24, 31 ; F. A. Walker, "Po- 
 litical Economy," p. 410, " Report of the International Monetary Confer- 
 ence, 1878," p. 74 ; Sumner, " Princeton Review," vol. iv, p. 563 ; S. Dana 
 Horton, "Report of the International Monetary Conference, 1878," 
 p. 741 ; Bourne, " Trade, Population, and Food," pp. 228, 230; JevoDS, 
 "Contemporary Review," vol. xxxix (1881), p. 750; S. Newcomb, "In- 
 ternational Review " (1879), p. 314. 
 
 VI. Production of Gold and Silver ; Relative Value of the Two 
 Metals. — Ad. Soetbeer, Petermann's " Mittheilungen," No. 57; "House 
 of Commons Report on Depreciation of Silver," 1876, Appendix, pp. 
 11, 12, 24; Bourne, " Statistical Journal," vol. xlii, p. 409, gives Sir H. 
 Hay's figures corrected by him to 1878 ; Spofford's " American Alma- 
 nac," 1878, gives tables from the "Journal des Economistes"; the 
 figures of Seyd, Hay, Jacob, and Tooke and Newmarch are in the 
 " House of Commons Report," above. Also see, supra, book iii. chap, 
 vi, for references. 
 
 The relative values of gold and silver since 1834, as given in Pixley 
 and Abell's (London) tables, are trustworthy. Previous to 1834 there 
 is much uncertainty. Soetbeer, ibid., gives Hamburg quotations since 
 1687. Another table, probably incorrect in places, is that of White, see 
 "Report of the International Monetary Conference," 1878, p. 647. 
 
 VII. Demonetization of Silver oy Germany. — For copy of laws of 
 1871 and 1873, see " Report of Directors of the United States Mint, 1873," 
 p. 82 ; " House of Commons Report on Depreciation of Silver," 1876, 
 p. 18 ; "Conference Monetaire Internationale," 1881, index, p. 215 for 
 " Allemagne." 
 
 VIII. Latin Union. — For treaty, see "Journal des Economistes, 
 May, 1866; "House of Commons Report," ibid, xxxviii, Appendix, pp. 
 92, 98, 106-109, 116 ; " Report of Monetary Conference," 1878, pp. 
 779-787. 
 
 IX. Flow of Silver to the East. — The figures of Sir Hector Hay 
 after 1851, "House of Commons Report," ibid., App., p. 24, are fullest, 
 and should be combined with Pixley and Abell's figures for years before 
 1851, ibid., Appendix, p. 21. See also Bourne, " Statistical Journal," 
 1879, p. 422; Waterfield, "House of Commons Report," ibid., Appen- 
 dix, pp. 171, 172, 174; Quetteville, ibid., p. 184; "Conference Mone- 
 taire Internationale," 1881, p. 197; London "Economist," February 
 24, 1883, Supplement, p. 7; "Parliamentary Document?," 1881, vol. 
 
BRIEF BIBLIOGRAPHY OF AMERICAN SHIPPING. 635 
 
 xciii; "Report of the Director of the United States Mint," 1880 (in 
 the Finance Report, 1880, p. 194); J. B. Robertson, "Westminster Re- 
 view," vol. cxv, p. 200. 
 
 X. Depreciation of Silver, 1876. — Causes, Bourne, ibid., pp. 206, 
 212, 222, 233; Wilson, ibid., p. 128; "House of Commons Report," 
 ibid.; Sumner, "Princeton Review," vol. iv., p. 570; S. Newcomb, 
 " International Review," vol. vi (1879), p. 326 ; Cochut, " Revue des Deux 
 Mondes," i, December, 1883, p. 514; Cairnes, "Essays"; F. Bowen, 
 "Minority Report of the United States Silver Commission," 1878. 
 
 Supposed cause of panic of 1873, see Williamson, " Contemporary 
 Review," April 1879 ; Seyd, " Decline of Prosperity " ; Bourne, ibid., 
 pp. 226, 227. 
 
 XI. Appreciation of Gold. — Giffen, " Statistical Journal," vol. xlii, 
 p. 36, started the theory for the period 1873-1879. Also see Bourne, 
 " Statistical Journal," vol. xlii, p. 406 ; S. Newcomb, " International Re- 
 view," 1879, p. 329 ; Wolowski, ibid., pp. 29, 30 ; Goschen, "Journal of 
 the Institute of Bankers " (London), vol. iv, part vi, May, 1883 ; Pat- 
 terson, " Statistical Journal," vol. xliii, p. 1 ; for table of prices see Lon- 
 don " Economist " (e. g., December 28, 1878). 
 
 XII. Bimetallism in the United States. — See supra, book iii, chap, 
 vii ; for a vast array of materials, see " Report of the International Mone- 
 tary Conference," 1878 ; Linderman's " Money and Legal Tender " ; the 
 Finance Reports of the United States; and Congressional Documents. 
 For the coinage laws of 1792, 1834, 1853, 1873, 1878, see pamphlet, 
 " Extracts from the Laws of the United States relating to Currency 
 and Finance," by C. F. Dunbar. For detailed account of passage of 
 Act of 1873, see " Report of the Comptroller of the Currency," 1876, p. 
 170. Present situation, " Atlantic Monthly," May, 1884, "The Silver 
 Danger." 
 
 A BRIEF BIBLIOGRAPHY OF AMERICAN SHIPPING. 
 
 I. English Navigation Acts. — Macpherson's "Annals," ii, pp.442, 
 484; Scobell, "Collection of Acts," p. 176; Ruffhead, "Statutes at 
 Large," iii, p. 182 ; Roger Coke, " Treatise on Trade " (1671), p. 36 ; Sir 
 Josiah Child, "New Discourse on Trade" (1671) ; Sir Matthew Decker, 
 " Essay on the Causes of the Decline of Foreign Trade " (1744) ; Joshua 
 Gee, " Trade and Navigation of Great Britain " (1730) ; Lindsay, " His- 
 tory of Merchant Shipping and Ancient Commerce " ; McCulloch, 
 " Dictionary of Commerce " (new edition), articles " Navigation " and 
 " Colonial Trade " ; ibid., edition of Adam Smith, note xii, p. 534 ; Hus- 
 kisson, speeches, iii, 13, 351 ; Levi, " History of British Commerce," p. 
 158. 
 
636 APPENDIX I. 
 
 II. Navigation Laws of the United States. — " United States Statutes 
 at Large," i, 27, 287, 305 ; Act of 1817, Statutes, iii, 351 ; Revised Stat- 
 utes (1878), " Commerce and Navigation," p. 795; Lord Sheffield, "Ob- 
 servations on the Commerce of the United States"; Pitkin, "Statis- 
 tical View of the Commerce of the United States," chap, i ; D. A^~~ 
 Wells, "Our Merchant Marine," chap, v; Seybert's "Statistical An- 
 nals " ; Macgregor, " Commercial Statistics of America." 
 
 III. Growth of American Shipping. — Rapid growth, 1840-1856. 
 Levi, " History of British Commerce," p. 582 ; Bigelow, " Tariff Ques- 
 
 x tion," Appendix No. 57; " Harper's Magazine," January, 1884, p. 217; 
 Lindsay, " History of Merchant Shipping," iii, p. 187; for ship-building, 
 see Report of the United States Bureau of Statistics, " Commerce and 
 Navigation," 1881, p. 927 ; for tonnage, ibid., pp. 928-930 ; also, see 
 " United States Statistical Abstract " ; Dingley's Report to House of 
 Representatives, December 15, 1882, No. 1,827, Forty-seventh Congress, 
 second session, pp. 5, 8, 254. 
 
