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diff --git a/.gitattributes b/.gitattributes new file mode 100644 index 0000000..6833f05 --- /dev/null +++ b/.gitattributes @@ -0,0 +1,3 @@ +* text=auto +*.txt text +*.md text diff --git a/12217-0.txt b/12217-0.txt new file mode 100644 index 0000000..74f1cde --- /dev/null +++ b/12217-0.txt @@ -0,0 +1,17403 @@ +*** START OF THE PROJECT GUTENBERG EBOOK 12217 *** + +Economics--Volume II + +MODERN ECONOMIC PROBLEMS + +BY + +FRANK A. FETTER, PH.D., LL.D. + +PROFESSOR OF ECONOMICS, PRINCETON UNIVERSITY + +1916 + + + + + TO + THE MOTHER + WITH A YOUTHFUL HEART AND + SYMPATHETIC INTEREST + IN ALL THINGS HUMAN + + + + +TABLE OF CONTENTS + + +PART I. RESOURCES AND ECONOMIC ORGANIZATION. + + 1. Material resources of the nation + + 2. The present economic system + + +PART II. MONEY AND PRICES. + + 3. Nature, use, and coinage of money + + 4. The value of money + + 5. Fiduciary money, metal and paper + + 6. The standard of deferred payments + + +PART III. BANKING AND INSURANCE. + + 7. The functions of banks + + 8. Banking in the United States before 1914 + + 9. The Federal Reserve Act + + 10. Crises and industrial depressions + + 11. Institutions for saving and investment + + 12. Principles of insurance + + +PART IV. TARIFF AND TAXATION. + + 13. International trade + + 14. The policy of a protective tariff + + 15. American tariff history + + 16. Objects and principles of taxation + + 17. Property and corporation taxes + + 18. Personal taxes + + +PART V. PROBLEMS OF THE WAGE SYSTEM. + + 19. Methods of industrial remuneration + + 20. Organized labor + + 21. Public regulation of hours and wages + + 22. Other protective labor and social legislation + + 23. Social insurance + + 24. Population and immigration + + +PART VI. PROBLEMS OF INDUSTRIAL ORGANIZATION. + + 25. Agricultural and rural population + + 26. Problems of agricultural economics + + 27. The railroad problem + + 28. The problem of industrial monopoly + + 29. Public policy in respect to monopoly + + 30. Public ownership + + 31. Some aspects of socialism + + Index + + + + +FOREWORD + + +The present volume deals with various practical problems in economics, +as a volume published a year earlier dealt with the broader economic +principles of value and distribution. To the student beginning +economics and to the general reader the study of principles is likely +to appear more difficult than does that of concrete questions. In +fact, the difficulty of the latter, tho less obvious, is equally +great. The study of principles makes demands upon thought that are +open and unmistakable; its conclusions, drawn in the cold light of +reason, are uncolored by feeling, and are acceptable of all men so +long as the precise application that may justly be made of them is +not foreseen. But conclusions regarding practical questions of public +policy, tho they may appear to be simple, usually are biased and +complicated by assumptions, prejudices, selfish interests, and +feelings, deep-rooted and often unsuspected. + +No practical problem in the field of economics can be solved as if +it were solely and purely an economic problem. It is always in some +measure also a political, moral, and social problem. The task of the +economist "as such" is the analysis of the economic valuation-aspects +of these problems. We may recall Francis A. Walker's comparison of the +economist's task with that of the chemist, which task, in a certain +case, was to analyze the contents of a vial of prussic acid, not to +give advice as to the use to make of it. Accordingly, in the following +pages, the author has endeavored primarily to develop the economic +aspects of each problem, and has repeatedly given warning when the +discussion or the conclusions began to transcend strict economic +limits. In many questions feeling is nine-tenths of reason. If the +reader has different social sympathies he may prefer to draw different +conclusions from the economic analysis. + +The outlook and sympathies that are expressed or tacitly assumed +throughout this work are not so much those personal to the author as +they are those of our present day American democratic society, +taken at about its center of gravity. When the people generally feel +differently as to the ends to be attained, a different public policy +must be formulated, tho the economic analysis may not need to be +changed. Therefore, in some cases, the author has discussed merely the +economic aspect, or has referred to the general principles treated in +volume one, and has purposely refrained from expressing his personal +judgment as to "the best" policy for the moment. + +The present volume was planned some years ago as a revision of a part +of the author's earlier text, "The Principles of Economics" (1904). +The intervening years have, however, been so replete with notable +economic and social legislation and have witnessed the growth of a +wider public interest in so many economic subjects, that both in +range and in treatment this work necessarily grew to be more than +a revision. Except in a few chapters, occasional sentences and +paragraphs are all of the specific features of the older text that +remain. Suggestive of the rapid changes occurring in the economic +field is the fact that a number of statements made in the manuscript a +few months or a few weeks ago had to be amended in the proof sheets to +accord with recent events. + +The author's debt for information, inspiration, and assistance in +various phases of the work is a large one. The debt is owing to +many,--authors, colleagues, and students. A few of the sources that +have been drawn upon will be indicated in a pamphlet following the +plan of the "Manual of References and Exercises in Economics," already +published for use in connection with Volume I; but the limits of space +will prevent a complete enumeration. I wish, however, in particular, +to acknowledge gratefully the aid and friendly criticisms given in +connection with the chapters on money and banking, on labor problems, +and on the principles of insurance, respectively, by my colleagues, +E.W. Kemmerer, D.A. McCabe, and N. Carothers. + +In completing, at least provisionally, the present work, the author +cherishes the hope that it will be of assistance not only to teachers +and to students in American colleges, but also to citizen-readers +seeking to gain a better and a non-partisan insight into the great +economic problems now claiming the nation's conscience and thought. + +F.A.F. + +Princeton, N.J., October, 1916. + + + + + +MODERN ECONOMIC PROBLEMS + +PART I RESOURCES AND ECONOMIC ORGANIZATION + + + + +CHAPTER I + +MATERIAL RESOURCES OF THE NATION + + § 1. Politico-economic problems. § 2. American economic problems + in the past. § 3. Present-day problems: main subjects. § 4. Attempts + to summarize the nation's wealth. § 5. Average wealth and the problem + of distribution. § 6. Changes in the price-standard. § 7. A sum of + capital, not of wealth. § 8. Sources of food supply. § 9. The sources + of heat, light, and power. § 10. Transportation agencies. § 11. Raw + materials for clothing, shelter, machinery, etc. + + +§ 1. #Politico-economic problems.# The word "problem" is often on our +tongues. Life itself is and always has been a problem. In every time +and place in the world there have been questions of industrial +policy that challenged men for an answer, and new and puzzling social +problems that called for a solution. And yet, when institutions, +beliefs, and industrial processes were changing slowly from one +generation to another and men's lives were ruled by tradition, +authority, and custom, few problems of social organization forced +themselves upon attention, and the immediate struggle for existence +absorbed the energies and the interests of men. But our time of rapid +change seems to be peculiarly the age of problems. The movement of +the world has been more rapid in the last century than ever before--in +population, in natural science, in invention, in the changes of +political and economic institutions; in intellectual, religious, +moral, and social opinions and beliefs. + +Some human problems are for the individual to solve, as, whether it is +better to go to school or to go to work, to choose this occupation or +that, to emigrate or to stay at home. Other problems of wider bearing +concern the whole family group; others, still wider, concern the local +community, the state, or the nation. In each of these there are more +or less mingled economic, political and ethical aspects. Economics +in the broad sense includes the problems of individual economy, of +domestic economy, of corporate economy, and of national economy. In +this volume, however, we are to approach the subject from the public +point of view, to consider primarily the problems of "political +economy," considering the private, domestic, and corporate problems +only insomuch as they are connected with those of the nation or of +the community as a whole. Our field comprises the problems of national +wealth and of communal welfare. + +What then are our politico-economic problems in America? They are +problems that are economic in nature because they concern the way that +wealth shall be used and that citizens are enabled to make a living; +but that are likewise political, because they can be solved only +collectively by political action. + +§ 2. #American economic problems in the past.# With the first +settlements of colonists on this continent politico-economic problems +appeared. Take, for example, the land policy. Each group of colonists +and each proprietary landholder had to adopt some method of land +tenure whether by free grant or by sale of separate holdings or by +leasing to settlers. In one way and another these questions were +answered, but rapidly changing conditions soon forced upon men the +reconsideration of the problem as the old solution ceased to be +satisfactory. + +In large part our political history is but the reflection of the +economic motives and economic changes in the national life. Thus +the American Revolution arose out of resistance to England's trade +regulations, commercial restrictions, and attempted taxation of the +colonies. The War of 1812 was brought on by interference with American +commerce on the high seas. The Mexican War was the result of the +colonization of Texan territory by American settlers and the desire +of powerful interests to extend the area of land open to slavery. The +Civil War arose more immediately out of a difference of opinion as to +the rights of states to be supreme in certain fields of legislation, +but back of this political issue was the economic problem of +slave labor. Illustrations of this kind, which may be indefinitely +multiplied, do not prove that the material, economic changes are the +cause of all other changes, political, scientific, and ethical; for in +many cases the economic changes themselves appear to be the results +of changes of the other kinds. There is a constant action and reaction +between economic forces and other forces and interests in human +society, and the needs of economic adjustment are constantly changing +in nature. + +§ 3. #Present-day problems: main subjects#. The particular economic +problems in America at this time are determined by the whole complex +economic and social situation. Two main factors in this may be +distinguished: the objective and the subjective, or the material +environment and the population composing the nation. The one is what +we have, the other is what we are, as a people. These factors are +closely related; for what we are as a people (our tastes, interests, +capacities, achievements) depends largely on what we have, and what we +have (our wealth and incomes) depends largely on what we are. We may +consider the following phases; the first two of the objective factor, +and the last two of the subjective factor. + +(a) The basic material resources, consisting of the materials of the +earth's surface and the natural climatic conditions which together +provide the physical conditions necessary for human existence, and +which furnish the stuff out of which men can create new forms of +wealth. + +(b) The industrial equipment, consisting of all those artificial +adaptations and improvements of the original resources by which men +fit nature better to do their will. These two (a and b) become +more and more difficult to distinguish in settled and civilized +communities, and become blended into one mass of valuable objects, the +wealth of the nation. + +(c) The social system under which men live together, make use of +wealth and of their own services, and exchange economic goods. + +(d) The people, considered with reference to their number, race, +intelligence, education, and moral, political, and economic capacity. + +The particular economic problems which are presented to each +generation of our people are the resultant of all these factors taken +together. A change in any one of them alters to some extent the +nature of the problem. The problems change, for example, (a) with the +discovery or the exhaustion (or the increase or decrease) of any +kind of basic material resources; (b) with the multiplication or +the improvement of tools and machinery or the invention of better +industrial equipment; (c) with changes in the ideals, education, and +capacities of any portion of the people whether or not due to changes +in the race composition of the population; (d) with the increase or +decrease of the total number of people, and the consequent shift in +the relation of population to resources. Many examples of such changes +may be found in American history, and some knowledge of them is +necessary for an appreciation of the genesis and true relation of our +present-day problems. + +§ 4. #Attempts to summarize the nation's wealth.