 IV. Steam and Iron Ships. — Preble, "History of Steam Naviga- 
 tion " ; Colden, "Life of Fulton " ; Porter, " Progress of the Nation," sec- 
 tion 3, chap, iv ; Nimmo, " Report to the Secretary of the Treasury in 
 Relation to the Foreign Commerce of the United States and the Deca- 
 dence of American Shipping" (1870) ; Dingley's Report, pp. 4, 23 ; Kel-^-- 
 ley, " The Question of Ships," Appendix ii, p. 208. 
 
 V. Decline of American Shipping. — " Report on Commerce and 
 Navigation " (1881), pp. 927, 928 ; ^Lindsay, ibid., iii, pp. 83, 187, 593, 
 645 ; ibid., iv, pp. 163-180, 292, 316, 376 ; " North American Review," 
 October, 1864, p. 489 ; ■' Report on Commerce and Navigation," 1881, 
 Ixv, pp. 915, 916, 922, 934; Lynch, Report to House of Representa- 
 tives on " Causes of the Reduction of American Tonnage," February 17, 
 1878, pp. ix, 80, 176, 195-213; remission of duties, Revised Statutes of 
 the United States (edition of 1878), section 2,513 ; Report on " Com- 
 merce and Navigation," xi, 83, 210; Dingley's Report; Nimmo, " De- ^' 
 cadence of American Shipping " (which gives several charts), p.' 17, " The 
 Practical "Workings of our Relations of Maritime Reciprocity " (1871) ; 
 
 ->Kelley, ibid. ; Reports of the New York Chamber of Commerce ; Sum- 
 ner, "Shall Americans own Ships?" in "North American Review," 
 June, 188^ ; Codman, " Free Ships " ; for high-rate profit in the United'C 
 States, Dingley's Report, p. 4. 
 
 VI. Burdens on Ship-Owners. — Tonnage duties, "Wells, p. 179; sail- 
 ors' wages, Revised Statutes, sections 4,561, 4,578, 4,580-4,584, 4,600 ; 
 consular fees, Dingley's Report, p. 9 ; pilotage, taxation, "Wells, p. 172, 
 et sea. ; see al3o Act of 1884, abolishing many of these burdens. 
 
APPENDIX II. 
 
 EXAMWA TIOR Q UES TIONS. 
 
 The following problems and questions have been arranged to indi- 
 cate to the reader the character of examinations set by English x and 
 American universities. They have been taken in each case from papers 
 actually given. It is hardly necessary to state, perhaps, that these ques- 
 tions do not exhaust the subject, and are only some of a kind of which 
 many more might be added : 
 
 Definitions. 
 
 1. Define briefly, Fixed Capital ; Unproductive Consumption ; Law of 
 Diminishing Returns; Effective Desire of Accumulation; Law of Increase 
 of Labor; Communism; Wages Fund; "Wages of Superintendence ; Real 
 Wages; Value; Price; Demand; Medium of Exchange; Gresham's Law. 
 
 2. Explain carefully the following terms: Productive Consumption, 
 Effectual Demand, Margin of Cultivation, Cost of Production, Value of 
 Money, Cost of Labor, Wealth, and Abstinence. 
 
 3. Explain the following terms : Real Wages, Fixed Capital, Allow- 
 ance System, Margin of Cultivation, Price, Demand, Medium of Ex- 
 change, Seignorage, Value of Money, and Bill of Exchange. 
 
 4. Define Supply, Value of Money, Productive Consumption, Cost 
 of Production, Cost of Labor, Exchange Value, Law of Production from 
 Land, Rate of Profit, Capital, and Gresham's Law. 
 
 5. Define Political Economy: State the parts into which it may be 
 divided, and show how they are mutually related. 
 
 Labob. 
 
 6. Distinguish between direct and indirect labor, and give an illus- 
 tration of the distinction. 
 
 7. Apply the distinction between productive and unproductive labor, 
 and productive and unproductive consumption, respectively, to each of 
 
 1 See Milnes's "Problems in Political Economy." 
 
638 appendix n. 
 
 the following persons : a tailor, an architect, an annuitant, a sailor, and 
 a brick-layer. 
 
 8. Is an actor to he classed as a productive laborer? The inventor 
 of a machine ? A confectioner ? 
 
 9. In which of the two classes of laborers, productive and unpro- 
 ductive, would you place the following? 
 
 (1.) The officers of our Government. 
 
 (2.) The maker of an organ. 
 
 (3.) An organist. 
 
 (4.) A schoolmaster. 
 
 (5.) An artist. 
 
 (6.) He who makes an article for which there is no use. 
 
 10. Classify as productive or unproductive the following laborers : 
 a clergyman, musical-instrument maker, actor, soldier, and lace-maker. 
 
 Capital. 
 
 11. Explain fully what you understand by capital, and what function 
 it discharges in production. Consider whether or not the following 
 ought to be included in capital: (1) the original and acquired powers 
 of the laborer, (2) the original properties of the soil, (3) improvements 
 on land, (4) credit, (5) unsold stock in the hands of a merchant, (6) 
 articles purchased but still in the consumer's hands. 
 
 12. Does a national loan add to the capital of a country ? 
 
 13. Inquire how far, or in what cases, or in what sense, it may be 
 said that a common dwelling-house, an hotel, a school-house, a police- 
 station, a theatre, and a fortification, constitute part of the capital of 
 the country. 
 
 14. Discuss carefully the question whether money lying in a bank (or 
 corn lying in a granary) is always capital, or whether its economio 
 nature depends upon the intentions of the owner. 
 
 15. Are railway-shares, stocks of wine, wheat, munitions of war, and 
 land, to be considered capital, or not ? 
 
 16. Explain fully whether you consider that United States bonds are 
 capital or not. 
 
 17. Is an investment in government funds capital, or not? Give 
 your reasons. 
 
 18. In what manner does a large expenditure for military purposes 
 affect the operations of capital and labor ? 
 
 19. Distinguish between wealth and capital. Show that there is no 
 assignable limit to the employment of capital in bettering the condition 
 of the members of a community. 
 
 20. " If there are human beings capable of work, and food to feed 
 them, they may always be employed in producing something." Explain 
 the meaning of this fully. 
 
EXAMINATION QUESTIONS. 639 
 
 21. What is meant by saying wealth can only perform the functions 
 of capital by being wholly or partially consumed? 
 
 22. Explain and illustrate the statement that demand for commodi- 
 ties is not demand for labor. 
 
 23. Show that expenditure of money does not necessarily increase 
 the demand for labor. 
 
 24. In what way would a general demand for luxuries affect pro- 
 ductive laborers and the wealth of the community ? 
 
 25. In a community where capital is all employed, what would be 
 the effect if one employer gradually withdrew some of his capital, and 
 spent this for personal luxuries ? 
 
 26. It is contended that " the demand for commodities, which can 
 only be got by labor, is as much a demand for labor as a demand for 
 beef is a demand for bullocks." Criticise this position. 
 
 27. "It is often said that, though employment is withdrawn from 
 labor in one department, an exactly equivalent employment is opened 
 for it in others, because what the consumers save in the increased cheap- 
 ness of one particular article enables them to augment their consump- 
 tion of others, thereby increasing the demand for other kinds of labor.'" 
 Point out the fallacy. 
 
 28. A college undergraduate, with the applause of shopkeepers, 
 bought twenty waistcoats, under the plea that he was doing good to 
 trade. Examine the economical soundness of his act. 
 
 29. A man invested a portion of his capital in a loan to a state which 
 subsequently repudiated its debts. The man thereupon gave up his 
 carriage, discharged superfluous gardeners, and reduced the number of 
 his domestic servants. Examine the effect of these changes on the 
 employment of labor in the district where he resides. 
 
 30. In the sixteenth century a great change in the mode of expen- 
 diture took place. Retainers were dismissed, households were reduced 
 and a demand for commodities was substituted for a demand for labor. 
 How would this change affect wages, and why ? 
 
 31. It is supposed by some persons that expenditure by the rich in 
 costly entertainments is good for trade. What is your opinion on the 
 subject? 
 
 32. A is an absentee who spends his income abroad. B spends his 
 income chiefly on American pictures and other works of art. C spends 
 most of his income on American servants. D saves and buys United 
 States bonds. E employs most of his income in the production of 
 manufactures. Explain the various effects of these different modes of 
 expenditure on the amount of wealth in the United States, and on 
 the working-classes of the country. 
 
 33. Compare the economic effects of defraying war expenditure (1) 
 by loans, (2) by increased taxation. 
 
640 APPENDIX II. 
 
 34. Define tbe term capital, and distinguish between fixed and cir- 
 culating capital, giving instances of each. 
 
 35. Distinguish between fixed and circulating capital, and point out 
 how far, or in what manner, each of the following articles belongs to 
 one kind or the other: a dwelling-house, a crop of corn, a wagon, a 
 load of coal, an ingot of gold, a railway-engine, a bale of cotton goods. 
 
 36. Of the following, which would you class under fixed and which 
 under circulating capital: cash in the hands of a merchant, a cotton- 
 mill, a plow, diamonds in a jeweler's shop, a locomotive, a nursery- 
 gardener's seeds, greenhouses, manures; a carpenter's tools, woods, 
 nails ? 
 
 37. If in a country like this a large amount of capital becomes fixed 
 in the building of railroads, what effect will this change taken by itself 
 have upon the laboring-class, supposing the capital to be (1) domestic, 
 or (2) borrowed wholly or in part from abroad? 
 
 38. "What conclusion is reached by Mr. Mill respecting the objections 
 to the use of labor-saving machinery ? 
 
 39. Is the extension of machinery beneficial to laborers ? 
 
 40. What is "the conclusive answer to the objections against ma- 
 chinery " ? 
 
 Efficiency of Peodtjction. 
 
 41. Explain briefly the chief causes on which the productiveness of 
 labor depends. 
 
 42. What are the principal ways in which advantage arises from the 
 division of labor ? 
 
 43. What are the principal advantages of division of labor? In 
 what cases and why is it better to carry on a productive enterprise on a 
 large scale ? 
 
 44. Under what circumstances, and in what callings, can the division 
 of employment be carried out to the fullest extent ? 
 
 45. Show how the amount of available capital and the extent of the 
 market for products limit division of labor. 
 
 Population. 
 
 46. Give a brief statement of Malthus's theory of population, explain- 
 ing the different checks on population in different stages of civilization. 
 
 47. Enunciate Malthus's law of population, and give an outline of the 
 reasoning by which he established it„ Give an account of any objec- 
 tions that have been brought against Malthus's position, and criticise 
 those objections. 
 
 48. When the growth of population outstrips the progress of im- 
 provements, what are the means of relief for the laborer ? 
 
EXAMINATION QUESTIONS. 641 
 
 49. Does the increased facility of emigration nullify the Malthusian 
 law of population in your opinion or not, and why? 
 
 50. Explain the law of diminishing return and the Malthusian doc- 
 trine of population ; and trace the connection between them. 
 
 Increase of Production. 
 
 51. Compare the motives to saving in the case of savages, and of a 
 country like the United States. State the causes of diversity in the 
 strength of the effective desire of accumulation. 
 
 52. Capital is said to be accumulated by saving; what is saving? Is 
 hoarded money a saving while hoarded ? 
 
 53. How far does the increasing productiveness of manufacturing 
 industry tend to neutralize the effect on profits of the diminishing pro 
 ductiveness of agricultural industry ? 
 
 54. "What conclusion as to the limit to the increase of production 
 does Mr. Mill deduce from his investigation of the laws of the various 
 requisites of production ? 
 
 Property. 
 
 55. "What are the essential elements of property ? Are the grounds 
 of property in land the same as those of property in movables? 
 
 56. Give what you conceive to be the chief arguments in favor of 
 the institution of private property, as opposed to common ownership. 
 
 57. What arguments does Mr. Mill suggest in favor of some redistri- 
 bution of landed property ? 
 
 58. What are the economic arguments for and against Communism ? 
 
 59. In what way, and by what means, do Socialists want to alter 
 the present distribution of wealth ? 
 
 60. Sketch the principal forms of Communistic and Non-commu- 
 nistic Socialism. 
 
 61. Should the power of bequest be limited ? 
 
 Wages. 
 
 62. On what, according to Mill, does the rate of wages depend? 
 Hence, show the fallacy of the popularly proposed remedies for low 
 wages. 
 
 63. State and examine the principal theories which have been put 
 forward as to the circumstances which regulate the general rate of wages, 
 saying which you deem to be correct, and why so. 
 
 64. Mr. Thornton argues that the wages-fund is neither "deter- 
 mined" nor "limited" : not " determined," because there is no " law " 
 to compel capitalists to devote any portion of their wealth to the pay- 
 
 41 
 
G42 APPENDIX n. 
 
 ment of labor, nor are they morally " bound " to do so ; and not " lim- 
 ited, " because there is nothing to prevent them from adding to the 
 portion of their wealth so applied. Criticise this argument, and, if you 
 dissent from Mr. Thornton's view, state the causes which "determine" 
 and "limit" the fund in question. 
 
 65. State precisely what you mean by the " wages-fund," and ex- 
 plain the conditions on which its growth depends. 
 
 66. Explain generally the circumstances which determine the rate of 
 wages. Mention some of the reasons why wages should be higher in 
 one occupation than in another. 
 
 67. In what way does dearness or cheapness of food affect money 
 wages ? 
 
 68. What determines — 
 
 (1.) The general rate of wages in a country ? 
 
 (2.) The relative rates of wages in different employments ? 
 
 69. What causes different rates of wages in different employments, 
 and by what methods might wages be raised? 
 
 70. How do you explain the fact that some of the most disagreeable 
 kinds of labor are the most badly paid ? 
 
 71. What, according to Mr. Mill, are the most promising means for 
 the improvement of the laboring-classes ? 
 
 72. In the Island of Laputa a law was passed compelling each work- 
 man to work with his left hand tied behind his back, and the law was 
 justified on the ground that the demand for labor was more than 
 doubled by it. Examine this argument. 
 