# If we seek to +compare the material resources of the nation at one period in our +history with those at another period, we find that it is impossible +to find a single satisfactory expression for them. Let us examine +the figures for the (so-called) "wealth of the people of the United +States",[1] as it has been calculated by the census officials. + + Average + total per capita + Population. "wealth." wealth. + + 1850 23,200,000 $7,136,000,000[a] $308 + 1860 31,400,000 16,160,000,000[a] 514 + 1870 38,600,000 24,055,000,000[a b] 624 + 1880 50,200,000 43,642,000,000 870 + 1890 62,900,000 65,037,000,000 1,036 + 1900 76,000,000 88,517,000,000 1,165 + 1904 82,500,000 107,104,000,000 1,318 + 1912 95,400,000 187,739,000,000 1,965 + + [Footnote a: Taxable only; all other figures include exempt.] + + [Footnote b: Estimated on a gold basis.] + +A detailed comparison of the classes of concrete things making up the +totals is possible only in the last three sets of figures (1900 to +1912), and they are here given (omitting 000,000). + + 1900. 1904. 1912. + 1. Real property (excepting + some items below) 52,538 62,331 110,700 + 2. Irrigation enterprises [a] [a] 360 + 3. Agricultural equipment + (livestock, tools, etc.) 3,822 4,919 7,706 + 4. Manufacturing equipment 2,541 3,298 6,069 + 5. Transportation agencies 11,249 14,434 22,360 + 6. Telegraph and telephones 612 813 1,304 + 7. Waterworks (privately owned) 263 275 290 + 8. Electric lighting plants 403 563 2,099 + 9. Products (still in trade)[b] 8,294 10,212 21,577 + 10. Direct goods in use[c] 6,880 8,250 12,758 + 11. Gold and silver 1,677 1,999 2,617 + + [Footnote a: No figures for these years.] + + [Footnote b: The main items are agricultural and mining products and + imported merchandise.] + + [Footnote c: The main items are clothing, personal adornment, furniture, + and carriages.] + +§ 5. #Average wealth and the problem of distribution#. The foregoing +figures make a most satisfactory showing, and appear to indicate +that mere economic problems are rapidly being solved by the growth +of national wealth. But unfortunately these figures have little +significance in connection with such an inquiry, if indeed they are +not badly misleading. + +In the first place, the final figures of "per capita wealth" are +merely averages; a per capita increase, therefore, may appear when +total wealth increases, altho the total may be due to the growth of +comparatively few very large fortunes. The fact is evident that vast +numbers of individuals and families are nearly propertyless and in +so far as this is true there is involved one of the greatest of our +socio-economic problems, that of the distribution of wealth and income +among the people. The more unequal the distribution, the greater, in +all likelihood, is the discontent; and the greater the effort of many +men to find some methods by which greater equality may be attained. + +§ 6. #Changes in the price-standard#. These figures, moreover, are +expressed in terms of the monetary price-unit, in dollars of the +gold standard, and therefore the increasing total figure (and +correspondingly, the increasing per capita) may be but the reflection +of a change in the value of the monetary unit. It is well known that +the gold dollar has now less purchasing power than in 1880, and less +also than at any intervening time.[2] To the extent that this is true +the increase in the figures of wealth (total and per capita) is only +nominal and does not indicate increase in the quantity and betterment +in the quality of real wealth. This fact is so evident that it would +seem unnecessary to call attention to it, if it were not constantly +overlooked in citing these figures. + +§ 7. #A sum of capital, not of wealth#. Consider further, that the +figures here given for wealth really express but the sum of capitals +of the individuals (or private corporations) of the nation. These +do not constitute a sum of social wealth in any proper sense of the +term.[3] Arithmetically it is a fallacious kind of a total, for the +sum of the individual capitals contains some items that should +be canceled to find the sum of wealth. Moreover, capital is an +acquisitive concept. It is an expression of the value of a man's +possessions, and not of the utility[4] of them. It measures intensity +of desire for goods and not necessarily the degree of welfare. Such a +total, therefore, embodies the difficulties of the paradox of value; +in some cases increased value reflects a growing scarcity and not +greater abundance.[5] + +For example, between 1900 and 1915, with the growth of population, the +total number of improved acres in farms in the United States increased +but little, and the per capita number diminished. At least in part +as a result of this fact, the prices of nearly all kinds of food rose +rapidly, as did also the price of farm land. The prices (and estimated +values) of farm lands are the expression of the individual capitals, +which formed each year an increasing statistical total of so-called +wealth. The people had less land per capita, and were poorer per +capita as respects this item of landed-wealth, had less meat per +capita, and had to give more labor in exchange for food, at the same +time that the statistical per capita of land values increased. + +So it may be as respects forests, coal, cotton, and eventually iron, +copper, and many other things. When forests were plentiful, lumber and +fire wood were free goods in many neighborhoods. Forests entered into +the total of national "wealth" in 1850 and 1860 at a comparatively +small sum. But in 1910 when the forests had been half used up they +appeared as a greater total and probably as a greater per capita +item of "wealth" than in 1850. The figures reflect changes in the +paradoxical section of the scale of values, and express scarcity +rather than wealth. + +Altho the wealth of a nation may not be expressed as a single sum of +values that accurately reflects the weal-bringing things composing its +environment, some conception of the situation is to be gained by an +enumeration of goods in their kinds and quantities and by studying +their relations to the life of the people. Objects of wealth may be +grouped in various ways. The following may serve our purpose of a +general survey of our present resources. + +§ 8. #Sources of food supply#. The land area of the country in 1910 +was about 1,900,000,000 acres, of which 879,000,000 acres were in +farms, this being 46 per cent of the total area. A very small part +of the remainder is used for residential and commercial purposes, +the rest being barren mountains, deserts, swamps, and forests. Of the +total in farms a little more than one-half was improved, 478,000,000 +acres altogether, a per capita average of 5.2 acres; and a little +less than one-half was unimproved, 400,000,000 acres altogether, a +per capita average of 4.3 acres. The improved land produced not merely +food but many kinds of materials, such as cotton, wool, hides, +and lumber, while much of the unimproved land was either in farm +wood-lots, or in rough range pasture. Of course the kinds and amounts +of produce per acre vary with the climate, particularly with sunshine +and rainfall; possibly the proportion of the area of the United States +that is true desert and infertile mountain land is greater than that +of any other equal area in the temperate zones. The actual productive +capacity per acre of the lands of America cannot be expressed in a +very helpful way as a general average per acre, but each area must be +carefully studied in respect to its climate, rainfall, and possibility +of irrigation and drainage. It is evident that a very large number of +economic problems must arise in connection with the land supply +for food: such as problems of land-ownership, taxation, irrigation, +drainage, forestry, and encouragement or limitation of population. We +are just beginning to awaken to the needs in this direction. + +The rivers, lakes, and ocean waters near our coasts are other great +sources of food, but no statistics are available to show adequately +their yield. Few of them are in private possession and they do not +appear at all in a total of "capitals," yet they are more important to +the nation than a large part of the land area. They are only beginning +to be developed artificially by the propagation of oysters, clams, and +fish. The development of a proper policy in this matter is one of our +economic problems. + +There were in 1910 (mostly on farms) about 64,000,000 beef and dairy +cattle, 60,000,000 swine, 56,000,000 sheep and goats, and there were +raised in the one year nearly 500,000,000 fowls of all kinds. + +§ 9. #The sources of heat, light, and power#. The law of the +conservation of energy expresses the fundamental likeness of heat, +light, and power. The principal sources from which man derives these +agencies are coal and falling waters, tho wood is of importance as +fuel in some localities. About 500,000 square miles of land (about 13 +per cent of the area of the country) are underlaid with coal. These +deposits are widely distributed, so that nearly every part of the +country is within 500 miles of a mine. The enormous deposits if used +at the present amounts per year would last probably 2,000 to 4,000 +years, but if used at the present increasing rate (doubling the +product every ten years) they would, it has been estimated, last but +150 years. What shall be the actual rate as between these extremes +is a question whose answer depends on our economic legislation as +to ownership, exploitation, prices, use, and substitution. This is +another of our important socio-economic problems. + +The one great available substitute for coal as a source of heat and +light and power is water power. It is estimated that in 1908 but +5,400,000 horse power was being developed from water falls, whereas +about 37,000,000 primary horse power[6] was available; but, by +the storage of flood waters so as to equalize the flow, at least +100,000,000 horse power, and possibly double that amount, could be +developed. As it requires ten tons of coal to develop one horse power +a year in a steam engine by present methods, there is here a potential +substitute for coal equal to two to four times our present annual use +of coal (about 500,000,000 tons in 1912). + +But this does not mean that it would be economical, at present costs +of mining coal and of building reservoirs, to make this substitution +now. To determine when, how far, and by what methods to develop this +water power from lakes and rivers for the use of the people and to +make this substitution, is another of our great economic problems. + +Petroleum and natural gas, of which our original reservoirs were +perhaps the richest in the world, are being rapidly exhausted. These +may be merely mentioned as being related to coal in the source +of their supply, in the nature of their uses, and in the economic +problems to which they give rise. + +§ 10. #Transportation agencies#. First to mention among the means of +transportation are the navigable waters--oceans, lakes, rivers, and +canals, with the necessary equipment of dredged inlets, harbors, +docks, locks, and lighthouses. Few of these appear in the total of +"capitals," for they are not in private possession. Yet a good system +of natural waterways may be greater wealth to one nation than costly +additional railroads are to another. Good natural harbors on the +waterways leading out to the oceans are a most important kind +of national wealth, as are the navigable great lakes within the +boundaries or on the borders of a country. Just in proportion as these +natural means of transportation are lacking, is the need to build +costly artificial means of transportation. + +Both in natural and in artificial means of transportation, America +is well provided. The straight coast line is 5700 miles long, and the +line following indentations of the coast is about 64,000 miles. The +Great Lakes with a straight shore line of 2760 miles are the most +important inland waterways in the world. The 295 navigable rivers in +the country have a length of 26,400 miles of navigable water. About +2000 miles of canals are still in operation. On the waterways some +27,000 American vessels are in use, with a capacity of 8,000,000 gross +tons.[7] + +There are about 250,000 route miles of steam railroads, or with +additional tracks, yard tracks, and sidings, a total of about 370,000 +miles. On these are over 63,000 locomotives, 52,000 passenger cars, +and 2,400,000 freight and company cars. Besides these are 45,000 track +miles of electric railways and nearly 100,000 cars. These railroads +include an enormous aggregate of works and structures in the form of +tunnels, cuts, banks, bridges, stations, and shops. + +There are in the country (1914) about 2,228,000 miles of public +roads, of which 10 per cent are "surfaced" roads. No figures are now +available of the number of wagons, horses, automobiles, and +other vehicles in use on the roads and streets for purposes of +transportation. + +Many of our economic problems are presented by these transportation +agencies, from the question of opening a new dirt road in a rural +township to that of building an inter-oceanic canal, from the question +whether to have free public roads or toll roads to that of regulating +the railroad rates on the whole railroad system of the country. + +§ 11. #Raw materials for clothing, shelter, machinery, etc.# The farm +lands supply, besides food, a large part of the raw materials for many +other goods, such materials as cotton, flax, wool, hides, feathers, +lumber, and firewood. The farm woodlots compose about 200,000,000 +acres, and the large forests, public and private, about 350,000,000 +acres, a total of about one-fourth the area of the country in +forests, containing about one-half of the lumber that the country once +possessed. The economic problem of a sound forestry policy is one of +the largest we have to solve. + +The most important other sources of raw materials for industry are +the mineral deposits in the earth's surface.