 73. Some coal-workers are calling for a diminution of the output of 
 coal, so as to keep up their wages. Examine how far, if at all, this re- 
 sult would follow from their proposed action. 
 
 74. Discuss any remedies for low wages that have been or might be 
 suggested. 
 
 75. Why are the wages of women habitually lower than those of 
 men? 
 
 Profits. 
 
 76. What is the cause of the existence of profits ? And what, accord- 
 ing to Mr. Mill, are the circumstances which determine the respective 
 shares of the laborer and the capitalist ? 
 
 77. (1.) What is the lowest rate of profit which can permanently 
 exist? (2.) Why is this minimum variable ? 
 
 78. Analyze the remuneration received by any of the following: (1) 
 the proprietor of a cotton-mill managing his own mill ; (2) a mer- 
 chant conducting his own business ; (3) a railway shareholder; (4) a 
 holder of government funds. 
 
 79. Into what portions may we divide the return which is usually 
 
EXAMINATION QUESTIONS. 643 
 
 called profit ? "Which of these portions would he received by a mer- 
 chant carrying on business with borrowed capital ? 
 
 80. Analyze tbe payment called profits into its various elements. 
 Point out in what respects the earnings of the employer differ from or 
 resemble the wages paid to other classes of laborers. 
 
 81. It is asserted that " profits tend to an equality." What condi- 
 tions must be satisfied before this position can be maintained? 
 
 82. How is the alleged tendency of profits to equivalence in different 
 employments to be reconciled with the notorious difference in the profit 
 of different individuals ? 
 
 83. "Which one of the elements in profit has the greatest effect on 
 its amount? Explain by comparing the causes which regulate each ele- 
 ment. 
 
 84. How does Mill reconcile the high wages in America with Ricar- 
 do's law of profits ? 
 
 85. Explain the proposition that the rate of profits depends on the 
 cost of labor, stating carefully what elements are included in cost of 
 labor. 
 
 86. Explain what connection there may be between an increase of 
 population and any of the elements entering into cost of labor. 
 
 87. What effect would an increase or diminution of population 
 have upon cost of labor ? 
 
 88. Explain Mill's view as to the cost of labor being a function of three 
 variables, considering the passages in which he says, 1. "If without 
 labor becoming less efficient its remuneration fell, no increase talcing 
 place in the cost of the articles composing that remuneration ; " 2. " If the 
 laborer obtained a higher remuneration, icithout any increased cheap- 
 ness in the things composing it ; or if, without his obtaining more, that 
 which he did obtain would become more costly " : profits in all these cases 
 would suffer a diminution ; and discussing — Firstly, if the remuneration 
 of labor falls, what can the cost of the articles composing that remunera- 
 tion signify to the capitalist ? Secondly, if the laborer gets a higher 
 remuneration, what can the increased cheapness of the things composing 
 it signify to the capitalist ? 
 
 89. Is the contest between capital and labor permanent and funda- 
 mental ? If not, give your reasons for your answer. 
 
 90. What is the effect on wages and profits of the introduction of 
 machinery ? 
 
 Rent. 
 
 91. "What connection exists between the law of Malthus and Ricar- 
 do's doctrine of rent ? 
 
 92. "What is the reason why land-owners can demand rent ? 
 
644 appendix n. 
 
 93. Explain and illustrate the distinction between rent and profits. 
 In what cases are they nearly indistinguishable ? 
 
 94. It has often been observed that in America land is much less 
 highly cultivated than in England. Explain the economic reasons for 
 this. 
 
 95. How does the theory of rent apply in a country like the United 
 States, where the farmer owns his land instead of hiring it ? 
 
 96. How is it that some agricultural capital pays rent, even if resort 
 is not had to different grades of land ? 
 
 97. Give a brief description of the theory of rent, and point out to 
 what payments not usually called rent the theory may be applied. 
 
 98. State briefly Eicardo's theory of rent, and show that, if it be 
 true, the following statements of Adam Smith must be false : 
 
 " The most fertile coal-mine regulates the price of coals at all the 
 other mines in the neighborhood." 
 
 " In the price of corn one part pays the rent of the landlord, an- 
 other pays the wages, and another the profit of the farmer." 
 
 99. Why does the farming business pay rent, and the cotton business 
 (ground-rent excluded) pay none ? Define rent. 
 
 100. " As population increases, rents estimated in corn increase, and 
 the price of corn rises; rents, therefore, doubly tend to increase." 
 Prove this. 
 
 101. Professor Eogers adduces, in refutation of the common theory 
 of rent, the fact that land near New York pays a high rent, while land 
 of the same natural fertility in the "Western States pays no rent. How 
 far do you admit the force of this objection ? 
 
 102. Examine the following doctrine : 
 
 " If invention and improvement still go on, the efficiency of labor will be 
 further increased, and the amount of labor and capital necessary to produce a 
 given result further diminished. The same causes will lead to the utilization of 
 this new gain in productive power for the production of more wealth ; the mar- 
 gin of cultivation will be again extended, and rent will increase, both in pro- 
 portion and amount, without any increase in wages and interest. And so, . . . 
 will . . . rent constantly increase, though population should remain station- 
 ary." — Henry George, " Progress and Poverty " (p. 226). 
 
 103. What answer is made to Mr. Carey's objection to Eicardo's 
 theory of rent, that in point of fact the poorer, not the richer, lands are 
 first brought under cultivation ? 
 
 104. Explain how land, " even apart from differences of situation, 
 . . . would all of it, on a certain supposition, pay rent." 
 
 105. Explain clearly how it is possible for the land of a country 
 which is all of uniform fertility to pay rent. 
 
 106. " If the earth had a perfectly smooth surface the same every- 
 
EXAMINATION QUESTIONS. 645 
 
 where, and if it were all tilled and cultivated in exactly the same way, 
 there would be no such thing as rent." Examine this proposition. 
 
 107. Show that rent does not increase the price of bread. 
 
 108. How is it shown that " rent does not really form any part of 
 the expenses of production or of the advances of the capitalist? " 
 
 109. (1.) What connection exists between the price of agricultural 
 products and the amount of rent paid ? (2.) Can rent affect the price ? 
 
 110. "Rent is the effect and not the cause of price." Prove this. 
 
 111. Does rent enter into the cost of production of the following 
 commodities or not, and why : Corn, cloth, the wine of the best vine- 
 yards? 
 
 112. " Rent arises from the difference between the least fertile and 
 the most fertile soils, and from the fact that the former have been 
 taken into cultivation. . . . Rent is the difference between the market 
 price of produce and the cost of production." Harmonize these state- 
 ments. 
 
 113. In order that the actual payments made by farmers to land- 
 lords should generally correspond with " economic rent," what condi- 
 tions must be observed ? 
 
 114. "What is assumed, as to competition, in all Mr. Mill's reasoning 
 on wages, profits, and rent ? Explain its action in each case. 
 
 Value. 
 
 115. Enumerate, compare, and criticise any opinions known to you 
 which have been held concerning the nature, origin, or measure of value 
 in exchange. 
 
 116. Define precisely what it is which gives value to objects, and 
 point out the causes which vary the value of the same object under 
 differing circumstances. 
 
 117. Do men dive to the bottom of the sea to get pearls because 
 they are valuable ; or are pearls valuable because men must dive to 
 the bottom of the sea to get them ? 
 
 118. There are three forms of difficulty of attainment. State the 
 law of value applicable to each. 
 
 119. Explain the exact economic meaning of the words supply and 
 demand. 
 
 120. When it is said that the value of certain commodities depends 
 upon supply and demand, what is meant by demand ? 
 
 121. If the supply of all commodities were suddenly doubled, would 
 any changes in their relative values ensue or not, and why ? 
 
 122. State the laws which regulate the permanent and temporary 
 values of agricultural products. 
 
 123. How far does the value of commodities depend on the quantity 
 of labor required for their production ? 
 
646 appendix n. 
 
 124. Has the term exchange value any precise meaning when we 
 are comparing times or places very remote from one another ? 
 
 125. What is meant by the natural (or normal) price and the market 
 price of commodities ? To what extent can they differ ? 
 
 126. Does a general rise of wages raise the prices of commodities in 
 general or not, and why ? Does it tend to cause any change in the 
 relative prices of commodities or not, and why ? 
 
 127. Suppose that wages were double, would the values of com- 
 modities be affected ? What would be the effect on prices and profits 
 of such an increase of wages ? 
 
 128. Are wages and profits influenced by prices? 
 
 129. Can employers recoup themselves by a rise of prices for a rise 
 of— 
 
 (a.) Wages in particular employments ? 
 (5.) General wages ? 
 How does this question bear on the efficacy of trades-unionism ? 
 
 130. Do values depend on wages ? 
 
 131. Explain the following statement: "It is true the absolute 
 wages paid have no effect upon values ; but neither has the absolute 
 quantity of labor." 
 
 132. Explain the statement that " high general profits can not, any 
 more than high general wages, be a cause of high values. ... In so 
 far as profits enter into the cost of production of all things, they can not 
 affect the value of any." 
 
 133. Explain fully why it is that capitalists can not compensate them- 
 selves for a general high cost of labor through any action on values and 
 prices. 
 
 134. " The value of a commodity depends on its cost of production." 
 Under what conditions is this true, and what causes interfere with 
 it? 
 
 135. Describe the hindrances which impede the free movement of 
 capital to those fields which apparently offer the highest return for its 
 employment. 
 
 136. Give J. S. Mill's analysis of the "cost of production," and also 
 Professor Cairnes's, with the arguments for and against each. 
 
 137. Analyze cost of production. What is its connection with cost 
 of labor ? 
 
 138. Give an analysis of cost of production of any commodity. 
 
 139. Show carefully the distinction between wages, cost of labor, 
 and cost of production. 
 
 140. Define clearly value, price, real wages, and cost of produc- 
 tion. 
 
 141. Define real wages, money wages, cost of labor. 
 
EXAMINATION QUESTIONS. 647 
 
 Monet. 
 
 142. Point out the difference between the scientific and popular con- 
 ceptions implied in the terms wealth and money. 
 
 143. Show the fallacy of confounding capital with money. Can 
 there be a glut of capital ? 
 
 144. "What is money? To what sort of necessity does it owe its 
 existence? What articles have been used for money? Enumerate the 
 qualities which render a commodity fit to serve as money. 
 
 145. "What are the qualities requisite in any commodity in order that 
 it may serve as money ? 
 
 146. Distinguish accurately between the functions of money. 
 
 147. How far is a fixed standard of value possible ? 
 
 148. "What effect does the great durability of gold and silver have 
 upon the value of money ? 
 
 149. How far does the law of demand and supply govern the value 
 of money ? 
 
 150. Explain fully how it is that the value of the precious metals is 
 affected by " questions of quantity only, with little reference to cost of 
 production." 
 
 151. "What is to be said to the following : " Some political econo- 
 mists have objected altogether to the statement that the value of money 
 depends on its quantity combined with the rapidity of circulation ; 
 which, they think, is assuming a law for money that does not exist for 
 any other commodity"? 
 
 152. Under what conditions is it true that the " value of money is 
 inversely as its quantity " ? 
 
 153. Explain carefully the following : " The average value of gold is 
 made to conform to its natural value in the same manner as the values 
 of other things are made to conform to their natural value." 
 
 154. In what various meanings is the phrase " the value of money" 
 used ? How far does the value of money in each of these meanings de- 
 pend on (1) the cost of production, (2) supply and demand? 
 
 155. Are the values of gold and silver subject to exactly the same 
 natural laws as other commodities ? 
 
 156. Give the explanations and qualifications required to render the 
 following proposition true: "The quantity of coin in every country is 
 regulated by the value of the commodities which are to be circulated 
 by it." 
 
 157. "Would the world be richer if every individual in it suddenly 
 found the quantity of money in his possession doubled ? 
 
 158. How far, or in what way, do you consider it correct to say that 
 the general level of prices in a country depends upon the quantity of 
 gold coin existing in that country ? 
 
648 APPENDIX II. 
 
 159. A single good harvest causes a considerable fall in the value of 
 wheat ; but a great addition to the year's supply of gold from the mines 
 produces little effect on its general value. How do you account for the 
 difference ? 
 
 160. Show the effect of establishing a double standard. 
 
 161. Show how Gresham's law is illustrated by the history of the 
 currency in the United States between 1834 and 1873. 
 
 162. What effect had the discovery of gold in this century upon the 
 coinage of the United States ? 
 
 163. What is the system upon which the small silver currency of the 
 United States is coined and issued? 
 
 164. State briefly the aim of the United States coinage act of 1853. 
 
 Cbkdit. 
 
 165. How do you define credit ? Form a classification of credit 
 documents. 
 
 166. It has been said that " credit is capital." Is this so or not? 
 
 167. Define capital, and examine the meaning of the term in the fol- 
 lowing statements: 
 
 (a.) Demand for commodities can not create capital. 
 (b.) Credit is not a creation, but a transfer of capital. 
 (c.) Wages depend upon the proportion between population and 
 capital. 
 
 168. State the law of the value of money which governs general 
 prices. What change is to be made in the statement, if credit is to be 
 taken into consideration ? 
 
 169. What is the part which instruments of credit, other than bank- 
 notes, play in the exchange of commodities ? 
 
 170. Mention some of the principal features of a credit crisis. 
 
 171. What are inconvertible notes ? What objections are thereto 
 currency of this description ? 
 
 172. Can an inconvertible currency be made to maintain the same 
 value as a convertible currency, and, if so, how ? Supposing that it can, 
 what objections are there, nevertheless, to it ? 
 
 173. " Nothing is subject to more variation than paper money, even 
 when it is limited, and has no guarantees ; for this simple reason, that, 
 having no value of its own, it depends on the idea that each person 
 forms of those guarantees." Comment on this passage. 
 
 174. How is it that a bad dollar does the work of buying as well as 
 a good one until it is found out ? Is it that it makes no difference 
 whether it is made of gold or not ? 
 
 175. To what extent is a government capable of giving fictitious 
 value to a paper or a metallic currency? 
 
EXAMINATION QUESTIONS. 649 
 
 176. In a country with an inconvertible paper currency, how can it 
 be determined whether the issues are excessive or not, and why ? 
 
 177. What will be the effect if the circulating medium of a country 
 is increased beyond its natural amount — 
 
 (1) when the medium is coin ? 
 