[8] This country is stored +more bountifully, probably, than is any other country, with the metal +ores of iron, copper, lead, zinc, gold, and silver. Aluminum is the +most abundant metal, composing about 8 per cent of the crust of the +earth, but by present methods it can be extracted only at considerable +cost from certain compounds that are limited in amount. The details as +to our metal stores are too complex for fuller treatment here, and may +be found in treatises on economic geology or on industrial geography. +The determination of wise policies as to the use of these stores +involves many economic problems, private and public. + +Another great class of material wealth is in the form of tools, +machinery, and other agencies for carrying on the industrial +processes of farming and of manufacturing. These are sometimes called +instrumental goods, or the industrial equipment. Still another class +consists of the great mass of completed direct goods, such as houses +to live in, libraries, museums, school buildings, theaters, all kinds +of buildings and equipment for pleasure and entertainment, parks, and +pleasure resorts in mountains, at lakes or sea shore. The possession +and use of these forms of wealth give rise to some economic problems +of public ownership and to others connected with the institution of +private property in general, as sketched in the following chapter. + + +[Footnote 1: It is to be observed that these figures appear under +the general title of Part I, "Estimated valuation of national wealth: +1850-1912," and the tables are spoken of (volume on Wealth, Debt, and +Taxation, p. 20) as "estimates of the aggregate wealth of the nation +as prepared by the United States censuses," but the tables themselves +are described (pp. 23-25) as the "estimated true valuation of all +property," this phrase being used as equivalent to "wealth." For the +definitions of wealth and property see Vol. I, pp. 264-265.] + +[Footnote 2: This change will be described below in ch. 6, in treating +of the standard of deferred payments.] + +[Footnote 3: See Vol. I, pp. 265, 278, 508 for the distinction between +wealth and capital.] + +[Footnote 4: See Vol. I, p. 25, for the definition of utility.] + +[Footnote 5: See Vol. I, p. 510 on the paradox of value.] + +[Footnote 6: That is, "the amount which can be developed upon the +basis of the flowage of the streams for a period of two weeks in which +the flow is the least," all the rest being allowed to escape unused. +Van Hise, "Conservation of Natural Resources," p. 119.] + +[Footnote 7: These and other figures in this section relate to the +year 1913.] + +[Footnote 8: Coal has been mentioned above, sec. 9.] + + + + +CHAPTER 2 + +THE PRESENT ECONOMIC SYSTEM + + § 1. The place of private property. § 2. Nature of property. § 3. + Relation of wealth, property, and capital. § 4. Some theories of + private property. § 5. Origin vs. justification. § 6. Limitations of + private property. § 7. Limitations of bequest and inheritance. § 8. + Social expediency of private property. § 9. The monetary economy. + § 10. The competitive system. § 11. Limitation of competition by + custom. § 12. Effect of modern forces upon custom. § 13. Adam + Smith's influence. § 14. The wage-system. + + +§ 1. #The place of private property#. Of fully equal importance with +material wealth in determining the economic power of a people is the +_social system_ under which the nation lives. This is the term applied +to the whole complex of institutions and arrangements in which and +by which people live together in society. It is the embodiment of the +opinions, ideas, and habits of life inherited by each generation from +its forbears. It is, indeed, a people's whole state of civilization +with its political, economic, intellectual, scientific, religious, and +esthetic aspects. + +The most important economic aspect of the existing system is, broadly +speaking, the institution of private property. So closely connected +with this that they are hardly more than different phases of the same +thing, are the use of money (the monetary economy), the wage system, +and competition as a mode of distribution. "The institution of private +property" is the general expression for the way in which men in the +modern state make use of their own energies and of material wealth +within the nation. Nearly all the total of the things mentioned in the +table in Chapter 2, section 4, are owned by private citizens.[1] We +live in a régime of private property, and all our economic problems +are affected by that fact. The determination of the exact boundaries +of private property makes up a large part of the politico-economic +problems which the people in each generation have to solve. A large +share, possibly, in a certain sense, every one of the economic +problems that are discussed involve change, limitation, definition, +or, more radically, abolition of present laws of property. Broadly +understood, as above, therefore, determination of the nature of +private property is _the essential_ economic problem. + +§ 2. #Nature of property#. Property means ownership, and "ownership" +is the abstract noun expressing the quality of possessing a +thing. Correspondingly, "owner" is the Anglo-Saxon equivalent of +"proprietor." Property thus, fundamentally, means not an object held, +or possessed, but the right in or belonging to a person to control +something that he owns. Ownership is a legal right to control under +certain conditions.[2] Physical, possession of an object is not +necessarily ownership. + +There are different kinds of ownership. It may be private, as that +of individuals, families, partnerships, or corporations; or it may be +public, as that of nations, states, counties, cities and towns, owning +such things as public buildings, parks, highways, the Adirondack +forest-reserve, or the Erie Canal. These two kinds are equally +effective as against the claims of outsiders, but the rights of those +inside the circle of ownership differ. For example, the rights of one +shareholder against another, or the rights of one member of a family +as against another, are not the same as the rights against outsiders. +Private property is the characteristic feature of our present +industrial society, but it exists side by side with public property +and with many intermediate grades between private and common property. + +Tho property meant originally and essentially the intangible right to +a thing, the word came to be applied also to the object of the right. +This is done both in common speech and in judicial decisions, with +inevitable ambiguity. This may be readily seen by trying to substitute +the word ownership for property, a thing quite simple in some cases +but impossible in others. One would not point to a house and say, +"This is my ownership," but either, "This is my property," or "I +exercise ownership over it." It is well recognized that a man may have +a property right in this abstract sense in or over his own services, +as to practise a trade or in the "good will" of a business or in +an intangible patent or a copyright, quite as well as in a material +object. + +§ 3. #Relation of wealth, property, and capital#. A failure to see +this distinction and to keep it clearly in mind has led to confusion, +even on the part of legislatures, learned judges, and able economists. +If property is said to be (for example) a house and lot and at +the same time the right to that house and lot, then there are two +properties at once for each economic good, viz.: the object itself and +the right to it.[3] + +This difficulty could be avoided by the consistent definition and use +of terms. A material economic object is a good, is a form of wealth. +The usance of wealth and the service of laborers at the moment +rendered constitute forms of income. The right of ownership, i.e., the +right to control, use, or direct the use of wealth and services, is +property, which is therefore the right to receive incomes. The value +of the incomes of an individual constitute his capital. Goods, rights +to goods, value of rights to goods: these three things are clearly +distinguishable. + +§ 4. #Some theories of private property#. Various theories have been +framed to explain the origin and to justify the existence of private +property. The occupation theory is that property is based upon +the priority of claim of one who finds wealth without an owner and +appropriates it. This is not an explanation of the property rights +that are arising every moment, nor does it give a logical reason for +the continuance of ancient property rights. It is a statement applying +to a case that has rarely happened, the settlement of an unoccupied +territory. + +More adequate to explain many cases is the conquest theory, that +property is based on force; for nearly all lands to-day are occupied +by the descendants of conquering invaders who took the lands and +natural resources from the former inhabitants, who in turn had taken +them from other occupants, many centuries before. The conquest theory +applies, for example, to the invasion of the Roman provinces by +barbarian tribes who divided the country and developed the feudal +system based on land tenure. But it hardly applies to present-day +happenings, and at its best it cannot, to modern minds, "justify" +present property rights. + +The labor theory, meeting some queries where others fail, is that +ownership is based on the act of production. It is declared that +every man has a right to that to which his brain and his muscle +have imparted value. It is evident that this test leaves without +explanation or justification a great number of things that do exist +and have existed as property. Usually the basis of the labor theory +of property is declared to be each individual's natural right to the +results of his own labor, which claim is assumed to be an ultimate, +undebatable, axiomatic fact. However, that type of natural-right +doctrine, which makes no appeal to experience and results, is now +quite discredited in political science. + +Another form of natural-rights theory is that property is necessary +for the realization of the dignity of human nature and every +individual has the natural right to self-realization. This theory +is, in a way, based on an appeal to experience, as to the effect of +property on human character, and it has the virtue of expressing one +of the ideals of modern democracy. Altho, in common with various other +"natural-rights" theories, it must be deemed too absolute and too +individualistic, it contains a far-reaching truth, of which due +account must be taken in our social philosophy. + +The legal theory is that property exists because the law says it +shall. This expresses a truth, but is no more than a truism. The law +determines the limits of property, but what determines the limits of +the law? What practical or social justification is there for passing +and continuing such law? The legal theory does not contain a final +explanation. Each of these theories has its defects, but each points +to some fact important and significant, at certain times and places, +in the explanation of this widespread institution. + +§ 5. #Origin vs. justification#. The question of the origin is not the +same as that of the present justification of the existing system of +private property. The institution of private property has evolved +under diverse conditions. In early societies individual property +rights were not very clearly marked. Every tribe asserted against +other tribes, and tried to uphold by war, its claims upon its +customary hunting grounds; but the claims of the individual hunters +on land within the tribe did not often come into conflict. Private +property at the outset was in personal possessions, ornaments, +weapons, utensils, which were very meager in that primitive society +in which it was the custom "to go calling with a club instead of a +card-case." Only later came individual property in land. A few years +ago it was generally believed that the organization of the old German +tribes was politically an almost perfect democracy, and economically +a communism in which all had equal claims upon the land. To-day this +opinion is very seriously questioned. It seems probable that there was +a goodly measure of communism in the control and use of lands (tho not +in other things), but this was largely confined to an oligarchy of the +favored; whereas the masses lived in subjection, cut off from all but +a meager share in the common lands. However that may have been, strong +forces within historic times have put an end to the common ownership +and tillage of land as it existed among the peasants of Europe. That +system was shown by experience to be wasteful. Competition tended to +bring the economic agents into more efficient hands, and the movement +was furthered by many acts of injustice and violence on the part of +those in power. + +Inquiries into the origin and development of any social institution +are interesting and helpful in forming an estimate of its present +significance, but the problems of the past are not those of to-day. +Whether or not the ancient beginning of property in Europe was in +violence and evil has but a remote bearing on the question as to the +present working of it. Social conditions and needs have not changed +more than have the forms and limits of property itself. Each +generation has its own problems to solve, and ignoring for the most +part the evils of the distant past, each generation must test existing +institutions by their present results. + +§ 6. #Limitations of private property#. It is well, in discussing +private property, to rid the mind at once of the idea that it is an +absolute and unchanging thing. Few realize the manifold ways in which +property rights are limited. Unmodified private control of property is +unknown; the public makes many reservations in its own interest. There +is, first, a whole set of limitations to prevent nuisances. An owner +in many situations is not free to build a slaughter-house or to start +a glue-factory on his land. Property is governed by general public +utility, and anything that threatens to become a nuisance or a danger +may be excluded. Under the right of "eminent domain," the state or the +railroad takes the old homestead from the owner who would live and die +there. + +Altho pecuniary damages are paid to him, this is a limitation of his +property rights. Rights of way on property exist either by contract +or by prescription permitting its public use. Most important of all +limitations is the right of taxation, by which society takes more or +less of private incomes for purposes of which the individual owners +may not approve. + +The law enforces a multitude of private claims by some persons against +others. A variety of rights called easements or servitudes may attach +to private property, modifying its exclusive use. Leases for any +period are a limitation of the owner's control. Both the holder of +the lease and the owner of the property have certain rights before the +law. The lender of money secured by mortgage has a legally recognized +and enforceable interest in the mortgaged wealth. Property is left in +trust for the benefit of persons or of institutions or of the public, +and is administered by trustees who are strictly bound to execute the +terms of their instructions. Contracts of many sorts are entered +into by owners, limiting their control in manifold ways, and the +law enforces these contracts. These all form a complex of equitable +claims, which together equal in value one undivided property right, +which in turn equals the value of the wealth.[4] + +§ 7. #Limitations of bequest and inheritance#. The term bequest +implies a will, usually a written will in which the person, in +anticipation of death, expresses his wishes as to the disposition of +his property. It is said sometimes that bequest is a "logical" result +of private property, but the law does not treat it as such. The +right of bequest, or of gift at death, is limited in various ways +in different countries. In countries where hereditary aristocracies +exist, primogeniture is in some cases required by law, in others +so strongly favored by public opinion that it is practically always +followed. Custom limits bequests in England to members of the family, +and wills given outside the family are rare, and are almost always +broken in the courts. John Stuart Mill contrasted this with the +practice in America, frequent even in his day and still more frequent +now, of rich men giving for public purposes. In France the right of +bequest outside the family is legally limited; only the share of one +child can be willed away by the father, and the rest must be equally +divided among the children. Settlements and _fidei commissa_ are +limited in many countries, because of the recognized social evils +resulting from the tying up of estates for generations. Throughout the +history of England, Parliament has given attention to the question of +mortmain, which chiefly concerned the drifting of great estates into +the hands of the church or of corporations, as the result of bequests +by the pious. In England, of late (and to a less extent in this +country), the policy of permitting unlimited endowments to charitable +institutions has been seriously questioned, and by legislation some +of the old endowments have been diverted from their original purposes +when these have ceased to be of social utility. Inheritance, in +contrast with bequest, usually means succession to the property of +one who has died intestate, that is, has made no will. The law of +inheritance likewise varies greatly with time and place. + +§ 8. #Social expediency of private property#. In the light of present +political philosophy the explanation and justification of private +property must be on grounds of social expediency. This is a broad +explanation and it has the fault of a broad explanation, that it needs +to be further explained. Under it can be brought the many varying +conditions. Even if private property works hardship to individuals in +many cases, yet it may be justified if, on the whole, it is best for +the progress of society. Laws must be judged by their average working, +not by exceptional cases. In general, the system of private property +must be judged by this test: Does it further the welfare of the nation +better than would any alternative plan for the control of economic +wealth? The question is not whether it is faultless, for no human +institution is so. Nor must it be assumed that the rule of property +needs to be uniform in respect to all kinds of wealth. There are +many kinds of property, and the test may be applied separately to the +different forms and to the varying degrees of property rights. The +varied and often strict limitations of property mentioned above are +all determined by some thought, wise or foolish, of social expediency. +Different parts of wealth may be treated in different ways: there may +be private property in wagons, and public property in roads; private +property in houses, and public property in forests; private property +in automobiles, and public property in railway carriages. But any rule +of property, like any other workable human law, must be applicable to +all individuals that meet the conditions. + +The very acceptance of the theory of social expediency implies the +need of frequent readjustment of the institution of private property. +The essential thought in the various attacks on the institution of +property is that, because it either causes or makes possible the +inequality of incomes, it is not socially expedient. Private property, +as it is found to-day, is complicated by many historical accidents. +Survivals of ancient injustice and relics of feudal institutions that +rest on no vital reason remain in our new country as well as in the +older ones. The limits of property in many respects are determined not +according to the logic of expediency, but by the social inertia which +often governs successive generations. + +The question is raised in many minds: If private property is not an +absolute right, what shall be its limits? What changes should be made +in it? These questions put the greatest economico-political problem of +our day, one that contains within it, indeed, many minor problems. A +number of these will receive attention in the following pages. + +§ 9. #The monetary economy#. So greatly does the use of money +facilitate the transfer, buying, and selling of private property and +so closely are property and pecuniary trade connected in practice and +in the thoughts of men, that every radical proposal to abolish private +property has included a plan to do away with money also. But money and +private property are not essentially and logically bound up together, +for a certain measure of private property always has been found where +money was little or not at all used. True, if there were absolutely no +private property, there would be little use for money, altho it might +still be used as a form of counter by the communistic state. We have +already seen[5] how a monetary unit comes into use, and we shall treat +more fully of the nature of money in later chapters. We may note here +merely that the use of money is an outstanding feature of the present +economic system and gives rise to many of the problems of political +economy. + +§ 10. #The competitive system#. The existing system is likewise +characterized by competition[6] in the buying and selling of wealth +and of the usances and services of economic agents. By competition we +mean here the condition of political freedom on the part of each man +to trade his property (goods, uses, or services) as he chooses, and +this combined with the disposition on his part to get what he +values most highly for himself and his family. Whenever any one else +(official or citizen) forbids and prevents a man from getting all he +can, in so far competition is limited. Whenever any one is deterred by +fear of, or by affection for, some other trader, from getting all he +can, in so far competition is limited. Whenever any one conspires with +another trader to act together with him to withdraw or to alter his +bid, in so far competition is limited. Private property and economic +competition do not merely happen to exist side by side, forming more +or less favored conditions each for the other; they are essentially +connected.[7] + +It is not our task at this point to present the advantages and +disadvantages of competition, but merely to indicate its important +place in the actual economic world. Like private property, competition +is not the universal feature of our present system, but it is the most +general and characteristic method of valuation, of price fixing, and +of trade. + +§ 11. #Limitation of competition by custom.#[8] The relatively large +influence of competition in present society appears more plainly in +comparing the present system with that of an earlier state of society +or with that of a present savage tribe. A member of the lowest human +societies is subject to law; tho he is a savage he is not "untutored." +On the contrary he is bound in many ways to follow customary lines +of conduct, and a large part of his time is given to learning the +traditions and then to observing the ceremonials of the tribe. +Primitive customs always take on a religious sanction, and every +member of the tribe is piously bound to do as his fathers have done +and as his neighbors are doing. This limitation applies to the choice +of food to eat, clothes to wear, time to hunt, plant, and harvest, +weapons and tools to use, where and how to trade, how much to give or +take, and to countless other details of economic choice. So, in early +society, economic relations were complex and but slowly changing from +generation to generation. Custom, rather than competition, ruled in +manifold ways the economic actions of men. + +Custom continued to rule a large share of the individual life of the +peoples of northern Europe through barbarian and feudal times. Its +force has gradually decreased, but even yet is not entirely set aside. +Political and economic interests were not clearly distinct in the +Middle Ages. Land was the all-important kind of wealth. Military +and other public services were performed by the higher landlords (as +vassals of their overlords) who in this way paid at the same time what +we to-day would call rent and taxes. The landlord in turn received +from his underlings services and goods in kind (food and supplies) and +so (in modern eyes) was both a collector of taxes and a receiver of +rent. The rent, however, was not a competitive price, but consisted +of the dues and services which the forefathers had been accustomed to +pay. In many ways also in the towns, close organizations of craftsmen +and of merchants regulated prices and kept others out of their +industries. Industrial privilege pervaded the life of that time. + +Yet through all the Middle Ages ran the forces of competition. The +inefficiency of customary services and the high prices charged +by selfish privilege were constant invitations to men to become +competitors. Men strove to break over the barriers of custom and of +prejudice. Their efforts to attain freedom to compete was the vital +force of the time. The industrial history of the Middle Ages was +largely the story of the struggle of the forces of competition against +the bonds of custom and privilege. + +§ 12. #Effect of modern forces upon custom#. The industrial events +following the discovery of America strengthened the forces making for +economic freedom. Discoveries in the Western hemisphere opened up a +wide field for the adventure and enterprise of Europe. Commerce is the +strongest enemy of custom, and new opportunities gave a rude shock to +the conservatism both of the manor and of the village. With the rapid +growth of industry and manufactures, old methods broke down. In an +open market custom declines; it flourishes best in sheltered places. +Further, the movement of thought in the Reformation, and the spirit +of the times which expressed the principle of personal liberty +and allowed the individual to follow his own opinions and take the +consequences, were favorable to competition. Despite these facts, the +restraints of the national governments on trade continued great, +in some respects increasing during the seventeenth and eighteenth +centuries, in France, Holland, and England. The regulation before +attempted by towns and villages was employed on a larger scale by +national governments with their industrial systems. The colonies in +America were used for the economic ends of the "mother country" +and for the selfish interests of the home merchants in Europe. The +American Revolution was one of the bitter fruits of the English policy +of trade restriction. + +§ 13. #Adam Smith's influence#. "The Wealth of Nations," the first +great work on political economy, was published in the year 1776. That +was the "psychological moment" for its appearance, as public thought +was so prepared for it that it had its maximum possible influence. +The year of the American Declaration of Independence gave the most +striking object lesson on the evils of a selfish colonial policy that +interfered on a grand scale with economic freedom. The old customs had +become ill fitted to life, ill adapted to the rapid industrial changes +that were going on. What was needed in many directions, both +in politics and in industry, was merely negative action by the +government, the repeal of the old laws, the overthrow of old abuses. +The French Revolution, following a few years later, emphasized this +thought in the political field. The philosophers of the time believed +in a "natural law" in industry and politics. The reformers of the +time wished to throw off the trammels of the past and to give men +opportunity to exert themselves "naturally." In America the old abuses +never had taken deep root, as the conditions of a new continent were +not favorable to monopoly and privilege. Altho the movement for the +repeal of medieval laws has continued in Europe from 1776 till the +present time, yet custom still is stronger to-day in Europe than +in America. Serfdom was not abolished until the first half of the +nineteenth century in Austria and southeastern Europe, and not until +the last half in Russia. Many economic and cultured forces furthered +this movement, but the most powerful intellectual force in its favor +was the work of Adam Smith. So strong an impression did Smith's book +make, that in the minds of men "free trade" became almost identical +in thought with political economy, whereas that was but the temporary +economic problem of the eighteenth century. + +Many men then thought that in "free and unlimited competition" had +been found a solution of all economic problems for all time. But soon, +it was apparent that it was no such simple and absolute solution. +Indeed many of the present economic problems--in one sense all of +them--center around this one: to determine the proper forms and limits +of competition. The varied aspects that this problem takes will appear +in every portion of the following pages. + +§ 14. #The wage-system.