 (2) when it is coin and convertible paper t 
 
 (3) when it is inconvertible paper ? 
 
 178. What is the error involved in the assumption, frequently made 
 by writers and public speakers, that the currency of a country ought to 
 increase in like ratio with its wealth and population ? 
 
 179. On what does the desire to use credit depend ? What connec- 
 tion exists between the amount of notes and coin in circulation and the 
 use of credit ? 
 
 180. Compare the advantages and disadvantages of a metallic and 
 paper currency. 
 
 181. A member of Congress advocated expansion of the paper cur- 
 rency by the following argument : " Our currency, as well as everything 
 else, must keep pace with our growth as a nation. . . . France has a 
 circulation per capita of thirty dollars; England, of twenty-five ; and 
 we, with our extent of territory and improvements, certainly require 
 more than either." State your opinion of this argument. 
 
 182. Trace the effects, immediate and ultimate, on general prices of 
 (a) an extended system of credit, (I) an enlarged issue of paper money, 
 and (c) an addition to the stock of precious metals, respectively. 
 
 183. What is the error in the common notion that " a paper currency 
 can not be issued in excess so long as every note represents property, or 
 has a foundation of actual property to rest on " ? 
 
 184. Explain the action of the check and clearing-house system, 
 and state what is meant by the restoration of barter. 
 
 Over-Production. 
 
 185. State the relation between supply and demand as aggregates, 
 e. g., between the aggregate supply of commodities in a given commu- 
 nity and the aggregate demand for them, and show the bearing of the 
 principle involved on the doctrine of " general over-production." 
 
 186. Prove that the increase of capital and the extension of industry 
 can not lead to a general over-production of commodities. 
 
 187. What is the error of those who believe in the danger of over- 
 production ? 
 
 188. Distinguish "excess of supply" from a "commercial crisis." 
 
 189. Give the substance of Mill's examination of the theories of ex- 
 cess of supply. 
 
 190. "When production is fully equal to consumption, every discov- 
 ery in the arts, or in mechanics, is a calamity, because it only adds to 
 
650 APPENDIX II. 
 
 the enjoyment of consumers the opportunity of obtaining commodities 
 at a cheaper rate, while it deprives the producers of even life itself." 
 Discuss this opinion of Sismondi. 
 
 191. Explain the difference in the theories of Dr. Chalmers and Mr. 
 Mill on over-production, and the excess of supply. 
 
 Peculiar Cases op Value. 
 
 192. It costs as much to produce straw as to produce grain ; how, 
 then, do you explain the comparatively low value of straw ? 
 
 193. Suppose a considerable rise in the price of wool to be foreseen, 
 how should farmers expect the prices of mutton to be affected, and 
 why? 
 
 194. Explain the operation of the laws of value by which the rela- 
 tive prices of wool and mutton are regulated. 
 
 International Teade and Values. 
 
 195. What is the meaning of the statement that "it is not a differ- 
 ence in the absolute cost of production which determines the inter- 
 change [of commodities between countries], but a difference in the com- 
 parative cost " ? 
 
 196. What are the advantages which a country derives from foreign 
 trade? 
 
 197. Explain clearly the following passage: "We may often, by 
 trading with foreigners, obtain their commodities at a smaller expense 
 of labor and capital than they cost to the foreigners themselves." 
 
 198. Is there any essential difference between trade between country 
 and country, and trade between county and county, or even between 
 man and man? What is the real nature of trade in all cases? 
 
 199. Why is it necessary to make any different statement of the laws 
 of value for foreign than for domestic products ? What is the cause for 
 the existence of any international trade ? 
 
 200. How would a serious decline in the efficiency of England, as 
 compared with other countries, in the production of manufactures affect 
 the scale of money incomes and prices in England, and why? 
 
 201. Mr. Mill refers the value of home products to the " cost of pro- 
 duction " ; of foreign products to the " cost of acquisition." Examine 
 the truth of this distinction. 
 
 202. It is said that in the home market the value of commodities de- 
 pends on the cost of production, in the foreign market on the cost of 
 acquisition. Comment on this distinction. 
 
 203. Is the cost of production the regulator of international values? 
 
 204. Discuss the following statement : " International value is regu- 
 lated just as inter-provincial or inter-parishional value is. Coals and 
 
EXAMINATION QUESTIONS. 651 
 
 hops are exchanged between Northumberland and Kent on absolutely 
 the same principles as iron and wine between Lancashire and Spain." — 
 Kuskin, " Munera Pulveris," p. 84. 
 
 205. "What determines the value of imported commodities? 
 
 206. "Why does cost of production fail to determine the value of com- 
 modities brought from a foreign country ? Does it also fail in the case 
 of commodities brought from distant parts of the same country ? 
 
 207. It is on the matter of fact that there is not much migration of 
 capital and labor from country to country that Mr. Mill has based his 
 whole doctrine of " international trade and international values." Ex- 
 plain and comment on the above statement. 
 
 208. "What are the causes which determine for a nation the cost of 
 its imports? 
 
 209. It follows from the theory of international values, as laid down 
 by Mill, that the permanent residence of Americans in Europe may 
 enhance the cost of foreign imports to Americans residing at home. 
 Explain in what way. 
 
 210. Suppose two countries, A and B, isolated from the rest of the 
 world, and a trade established between them. In consequence of the 
 labor of A becoming less effective, the cost of production of every arti- 
 cle which can be produced in that country is greatly increased, but so 
 that the relation between the costs of any two articles remains the same. 
 "What, if any, will be the effect of the change on the trade between A 
 and B ? Does your answer depend upon your using the phrase " cost 
 of production " in a sense different from that given to it by some econo- 
 mists ? 
 
 211. Show that every country gets its imports at less cost in propor- 
 tion to the efficiency of its labor. 
 
 Foreign Exchanges. 
 
 212. "What is the ordinary limit to the premium on foreign bills of 
 exchange, and why? 
 
 213. What are the chief effects on the foreign exchanges which are 
 produced by the breaking out of a war ? Account for the fact that in 
 1861 the exchanges on England in America fell considerably below 
 specie point. 
 
 214. Suppose that the next harvest in England should be very de- 
 fective, and extraordinary supplies of American grain needed, now 
 would this probably affect the price of bills of exchange between Eng- 
 land and America, and the profit on the exportation of English manu- 
 factures to the latter, and why ? 
 
 215. Trace the process by which the precious metals spread from the 
 mines over the world. 
 
652 APPENDIX II. 
 
 216. Suppose the exchange between England and the United States 
 to be heavily against England, how will tbis fact affect the export and 
 import trade between the two countries, and wby ? 
 
 217. "What is meant by exchanges being against a country? 
 
 218. Enumerate the principal circumstances which affect the rate of 
 exchange between two countries. How is the par of exchange ascer- 
 tained ? 
 
 219. In what way are gold and silver distributed among the different 
 trading countries ? Between different parts of the same country ? 
 
 220. Trace the effects of large and continuous issues of inconvertible 
 paper currency on the prices of commodities, on importation and expor- 
 tation, and on the foreign exchanges. 
 
 221. State the conditions under which international trade can per- 
 manently exist. "What will be the ultimate effect of a large movement of 
 foreign gold upon prices, imports, and exports in the receiving country? 
 