# Viewed in another aspect the present economic +and social order is called the wage-system.[9] The wage-contract, like +the use of money, is not essential to the existence of a system of +private property. Communities such as the American colonies and as +many of the newly settled states, may consist almost entirely of +self-employed owners of land. Bulgaria, before the Balkan wars called +the peasant state, presented this organization (tho of course with +some wage-payment), as did also its neighbor Serbia. But given the +institution of private property with competition (freedom to buy +and sell), let manufactures and commerce develop to any extent, +and inequalities of fortunes increase while an increasing number of +persons work for wages. It is noteworthy that as this goes on (as +it has done in America at an increasing rate since the middle of the +nineteenth century) it is the agricultural and rural hand industries +that continue to be mainly worked by owner-managers and workers, +while it is the manufacturing, transporting, and large commercial +enterprises in which the labor is done for wages. The acceptance of +the wage-system thus far has been the inevitable price to be paid +for manufacturing and industrial development; and one of our economic +problems is to determine whether this must continue, and if so, +whether in the same measure as in the past. + + +[Footnote 1: The exceptions are probably unstated amounts of exempt +real estate (owned by municipalities, state, and nation), some of the +irrigation plants, part of the canals, and that part of the gold and +silver which is in the public treasury.] + +[Footnote 2: See Vol. I, pp. 264-267. The law makes between property +rights and equitable rights some subtle distinctions, which have their +reason in the history, if not in the logic, of the law but which are +not essential to economic discussion. In some states this distinction +has been in large measure abolished. What interests us are the rights +(claims) that men have to the control of wealth and services, whether +by technical law these are called legal or equitable, and this right +is what is meant by "property" in our discussion of it.] + +[Footnote: 3 This confusion has had important practical consequences +in the field of taxation. See Vol. I, pp. 265-267, and below, ch. 17.] + +[Footnote 4: These claims mutually delimit each other (whether they be +called equitable claims, or liens, or property rights), and wealth +is not multiplied by multiplying the claims, as is unfortunately +sometimes assumed to be the case. See above, sec. 3.] + +[Footnote 5: See Vol. I, p. 51.] + +[Footnote 6: See Vol. I, p. 73.] + +[Footnote 7: This will appear in comparing the competitive method of +distribution with other methods in ch. 31.] + +[Footnote 8: See Vol. I, p. 143, on medieval land tenures; p. 158, on +customary rents; p. 190, on the effect of caste.] + +[Footnote 9: See Vol. I, p. 227.] + + + + +PART II + + +MONEY AND PRICES + + + + +CHAPTER 3 + +NATURE, USE, AND COINAGE OF MONEY + + § 1. Origin of money. § 2. Qualities of the original money-goods. + § 3. Industrial changes and the forms of money. § 4. The precious + metals as money. § 5. Gold-using countries. § 6. Varying extent of + the use of money. § 7. Money defined and reviewed. § 8. Metal money + without or with coinage. § 9. Technical features of coinage. § 10. + Seigniorage defined. + + +§ 1. #Origin of money#. Everywhere in the world where the beginnings +of regular trade have appeared, some one of the articles of trade soon +has come to be taken by many traders who did not expect to keep or use +it themselves, but to pass it along in another trade.[1] This made it +money, for money is whatever comes to be used as a general price-good. +The character of a _general_ price good clearly distinguishes money +from goods bought and sold by a particular class of merchants, such +as grain, cattle, etc., to be sold again. It is only in so far as a +particular good comes to be taken by persons not specially dealing in +it, taken for the purpose of using it as a price-good to get something +else which they desire, that a thing has the character of money. The +thing called money thus is a durative good passing from hand to hand +in a community, and completing its use in turn to each possessor of it +only as he parts with it. + +The use of money is of such social importance, that it would be +impossible for modern industrial society to exist without it. The +discussion of money touches many interests, it raises many questions +of a political and of an ethical nature. There are perhaps more +popular errors on this than on any other one subject in economics, but +the general principles of money are as fully understood and as firmly +established as are any parts of economics. + +§ 2. #Qualities of the original money-good#. The selection of any +money-commodity has not been mere chance, but has been the result of +that object being better fitted than others to serve as a medium of +exchange. The main qualities that affected the selection of primitive +form of money were as follows: 1. Marketability (or saleability); that +is, it must be easy to sell. The first forms of money had to be things +which every one desired at some time and many people desired at any +time. That was the essential quality that made any one ready to take +it even when he did not wish to use it himself. Many kinds of food and +of clothing are very generally desired goods. But few of these classes +of goods have in a high measure certain other important qualities, now +to be named. + +2. Transportability; that is, the money material must be easy to +carry, it must have a large value in small bulk and weight. To carry +a bag of wheat on one's back a few miles requires as great an effort +ordinarily as does the raising of the wheat, and the cost of carriage +for fifty miles even by wagon will often equal the whole value of the +wheat. Cattle, while not comparatively very valuable in proportion to +weight, and not possessing the other qualities of money in the highest +degree, have the advantage that they can be made to carry themselves +long distances, and therefore they have been much used as money in +simpler economic conditions. + +3. Cognizability; that is, the money-good must be easy to know, and +to judge as to quality. If expert knowledge or special apparatus are +needed to test it in order to avoid counterfeits, few could be ready +to take it and trading would be a costly process. + +4. Durability; that is, the money-good must be easy to keep without +much loss in amount or in quality, perhaps for long periods, until it +can be passed on in trade. Few kinds of food answer very well to this +last requirement, being organic and perishable. But all four qualities +above named were pretty well embodied in primitive times in rock salt, +in rare flints and bits of copper suitable for tools and weapons, +in furs in northern countries, and in many articles of personal +adornment, such as beads, feathers, jewels, and metal ornaments. + +5. Divisibility; that is, the quality in the monetary material that +permits it to be divided easily into smaller amounts and then to be +united again into larger masses at little cost and without loss in +amount or in quality. This quality is present only when the material +is quite homogeneous throughout the whole mass, a condition fulfilled +more completely by the metals than by any other goods. This quality +makes it possible to put the governmental stamp upon the money +material, and to produce pieces, some of which are exact duplicates +and some exact multiples, of others. In this manner pieces of money +are provided suitable for transactions of different magnitudes, down +to small fractional amounts. A monetary system of this kind aids +greatly the development of the sense and habit of exact estimation of +price. + +§ 3. #Industrial changes and the forms of money#. The money use, as +has just been shown, is a resultant of a number of different motives +in men. The changing material and industrial conditions of society +change the kind of money that is used. Things that have the highest +claim to fitness for money with a people at one stage of development +have a low claim at another. The final choice of the money-good +depends on the resultant of all the advantages. Shells are used for +ornament in poor communities but cease to be so used in a higher state +of advancement, and thus their saleability ceases. Furs cease to be +generally marketable in northern climes, when the fur-bearing animals +are nearly killed off and the fur trade declines. When tobacco was the +great staple of export from Virginia, everybody was willing to take +it, and its market price was known by all. It served well then as the +chief money, but, as it ceased to be the almost exclusive product +of the province, it lost the knowableness and marketability it had +before. In agricultural and pastoral communities where every one had +a share in the pasture, cattle were a fairly convenient form of money, +but in the city trade of to-day their use as money is impossible. +Thus, in a sense, different commodities compete, each trying to prove +its fitness to be a medium of trade; but only one, or two, or three at +the most, can at one time hold such a place. + +While industrial changes and conditions affect the choice of money, in +turn money reacts upon the other industrial conditions. If a new and +more convenient material is found or the value of the money metal +changes to a degree that affects the generalness of its use, industry +is greatly affected. The discovery of mines in America brought into +Europe in the sixteenth century a great supply of the precious metals, +and this change in the use of money reacted powerfully upon industry. +Money, being itself one of the most important of the industrial +conditions, is affected by and in turn affects all others. + +§ 4. #The precious metals as money#. Certain of the metals early began +to show their superior fitness to perform the monetary function. The +metals first used as money were copper, bronze (an alloy of copper +with nickel), and iron. These were truly precious metals in +early times for they were found only in small quantities in a few +localities. They, therefore, were widely sought and highly valued as +ornaments and for use as tools and weapons. But as the great ancient +nations emerged into history, these materials were already being +displaced in large measure. Their value fell greatly as a result of +greater production due to somewhat regular mining. As wealth grew, as +trade increased, as the use of money developed, as commerce extended +to more distant lands, the heavier, less precious metals failed +to serve the growing monetary need, especially in the larger +transactions. Silver and gold, step by step, often making little +progress in a century, became the staple and dominant forms of money +in the world, while copper and nickel still continued to be used for +the smaller monetary pieces. Every community has witnessed some stages +of this evolution. In this contest silver had proved itself a few +centuries ago to be on the whole the fittest medium of exchange for +most purposes, though gold was at the same time in use in larger +transactions and in international trade. + +§ 5. #Gold-using countries#. At the beginning of the nineteenth +century nations were divided, in accordance with the metals they used +as standards, into two great groups, silver- and gold-using. Since +that time, and more rapidly after 1850, gold has displaced silver as +the standard money. In a higher degree than any other one material, +gold has the qualities of a good standard for rich and industrially +developed communities. England for a long period practically has had +gold as its standard money; the United States since 1834 (except for +the period of paper money from 1862 to 1879); France since about 1879, +having shifted gradually from silver, after 1855, under the working +of the bimetallic law; Germany since 1873; and Japan since the later +nineties. Other countries have been striving to attain it. Since +about 1890 some states (including Mexico) and some of the colonial +possessions of the great nations (including India and the Philippines) +have adopted the plan of "the gold-exchange standard." By this plan +gold is the standard price unit, while silver continues to be used +all but exclusively as the material in circulation, its amount being +controlled and its value regulated on principles to be explained below +under coinage, seigniorage, and foreign exchange. There are now left +but a few silver-standard countries, the most important being China. +There are, however, numerous countries, notably in South America and +Central America, which have fiduciary paper-money standards.[2] + +§ 6.# Varying extent of the use of money#. Trade by the use of money +at no time has become the exclusive method. Barter still lingers +to-day.[3] The extent to which, on an average, money is used in +different parts of the world differs widely. The use of money in +Siberia is less than in European Russia, and its use is less there +than in western Europe. The use of money as compared with barter is +generally much greater in the cities than in the rural districts. In +the cities of Mexico not only money, but banks and credit agencies are +in general use; whereas the rural districts are more backward and make +far more use of barter than is the case in the United States. At the +ports in the cities of China, India, and South America the use of +money may be very like that in European cities; but go a little way +into the interior of these countries and conditions as to the use of +money change greatly. + +However, the comparative per capita amounts of money (in terms of +American dollars) in circulation in different countries is far +from being a true index of their industrial development or of their +commercial activity. Indeed, beyond a certain point the larger average +amount of money in circulation in a country may indicate backwardness +in the development of banks and other credit agencies rather than +greater amount of wealth or of business. Notice, for example, the +medium position of the great commercial countries, Germany and the +United Kingdom, as compared with other countries above and below them +in the following list. + +PER CAPITA CIRCULATION OF MONEY IN LEADING COUNTRIES DECEMBER 31, +1912. + + France..................$48.91 America (U.S.)..........$32.98 + + Australia............... 38.45 Portugal................ 29.46 + + Canada.................. 33.57 Netherlands............. 26.86 + + Switzerland............. 24.32 Mexico.................. 9.17 + + Germany................. 21.36 Finland................. 8.38 + + United Kingdom.......... 21.21 Chile................... 8.24 + + Spain................... 19.96 Turkey.................. 7.09 + + Brazil.................. 18.79 Russia.................. 6.45 + + Denmark................. 17.73 Japan................... 5.68 + + Belgium................. 15.83 Bulgaria................ 5.57 + + Austria-Hungary......... 14.68 Serbia.................. 5.49 + + Rumania................. 13.24 Venezuela............... 5.51 + + Italy................... 13.09 India (British)......... 5.19 + + South Africa............ 12.93 Ecuador................. 4.62 + + Norway.................. 12.50 Peru.................... 3.17 + + Sweden.................. 11.59 Colombia................ 2.32 + + Greece.................. 11.02 Paraguay................ .57 + +7. #Money defined and reviewed#. Money may be defined as a material +means of payment and medium of trade, generally accepted as the +price-good and passing from hand to hand. The definition contains +several ideas. The words "generally accepted" imply that money has a +peculiar social character, is not an ordinary good. As a price-good, +money itself must be a thing having value, otherwise it could not be +accepted. Trade means the taking and giving of things of value. Money +is, therefore, not merely an order for goods, as a card or paper +requesting payment; it is itself a thing of value (tho this value may +be due partly or solely to its possessing the money function). Such +things as a telegram when transferring an order for the payment of +money, as the spoken word, and as a mere promise to pay, are not +money. Even checks and drafts are merely substitutes for money. Money +passes from hand to hand, is a thing that can be handled, and is or +can be bodily transported. + +The application of the definition is not always easy, for money shades +off into other things that serve the same purpose and are related in +nature. In many problems money appears to be at the same time like +and unlike other things of value, and just wherein lies the difference +often is difficult to determine. Even special students differ as to +the border-line of the concept, but as to the general nature of money +there is essential agreement. + +8.# Metal money without or with coinage#. In antiquity the metals +were used as money in bulk; that is, the amount was weighed at each +transaction and the quality was tested whenever there was doubt.[4] +In countries industrially backward, payments are still made in this +manner. For some time after the discovery of gold in California, gold +dust was roughly measured out on the thumb-nail. In shipments of gold +to-day by bankers to settle international balances, metal may be in +the form of bars that bear the mark of some well-known banking house. +In all of the cases of this kind the gold is money in fact, but not by +virtue of any act of government. The metal is simply a valuable good, +the receiver of which values it according to its weight and fineness. +This is true even when the government mint, for a small charge, tests +and stamps the bars at the request of citizens. + +Very early it became the practice of governments to shape and stamp +pieces of metal to be used as money, so as to indicate their weight +and fineness. The act of shaping and marking metal for this purpose is +called coinage.[5] The coinage by government had notable advantages in +giving to the monetary units uniformity of size, fineness, and value, +with the stamp that was readily recognized. But in its simplest form +coinage in no way changed the value of the money, and any other mark +equally plain put upon it would have served equally well, if only it +had carried with it equal assurance of the quality and weight of the +metal. + +9. #Technical features of coinage#. For each kind of metal money there +is an established _ratio of fineness_ for the more precious material, +which is mixed with baser metals used as alloys. In the United States +all gold and silver coins are made nine-tenths fine; in Great Britain, +eleven-twelfths. The established weight of the gold dollar in the +United States is 25.8 grains of standard gold which contain 23.22 +grains of fine gold. The _limit of tolerance_ is the variation either +above or below the standard weight or fineness that a coin is allowed +to have when it leaves the mint. This is different for each of the +principal coins, being about one-fifth of one per cent on a gold +eagle. The _par of exchange_ between standard coins of different +countries is the expression of the ratio of fine metal in them. +Thus the par of exchange between the American dollar and the English +sovereign (the "pound") is 4.866; that is, that number of dollars +contains the same amount of fine gold as an English gold sovereign. +The embossed design is merely to make the coins easily recognizable +and difficult to counterfeit; and milled or lettered edges are to +prevent clipping and otherwise abstracting metal from the coins. + +10. #Seigniorage defined#. Coinage, as practised by early governments +and rulers, came to be a function of great importance politically as +well as economically. The right to issue money came to be one of +the most essential prerogatives of sovereignty. The prince, king, or +emperor stamped his own device or portrait upon the coin; hence the +term seigniorage from _seignior_ (meaning lord or ruler). Seigniorage +meant primarily the right the ruler, or the estate, has to charge +for coinage, and hence it has come to mean also the charge made for +coinage, and often, in a still broader sense, the profit made by the +government in issuing any kind of money with a value higher than that +of the materials (whether metal or paper) composing it. Coinage is +rarely without charge, and often has been a source of revenue to the +ruler. In antiquity and in the Middle Ages this right was frequently +exercised by princes for their selfish advantage to the injury and +unsettling of trade. This introduced a very great problem of value +into the use of money. + +The coinage is said to be _gratuitous_ when no charge is made for +coinage. Coinage is said to be _free_ if the subject or citizen +may take bullion to the mint whenever he pleases, paying the +usual seigniorage. Coinage is _limited_ if the government or ruler +determines when coinage is to take place. Thus, coinage may be both +free and gratuitous, when citizens are allowed to bring bullion +whenever they please and have it converted into coins without charge +or deduction. But coinage is free without being gratuitous when any +citizen may bring metal to the mint, whenever he chooses, to be coined +subject to the seigniorage charge. + + +[Footnote 1: See Vol. I, pp. 15-16 and 50-53 for an introductory +statement of the origin of money in connection with markets.] + +[Footnote 2: See ch. 5.] + +[Footnote 3: See Vol. I, p. 43, on the decline of barter.] + +[Footnote 4: "I will ... refine them as silver is refined, and will +try them as gold is tried." Zech. xiii, 9. "I bought the field ... +and weighed him the money, even seventeen shekels of silver. And I ... +weighed him the money in the balances." Jer. xxxii, 9, 10. A shekel +was 224 grains, troy weight, which is about equal to six-tenths of the +pure metal in a silver dollar to-day and worth now about twenty-four +cents in gold. At that time, however, the purchasing power of silver +was many times greater than it now is.] + +[Footnote 5: From the French _coin_, in turn from Latin _cuneus_, +wedge, suggestive either of an earlier wedge-shaped piece, or of a +wedge-shaped mark on the piece. The German word _Münze_ is from the +Latin _moneta_ (as is the English _mint_, the place where coins are +made), which meant money, that name being taken from the temple of +Juno, called _Moneta_, where coins were made.] + + + + +CHAPTER 4 + +THE VALUE OF MONEY + + § 1. Standard-commodity money. § 2. Alternative uses of the money-good. + § 3. Money as a valuable tool. § 4. Relative importance of + money. § 5. Concept of the individual monetary demand. § 6. Concept + of the community's monetary demand. § 7. The money-material in + its commodity uses. § 8. The general level of prices. § 9. Effect of + increasing gold production. § 10. The quantity theory of money. § 11. + Interpretation of the quantity theory. § 12. Practical application of + the quantity theory. + + +§ 1. #Standard-commodity money#. The actual money in use in almost +every country to-day consists of a wide and confusing variety: gold, +silver, nickel, copper, paper in various forms, issued by various +authorities under various conditions as to amount and as to +seigniorage. But among all the kinds, in each country some one kind +is found standing preëminent and in a peculiar position, as the +_standard_ money to which the value of all the other kinds of money is +in some manner adjusted. Usually this standard money is composed of +a material (gold or silver) which is a commodity; but there are +many examples of paper money being for the time the standard. The +difficulties of the money problem must be attacked at the point +of standard-commodity money, where it is nearest to ordinary value +problems and is less complicated than when the various other kinds of +money and the various money substitutes are included. + +We mean by standard money that kind, no matter what its form, which +serves in any country as the unit in which the value of other kinds of +money is expressed. The standard usually is a quantity of metal of a +certain weight and fineness, which, as a commodity, has a value also +in industrial uses. Coins of this standard are called full, or real, +money by some writers that deny the title of money to everything else. + +§ 2. #Alternative uses of the money-good.# Let us consider the +problem of money-value as it would present itself if only one kind of +commodity money were in use. This doubtless was in large measure, +if not entirely, the case for a time in early societies after one +material had proved itself to be the best suited for the purpose. The +history of many kinds of money may, we have seen, be traced back to +a point where they were not money, but commodities with a direct +value-in-use. Such were ornaments, shells, furs, feathers, salt, +cattle, fish, game, and tobacco. Each of these materials has, in each +situation, a value which is the reflection of its power to appeal +to choice. Now, if to the commodity-use is added the money-use, this +increases the demand for that good. No new theory is required to +explain the value of a commodity as it gradually acquires the added +use of a medium of trade. The money use is one that works no physical +or visible change in goods except a slight unavoidable abrasion, and +at any time a person receiving a piece of commodity money may retain +it for its use-value, as food, ornament, tool, or weapon, or may +retain it for a time and then spend it as money. This case of value is +no more difficult than that of anything else having two or more uses. +For example, cattle are used for milk, for meat, and as beasts of +burden. Each of these uses is logically independent as a cause +of value, yet all are mutually related, the value of cattle to a +particular person being determined by the consideration of all the +uses united into one scale of varying gratification. + +§ 3. #Money as a valuable tool.