 222. State the theory of the value of money (i. e., "metallic 
 money "), and clear up any apparent inconsistencies between the follow- 
 ing statements : (1.) The value of money depends on the cost of produc- 
 tion at the worst mines ; (2.) The value of money varies inversely as its 
 quantity multiplied by its rapidity of circulation; (3.) The countries 
 whose products are most in demand abroad and contain the greatest 
 value in the smallest bulk, which are nearest the mines and have the 
 least demand for foreign productions, are those in which money will be 
 of lowest value. 
 
 223. The effects of the depreciation of the paper currency in the 
 United States are thus described by Mr. Wells: "It renders it impossi- 
 ble to sell abroad the products which have cost too much at home, and 
 invites from other countries the products of a cheaper labor paid for in 
 a sounder currency. It exaggerates imports, while destroying our ability 
 to pay in kind." State how far you agree with the deductions here 
 drawn, assigning your reasons where you differ. 
 
 224. "When the foreign exchanges are manifestly against a country, 
 and a balance of indebtedness is the cause, the equilibrium can be re- 
 stored in two ways. State and explain the operation of each. 
 
 225. What are the conditions which determine for a country a high 
 range of general prices ? How far is this advantageous ? 
 
 226. "What is the effect of the imposition of a tribute by one country 
 on another upon the course of trade between them, and the terms on 
 which they exchange commodities ; and why ? 
 
 227. For what reasons may a nation's exports habitually exceed or 
 fall short of its imports ? 
 
 228. Explain the real and nominal exchange. 
 
 229. Expound Mr. Mill's theory of the influence which a converti- 
 ble currency exercises on foreign trade. 
 
EXAMINATION QUESTIONS. 653 
 
 230. "What is the effect of a depreciated currency on (1) foreign 
 trade, and (2) the exchanges ? 
 
 Intebest. 
 
 231. How doe9 the general rate of interest determine the selling 
 price of stocks and land ? 
 
 232. Is there any relation between the rate of interest and the value 
 of money ? 
 
 233. What are the relations of interest and profit ? On what causes 
 does the rate of interest depend ? 
 
 234. " High interest means bad security." Comment on this snying. 
 
 235. Is the rate of interest affected by the supply of the precious 
 metals ? 
 
 236. What determines the rate of interest on the loanable funds? 
 Is the " current [or ordinary] rate of interest the measure of the relative 
 abundance or scarcity of capital " ? 
 
 237. What are the chief causes that determine the rate of interest ? 
 
 238. If it be true that in America every man, however rich, is en- 
 gaged in some business, but that in England many rich men have no 
 trade or profession, how is the rate of mterest in each country affected 
 in consequence, and why ? 
 
 239. How does a fall in the purchasing power of money tend to 
 affect, if at all, and why, (1) the rate of interest, (2) the price of land, 
 (3) the price of government bonds, (4) the price of gold and silver orna- 
 ments and plate ? 
 
 Foreign Competition. 
 
 240. Explain the grounds of Mr. Mill's proposition that general low 
 wages never caused any country to undersell its rivals, nor did general 
 high wages ever hinder it from doing so. If you think the proposition 
 needs qualification, give your reason. 
 
 241. (1.) What is the true theory of one country underselling another 
 in a foreign market ? (2.) What weight should be attributed to the fact 
 of generally higher or lower wages in one of the competing countries ? 
 
 242. Discuss the question whether a high rate of wages necessarily 
 lays the commerce of a country under a disadvantage with reforence to 
 a country where the rate of wages is lower. 
 
 243. What are the conditions under which one country can perma- 
 nently undersell another in a foreign market ? 
 
 244. Point out distinctly the connection between the money wages 
 of laborers in the United States and the productiveness of the soil. 
 
 245. In the Eastern States iron-molders earn from fourteen to seven- 
 teen dollars a week; in California their wages run from twenty-one to 
 twenty-seven dollars. Account for this variation. 
 
g54: APPENDIX II. 
 
 Progress of Society. 
 
 246. What are the reasons for the change in the normal values of 
 manufactured and of agricultural commodities, respectively, during the 
 progress of society ? 
 
 247. Wages and profits in different employments and neighborhoods 
 are not uniformly proportional to the efforts of labor and abstinence 
 of which they are the respective rewards. Classify the circumstances 
 which prevent this correspondence, and show how far their effect is 
 likely to be reduced (a) by general economical progress, and (5) by the 
 extension of the division of labor. 
 
 248. What is the law of diminishing returns ? Can you point out any 
 connection between this law and the following phenomena ? — 
 
 (a.) Density of population. 
 
 (&.) Bate of wages. 
 
 (c.) Rate of profits in different countries. 
 
 249. Sketch the influence on rents and profits of an increase of popu- 
 lation and capital concurrently with a stationary state of the arts of 
 production. 
 
 250. Is there reason to believe that Mr. Mill has underrated the 
 powers possessed by man of extending the area of production and facili- 
 tating the market of food ? If such a statement has been made, to what 
 extent is his theory of population modified, and the risks he had indi- 
 cated rendered distant ? 
 
 251. Compare the effects on rent, profits, and wages, of a sudden 
 improvement in the production (a) of food, (5) of some manufactured 
 articles largely consumed by the working-classes. 
 
 252. Trace the connection between Ricardo's theory of rent and the 
 decline in the general rate of profits as a country increases in popula- 
 tion. Explain clearly the connection which exists between wages and 
 profits. 
 
 253. What effect is produced upon rents, profits, and wages, respect- 
 ively, in a country like France, where population is stationary and capi- 
 tal advancing ? 
 
 254. If capital continued to increase and population did not, explain 
 the proposition that " the whole savings of each year would be exactly 
 so much subtracted from the profits of the next and of every following 
 year," if improvements were stationary. 
 
 255. How does social and industrial progress tend to affect the prices 
 of land, raw produce, and manufactures, respectively, and why ? 
 
 256. The capitalized value of land rises, in the progress of society, 
 from two causes — from one which affects land in common with all in- 
 vestments ; from another which is peculiar to land. 
 
EXAMINATION QUESTIONS. 655 
 
 257. " The tendency of improved communications is to lower exist- 
 ing rents." How far is this true, and in what directions is it true ? 
 
 258. What would be the effect on profits, wages, and rents of an 
 improvement in a manufacutured article consumed by the laboring- 
 class ? 
 
 259. Explain the doctrine of the tendency of profits to a minimum, 
 the cause of that tendency, and the circumstances which counteract 
 it. 
 
 260. What was Adam Smith's doctrine as to the decline of profit in 
 progressive communities ? Criticise his argument. 
 
 261. Mention some of the principal causes which, in the ordinary 
 progress of society, respectively tend to increase or to reduce the cur- 
 rent rate of profits. 
 
 262. Why do profits tend to fall as population increases, and how 
 may this result be retarded or prevented ? 
 
 263. What is the effect of a general rise of money wages, apart from 
 the consideration of a greater efficiency of labor, in prices, profits, and 
 rent ? Give reasons for your answer. 
 
 264. How does the general progress of society in wealth and indus- 
 trial efficiency tend to affect the rate of wages, the rate of profit, and 
 the rate of rent, respectively ? 
 
 265. What is the general effect of the progress of society on the land- 
 owner, the capitalist, and the laborer ? 
 
 Future of Laboring-Classes. 
 