# Money is often, by a figure of +speech, called a tool. A tool is a piece of material taken into the +hand to apply force to other things, to shape them or move them. +Figuratively, this is what money does. A man takes it not to get +enjoyment out of it directly, but to apply force, to move something, +and that which he moves is the other commodity. Money thus (as money) +is always an indirect agent. Adam Smith aptly likened money to the +roads and wagons that transport goods, thus gratifying desires by +putting goods into more convenient places. The fundamental use that +money serves is to apportion one's income conveniently as it accrues +and as it is spent. The use of money increases the value of goods by +increasing the ease with which trade takes place. Like any tool or +agent, money is valued for what it does or helps to do. It enhances +the value of the goods that it buys and sells by dividing them into +quantities convenient for use and by making them available at +the right times. In the light of the principles of diminishing +gratification and of time-preference it is clear that the amounts in +which, and the times at which, goods are available have an essential +bearing on their values. Money is the most successful device ever +discovered for distributing the supplies of a journey along its +course, and the goods of daily need over a period of time. The use of +money as a storehouse of value by hoarding it is merely a more extreme +case of keeping income until a time when it will have a greater value +to the owner than it has in the present.[1] + +§ 4. #Relative importance of money.# Because money is the general +expression of purchasing power, and comes to symbolize all other +wealth, it often assumes undue and exaggerated importance in men's +eyes. Money is but one of many forms of wealth. It constitutes but a +small percentage of the total wealth of a country, and it is far from +being the most indispensable to human welfare. Yet its importance, +as a whole, in determining the form of industrial organization is +enormous. In a society without money, industrial processes would be +very different, and trade would be hampered in manifold ways. + +A poor community has little money because it cannot afford more; it +gets along with less money than is convenient just as it gets along +with fewer agents of every other kind that it could use. Pioneers in a +poor community where the average wealth is low cannot afford to keep +a large number of wagons, plows, good roads, or schoolhouses. If the +members of the community were wealthy enough each would have more +of these and of other things, and the sum total of money would be +greater. Great as is the convenience of money, poorer communities have +to do with little of it. It is, therefore, a confusion of cause and +effect when poor communities imagine that their poverty is due to lack +of money. + +§ 5. #Concept of the individual monetary demand.# Let us now seek +to get in mind the idea of an _individual monetary demand,_ as that +amount of money which at any time is required by an individual to make +his purchases in expending his income. Every man may be thought of +as having an average monetary demand, or his average individual cash +reserve, throughout a period. A man with a salary of $50 a month +paid monthly has ordinarily a maximum monetary demand of $50. If his +expenditures are made in two equal parts, the one on pay-day, the +other thirty days later, his average monetary demand during the month +is a little over $25. If most of his purchasing is done in the first +week of the month, his average monetary demand may be perhaps $10. +Many a workman purchases on credit, running accounts at the stores for +a month. Then on pay day he spends his entire month's wages the day +he receives it, and goes without money for the rest of the month. His +average monetary demand throughout the month would then be about +equal to one day's wages. Evidently any person's cash reserve may +be expressed as that proportion of his income that is to him of more +value retained in money form for any period than if at once expended. + +In this conception of the individual monetary demand, must, however, +be included not merely the demands of retail purchasers, made by +themselves, but also those of all agencies such as merchants, bankers, +and transportation companies, serving the needs of ultimate consumers +of goods. The use of money may be necessary several times before a +commodity completes its journey from producer to consumer. + +Of two persons whose expenditures of money are of the same kind and +made at the same rate, the one having the larger amount of purchases +to make has the larger monetary demand. But the amount of purchases +does not always vary directly with the amount of real income[2]; for +example, a farmer and a village mechanic may have at their disposal +incomes equal in the quantities of goods, such as food, fuel, +clothing, and house-uses (worth, let us say, $1000 for each), but the +farmer would be getting a larger part of his goods directly from his +farm and by his own labor, while the mechanic would be getting first +a money income to be expended afterward for food, clothing, and rent. +The mechanic would in this case have an average monetary demand much +larger than the farmer. + +We see thus that a person's monetary demand at any time is that amount +of money which rests in his possession as the necessary condition to +making his purchases as he desires. Individual monetary demand varies +in proportion directly to the delay, and inversely to the rapidity +with which the individual passes the money on; and directly to +the amount of the person's income that is received and expended in +monetary form. + +§ 6. #Concept of the community's monetary demand.# The monetary demand +of a community at a given time is the sum of the monetary demands of +the various individuals and enterprises. It is that stock of money +which is necessarily present to effect the exchanges of the community +in the prevailing manner at the existing price level. A single +dollar as it circulates helps to supply the monetary demand of many +individuals in turn: the more quickly each person spends the piece +of money he receives, the greater its rapidity of circulation. Let us +suppose that every piece of money passed from one person to another +once each day. Then a dollar would, in the course of a business year +(about 300 days), serve to buy (and at the same time to sell) $300 +worth of goods. If the average purchases of each individual amounted +to $1000 a year, the average monetary demand of each would be about +3-1/3 dollars. + +But every moment beyond the average time that any one kept money would +increase his monetary demand. If he delayed a day, a week, or a +month in spending the money, waiting until he could buy in some other +market, or until a better time to buy, he would thus increase insomuch +the amount of money needed to make the trade (on that scale of +prices). It requires more slow dollars than swift dollars to make a +given volume of purchases. + +Evidently the times of maximum monetary demand of the different +individuals do not coincide; rather they alternate with each other, +and the community's total monetary demand at a given time is a +composite of the many individual variations. The amount of money that +will remain in circulation in a community depends on several factors, +the chief among them being the amount of goods to exchange, the +methods of exchange, and the prevailing scale of prices. The amount +of goods to be exchanged may change even when the amount produced is +unaltered (e.g., a change from agricultural to industrial conditions). +The methods of exchange may alter so as to require either more money +(e.g., cash instead of credit business), or less money (e.g., use of +bank checks displacing use of money by individuals). Or, apart from +the other factors, the scale of prices may change as the conditions of +gold and silver production are altered. The interrelations of gold +and silver production, paper money issues, banking growth, and +money-inflow and outflow in foreign exchanges give rise to the most +interesting and important problems in the field of monetary theory. + +§ 7. #The money-material in its commodity uses#. We are now prepared +to take up the question: What determines the ratio at which money +exchanges for other goods? And, as money comes to be the unit in which +prices are generally expressed, the question becomes: What determines +the general level of monetary prices? We have this problem in its +simplest form in the case of a commodity-money such as gold. It may be +looked upon merely as so much precious metal. The problem of its value +as bullion is the same as that of the value of pig iron or of zinc, +of meat or of potatoes. There is here no special monetary problem. +The value of gold as bullion and its value as money are kept in +equilibrium by choice and by substitution. The several uses of gold +are constantly competing for it: its uses for rings, pens, ornaments, +championship cups, photography, dentistry, delicate instruments, and +as a circulating medium. If the metal becomes worth more in any one +use, its amount is increased there and is correspondingly diminished +in other uses.[3] + +When coinage is free and gratuitous[4] the standard money is a +commodity. Such coinage is essentially but the stamp and certificate +that the coin contains a certain weight and fineness of metal. Where +coinage is free and gratuitous each coin will be worth the same as the +bullion that is in it so far as the citizens exercise their choice. +They will not long keep uncoined metal in their possession when it is +worth more in the form of money, nor will they long keep money from +the melting-pot when it is worth more as bullion. Yet there may be +a slight disparity between the bullion value and the monetary value +before the metal is converted into coin or the coin melted down into +metal. + +This adjustment of the value of commodity-money to other things is +made also on the side of supply, in the use of labor and material +agents to produce the precious metals and to produce other things. +Gold-mining, for example, is one among various industries to which men +may apply their labor and their available material agents. Some mines +are superior, others medium, others marginal which it barely pays +to work. There is, therefore, a rise and fall of the margin of +gold production with changes in prices and changes in the cost of +production. Large new deposits of gold are discovered from time to +time and new methods of extracting gold are invented. If, when it +barely pays to work a mine, such changes occur, gold becomes worth +less, and the poorer mines eventually must go out of use. As gold +rises in value some abandoned mines again come into use. A similar +variation may be noted in the utilization of marginal land, marginal +factories, marginal forges, and marginal agents of every kind.[5] + +§ 8. #The general level of prices#. We come now to a more peculiar +aspect of the monetary value problem. In performing its function +as general medium of trade, money determines the general level +of monetary prices. We have the idea of a general level of prices +whenever we contrast the price ratio of money to other commodities at +one time with its ratio at another time. Now the monetary prices +of the various commodities are constantly changing, and in somewhat +different degrees, but on the average there may be a general trend +upward or downward, and this is called a change in the general scale +(or level) of prices, as contrasted with changes in the values of any +two commodities in terms of each other. The general price level will +be more fully discussed below (Chapter 6, section 3) in connection +with the method of measuring by index numbers its changes. This brief +explanation may, perhaps, be enough for our present purpose. Our +question now is: What is the effect of changes in the quantity of +money (considered apart from chance accompanying changes) upon the +general level of prices? + +§ 9. #Effect of increasing gold production#. Let us take a case where +gold is in general use as money, and where for some time there has +been no noticeable change in the amount of business, the methods of +trade, and the general scale of prices. What would happen when new +gold mines were found that were much easier to operate, and gold began +to be produced at a much more rapid rate than formerly? The amount +of gold as compared with other forms of wealth evidently would be +increased. What if all the increase went into the industrial arts? The +value of gold in its industrial uses would fall. Then a part of the +increase must be diverted to monetary uses. When any man, by reason of +the increasing gold supplies, gets a larger stock of money than he had +before, the proportion formerly existing between his use for money +and his monetary stock is altered. He has more money than meets his +monetary demand at the existing prices. As he seeks to reduce his +stock of money to due proportions by buying more goods, he thereby +distributes a part of the excess of money to others. This bids up the +prices of goods further until the total value of goods exchanged again +bears the same ratio as before to the average monetary demand of each +individual. + +Take an extreme case: if twice as many dollars get into circulation +in a community, either some few men may have far more dollars than +before, while others have nearly the same number; or every man may +have his due proportion of the new supplies, just twice as many as +before in proportion to his income. The latter result, "other things +being equal," is the logical one after equilibrium has been restored. +If prices of goods remained the same as before, there would be twice +as many pieces of money available to effect the same number of trades +at the same prices. There is no reason why each person should tie up +twice as large a proportion of his income in the form of money. If, +however, there is a concerted movement to spend the surplus money, +there results a general bidding down of the value of money, a general +bidding up of the prices of goods. At what point will this movement +stop? The rational conclusion must be that, other things being equal, +the new equilibrium will be established when the ratio between the +value of money and the price of the goods which each individual is +purchasing becomes the same as before. The money being doubled, prices +must be doubled, and likewise for any other change in quantity. + +§ 10. #The quantity theory of money.