 266. Examine the influences of machinery on the economic condition 
 of the working-classes. 
 
 267. Mention and discuss some of the popular remedies for low 
 wages, and especially the effect of the subdivision of landed property 
 among peasant proprietors. 
 
 268. Explain briefly what is meant by co-operation, and indicate the 
 more prominent forms assumed by the co-operative movement. 
 
 269. What is meant by the co-operative system of industry ? Show 
 ways in which this system may affect, for good or for evil, the produc- 
 tiveness of labor ; and mention any moral benefits, or the opposite, in 
 which it may be expected to issue. 
 
 270. What are the difficulties in the way of co-operation for the pro- 
 duction of salable objects ? 
 
 271. Explain the advantages of industrial partnership, in which the 
 employes share, in proportion to the wages received, half the profits of 
 the business beyond a certain fixed minimum which is assigned to the 
 employers. 
 
656 APPENDIX II. 
 
 Taxation. 
 
 272. How is the state justified in undertaking any manufacture or 
 service which might be performed by private enterprise ? 
 
 273. Enumerate Adam Smith's canons of taxation. 
 
 274. Examine the argument in favor of the resumption by the state 
 of what is called the unearned increment in the value of land arising 
 from the development of society. 
 
 275. A picture by Gainsborough and a house in Broadway are sold 
 in the same year at the same price ; at the end of fifty years each sells 
 for five times its first cost. Is there any, and, if so, what, reason why 
 the increase should be sequestrated for the public benefit in the one case 
 and not in the other ? 
 
 276. Explain the incidence of taxes laid on wages. 
 
 277. "Why should a tax on profits, if no improvements follow, fall 
 on the laborer and capitalist ? 
 
 278. Explain what effect, if any, will be produced on the price of 
 corn by — 
 
 (1) a tax upon rent ; 
 
 (2) a tithe; 
 
 (3) a tax of so much per acre, irrespective of value ; 
 
 (4) a tax of so much per bushel. 
 
 279. On whom does a tax of a fixed proportion of agricultural 
 produce fall ? 
 
 280. Discuss the question whether the income-tax ought to be a 
 tax upon income and property, or upon expenditure. 
 
 281. Discuss the expediency of a graduated income-tax. 
 
 282. State the arguments which you think strongest both for and 
 against exempting savings from the income-tax. 
 
 283. Explain the conditions which should he observed in imposing 
 taxes on commodities. 
 
 284. What taxes does a tradesman get back in the price of the arti- 
 cles he sells, and what does he not ? 
 
 285. Test by Adam Smith's four maxims of taxation the policy of 
 indirect taxes on the necessaries of life. 
 
 286. All indirect taxation violates Adam Smith's fourth canon. 
 
 287. Discuss the following : 
 
 " A man with $100,000 in United States bonds comes to Boston, 
 hires a house . . . ; thus he lives in luxury. ... I am in favor of tax- 
 ing idle investments such as this, and allowing manufacturing invest- 
 ments to go untaxed." 
 
 288. Compare the advantages and disadvantages of direct and indi- 
 rect taxation. 
 
EXAMINATION QUESTIONS. 657 
 
 289. On what principles is this country now taxed ? 
 
 290. Explain the arguments for and against the policy of maintain- 
 ing a surplus for the purpose of redeeming a national debt. 
 
 291. In estimating the ability of the United States to pay its public 
 debts, it is usual to include among the data of the question the increased 
 productiveness of industry in that country. How far is this a pertinent 
 consideration ? 
 
 Protection. 
 
 292. Mention some of the principal arguments brought forward in 
 favor of protective tariffs. 
 
 293. Connect the principle of the division of employments (or labor) 
 with the policy of free trade and the functions of government. 
 
 294. Sketch the effects of discriminating duties, including the opera- 
 tion of the corn laws. 
 
 295. Examine the following argument, emending, if you think it 
 necessary, the free-trader's doctrine on the point raised : The free- 
 trader's belief is that a customs duty is added to the price of the article 
 upon which it is imposed. If the article is imported, according to his 
 theory, the increase of the price goes into the public treasury; if the 
 article is made in the country, the increase of the price goes into the 
 pocket of the producer. But in the former case there is no protection ; 
 and competition will prevent the latter. Therefore protection does not 
 increase the price of the protected article. If a customs duty is im- 
 posed upon a commodity, and its price is not raised in consequence, 
 what inference can you draw ? 
 
 296. Under what circumstances did Mr. Mill think nascent states 
 might be justified in adopting a policy of protection? Criticiso his 
 opinion, and, if you agree with it, give some examples of its application. 
 
 297. Americen protectionists allege that the high rate of wages pre- 
 vailing in the United States disables them from competing with " the 
 pauper labor " of Europe. Examine the grounds of this statement, and 
 consider how far it forms a justification for protection to American 
 industry. 
 
 298. A high rate of wages indicates, not a high, but a low cost of 
 production for all commodities measured in which the rate of wages is 
 high. 
 
 Explain and prove this proposition, and illustrate it from the cir- 
 cumstances of the United States. 
 
 299. State under what limitations the proposition is correct, that 
 profits vary inversely with wages. Explain the circumstances which 
 cause both a higher rate of wages and profits to prevail in a young 
 country, such as the United States, than in England. 
 
 300. In America wages are much higher than in England, yet the 
 
 42 
 
658 APPENDIX II. 
 
 general rate of profits is higher also, according to Mr. Mill. How do 
 you reconcile the two facts ? 
 
 301. Examine the following: 
 
 "It seems to me that protection is absolutely essential to the en- 
 couragement of capital, and equally necessary for the protection of the 
 American laborer. ... He must have good food, enough of it, good 
 clothing, school-houses for his children, comforts for his home, and a 
 fair chance to improve his condition. To this end I would protect him 
 against competition with the half-paid laborers of European countries." 
 — Congressional Glooe. 
 
 302. An American newspaper has said of the burning of Chicago : 
 " The money to replace what has been burned will not be sent abroad 
 to enrich foreign manufacturers; but, thanks to the wise policy of pro- 
 tection which has built up American industries, it will stimulate our 
 own manufactures, set our mills running faster, and give employment 
 to thousands of idle working-men." Comment on this passage. 
 
 303. On whom does a tax on imports, if not prohibitory, fall ? 
 
 304. In what cases would duties on imported commodities fall on 
 the producers? 
 
 305. Are taxes on imports in any way paid by foreigners ? 
 
 306. Discuss the effects of duties on exports. 
 
 307. Trace the effects of duties on the importation of raw materials, 
 and distinguish, with examples, between duties that violate and duties 
 which do not violate the principle of free trade. 
 
 308. Is it possible for any country by legislative enactments to en- 
 gross a larger share of the advantages of foreign trade than it would 
 naturally have ? Discuss the question fully. 
 
 309. "Those are, therefore, in the right who maintain that taxes 
 on imports are partly paid by foreigners; but they are mistaken when 
 they say it is by the foreign producer. It is not on the person from 
 whom we buy, but on all those who buy from us, that a portion of our 
 customs duties spontaneously falls." Explain and examine the reasons 
 for this conclusion. 
 
 310. State the principle which determines the relation between the 
 amount of a country's imports and that of its exports, and show how 
 this relation is affected by a system of protective duties. 
 
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