# This explanation of the effect +of changes in the quantity of money in a country upon prices (the +general scale of prices) is known as the quantity theory of money. +This theory has, for a century, been very generally accepted by +competent students of the money problem. It may be summed up thus: +other things being equal, the value of the monetary unit, expressed +in terms of all other commodities, falls as the quantity of money +increases, and _vice versa_. That is, prices rise and fall in +direct proportion to changes in the total quantity. This is a simple +explanation of a complex and difficult set of conditions. The phrase, +"other things being equal," betokens the statement of a tendency where +there are several factors. The quantity theory explains what happens +when there is a change in one of the factors--the number of pieces +of money. There are three large sets of facts to be brought into +relationship with each other in the quantity theory: (1) the amount +of business, or the number of trades effected; (2) the rapidity of +circulation, depending on the methods by which business is done; (3) +the amount of money available. According to the quantity theory we +must expect that, when conditions (1) and (2) remain fixed, the value +of money will vary inversely as its quantity. This quantity theory may +be expressed in the formula P = MR/N when P is the symbol for price, +or the general price level, N is (1) above, R is (2), and M is (3). +P, therefore, changes directly with either M or R, or inversely with +N.[6] + +§ 11. #Interpretation of the quantity theory.# The quantity theory +must be carefully interpreted to avoid various misunderstandings of it +that have appeared again and again in economic discussion. + +(1) It does not mean that the price level changes with the absolute +quantity of money, independently of growth of population and of the +corresponding growth in the volume of exchanges. + +(2) It is not a mere per capita rule to be applied at a certain moment +to different countries. For example, Mexico may have $9 per capita and +the United States $35, while average prices may not differ in anything +like that proportion. But in these two countries not only the amounts +of exchanges per capita but the methods of exchange and the rapidity +of the circulation of money differ greatly.[7] + +(3) It cannot be applied as a per capita rule to the same country +through a series of years, without taking account of the many changing +factors. It is estimated that in 1800 the money stock was about $5 +per capita in the United States, and in 1914 about $35[8], but average +prices have not necessarily changed in the same ratio. In a period of +years a country may change in a multitude of ways, in complexity of +industry, modes of exchange, transportation, wealth, and income. These +changes require, some larger, others smaller, per capita amounts +of money to maintain the same level of prices. For example, the +substitution of cash payments for book-credit in retail trade calls +for a larger per capita stock of money; whereas an increased use of +banks and checking accounts, by economizing the use of money, enables +a smaller amount of money to maintain the same level.[9] + +(4) Tho applied originally to standard money, the quantity theory +applies to all other kinds of money circulating side by side and at +a parity of value, so far as these fulfil the definition of money and +are not merely supplementary aids of money. These substitutes for, or +supplements to, money enable each dollar to do more work, to circulate +more rapidly. If the standard money alone were doubled in quantity, +while the various forms of fiduciary money (smaller coins, bank notes, +government notes) remained unchanged, the quantity of money as a whole +would not be doubled. Indeed, in such a case, the method of exchange +would be greatly altered. According to the quantity theory, therefore, +prices would not be expected to double. + +§ 12. #Practical application of the quantity theory#. Despite the +number of changing factors affecting the methods of exchange and +the amount of business, the quantity theory is a rule unable at any +moment. These various factors change slowly, and the quantity theory +answers the question: What general change occurs in prices as a result +of the increase or decrease of the money in a given community at a +given moment? Like the law of gravitation and the law of projectiles, +the theory must be interpreted with relation to actual conditions. + +The quantity theory makes intelligible the great and rapid changes in +prices which have followed sudden changes in the quantity of money. +Inductive demonstration of broadly stated economic principles is +usually difficult, but there have been many "monetary experiments" +to teach their lessons. Many inflations and contractions of the +circulating medium have occurred, now in a single country, again +in the whole world; and the local or general results have helped +to exemplify richly the working of the quantity principle. With the +scanty yield of silver and gold mines during the Middle Ages, prices +were low. After the discovery of America, especially in the sixteenth +century, quantities of silver flowed into Europe. The great rise of +prices that occurred was explained by the keenest thinkers of that day +along the essential lines of the quantity theory, tho there were many +monetary fallacies current at that time. The experience in England +during the Napoleonic wars, when the money of England was inflated (by +the forced issue of large amounts of bank notes) and prices rose above +those of the Continent, led to the modern formulation of the theory by +Ricardo and others about 1810. The discovery of gold in California +and Australia in 1848-50 greatly increased the gold supply, and gold +prices rose throughout the world. Between 1870 and 1890 the production +of gold fell off while its use as money increased greatly, and prices +fell. A great increase of gold production has occurred in the period +since 1890. In part the rising prices since 1897 are explicable as the +periodic upswing of confidence and credit, but in the main doubtless +they are due to the stimulus of increasing gold supplies.[10] These +are but a few of many instances in monetary history, which, taken +together, make an argument of probability in favor of the quantity +theory so strong as to constitute practically an inductive proof. + + +[Footnote 1: The old-fashioned miser, however, withdraws his hoarded +gold for the time from its usual monetary function as an indirect +agent and treats it as a direct good yielding to him psychic income by +its mere possession.] + +[Footnote 2: See on kinds of income, Vol. I, p. 26 ff.] + +[Footnote 3: See secs. 1 and 2 of this chapter; also Vol. 1, +especially pp. 31-38 and 353-355.] + +[Footnote 4: This means actually gratuitous, for any real difficulty +in getting metal to or from the mint operates as a cost in the +conversion of bullion into money, or _vice versa_; e.g., the gold may +be in Australia and the mint in London.] + +[Footnote 5: See Vol. I, pp. 138 ff. and 361 ff. + +FIG. 1. GOLD PRODUCTION OF THE WORLD, 1493-1914. + +The changes in gold production here shown have bearings not only +upon problems of money, but in some respects upon nearly every modern +economic problem. Compare in the present connection this figure with +Figure 3, in Chapter 6, Section 4, showing changes in index numbers of +prices. + +[Illustration: FIG. 1. GOLD PRODUCTION OF THE WORLD. 1493-1710. +AVERAGES FOR PERIODS BEFORE 1870]] + +[Footnote 6: This formula is presented by E.W. Kemmerer in "Money and +Prices" (2d ed., 1909), p. 15 ff.] + +[Footnote 7: See above, ch. 3, sec. 6, table.] + +[Footnote 8: + + PER CAPITA CIRCULATION OF MONEY (ESTIMATED) IN THE UNITED + STATES IN VARIOUS YEARS. + + 1800......$4.99 1850......$12.02 1890......$22.82 + 1810...... 7.60 1860...... 13.85 1900...... 26.93 + 1820...... 6.96 1870...... 17.51 1910...... 34.33 + 1830...... 6.78 1880...... 19.41 1915...... 35.44 + 1840......10.91 +] + +[Footnote 9: On the function of deposits, see below, ch. 7, sec. 11.] + +[Footnote 10: Consult Figure 1 in ch. 4 and Figure 2 in ch. 6 for the +graphic presentation of these and related facts.] + + + + +CHAPTER 5 + +FIDUCIARY MONEY, METAL AND PAPER + + § 1. Commodity and fiduciary defined. § 2. Present monetary system + of the United States. § 3. Saturation point of fractional money. § 4. + Light-weight fractional coins. § 5. Worn coins and Gresham's law. + § 6. A general seigniorage charge on standard money. § 7. Coinage on + governmental account. § 8. The gold-exchange standard. § 9. Nature + of governmental paper money. § 10. Irredeemable paper money. § 11. + Theories of political money. + + +§ 1. #Commodity and fiduciary defined#. The actual moneys in +circulation in every modern country consist of a wide variety of +pieces, differing in denomination, physical size, shape and materials, +mode of issue, source or authority of issue, and legal character. +Among these kinds, one is the standard and is a commodity-money.[1] In +such cases the coinage is free and nearly gratuitous, and the value +of the money is kept close to parity with its value as bullion by +changing bullion into coin, or coin back into bullion, whenever there +is an appreciable difference between the values in the two uses. This +adjustment is brought about by the free action of the people. The +government, having declared what is the standard money unit, and +having provided a mint to make coins, leaves it to citizens, acting +from the ordinary competitive motives, to decide when they will reduce +or increase the number of coins in circulation. + +The other kinds of money are not commodity-money and the materials of +which they are made, whatever they be, are not worth as much in any +other uses as they are in their present monetary form. Their value is +always referred to, and adjusted to, that of the commodity-money, so +long as any of it is in circulation. In contrast with commodity-money, +these other kinds may be called fiduciary money. By fiduciary money +we mean money that has not a commodity value equal to its money value, +but which is generally accepted because each receiver has faith that +others in turn will take it in the same way.[2] + +§ 2. #Present monetary system of the United States.# Here is given a +summary of the main features marking the present monetary system of +the United States (in 1915). + +Not all this variety is essential to an efficient monetary system and +several of the kinds survive as the result of historical accidents +(political and legislative). But all are now kept in accord with the +value of the gold coin which, it will be observed, is the only kind +the amount of which is not artificially limited. Silver dollars are +no longer coined, subsidiary silver and minor coins are issued only +in exchange for other money, as are gold and silver certificates in +exchange for gold or for silver, which they merely represent while in +circulation. + +§ 3. #Saturation point of fractional money.# Fiduciary money is that +on which regularly the issuer makes a seigniorage charge.[3] Let us +consider now the effect of seigniorage on the value of money. + +Fractional coins are those of smaller denominations than the standard +unit of money, as shillings and pence in England, and half dollars, +quarter dollars, dimes, nickels, and cents in America. Money to serve +well a variety of uses must be of different denominations, and "small +change" is necessary to make small purchases and for exact settlement +in larger payments that are not multiples of the standard unit. The +amount required (or most convenient to use) in each denomination +of fractional coins is thus a more or less certain portion of each +person's monetary demand, shaped by experience and fixed by habit. For +example, within certain elastic limits of convenience quarters may be +used for halves, and dimes for nickels (and _vice versa_); but each +person has a point of preference. The total demand for each kind of +change is the sum of the individual demands. This point where the +amount of coins of any denomination (in relation to the whole monetary +system) is most convenient may be called the saturation point of that +kind of small change, up to which point the people prefer a share +of their money in that form, and beyond which they will, if free +to choose, exchange that kind for other denominations (smaller or +larger). Each kind of money, as the cent, nickel, dime, has its own +peculiar demand and its saturation point. + + MONETARY SYSTEM OF THE UNITED STATES, 1915 + + Metals | Weight, grains | Fineness |Ratio to gold + 1. Gold coins | 25.8 | .90 | 100 + 2. Silver dollar | 412.5 | .90 | 15.988 to 1 + 3. Silver, subsidiary | 385.8 | .90 | 14.953 to 1 + 4. Nickel (5 cents) | 77.0 | .25 | ........... + 5. Copper (1 cent) | 48.0 | .95 | ........... + ---------------------------------------------------------------- + Metal |Limit of issue | Legal tender for|Receivable for + | | private debts |public dues + 1. Gold coins | Unlimited. | Unlimited. |For all + 2. Silver dollar |Ceased in 1905 | Unlimited. |For all + 3. Silver, | Needs of the | $10 |$10 + subsidiary | people | | + 4. Nickel (5 cts.) | Do. | 25 cts. |25 cts. + 5. Copper (1 ct.) | Do. | 25 cts. |25 cts. + | \ | + _Paper_ | | | + 6. Gold certificates|Unlimited in ex-| No |For all + |change for gold | | + 7. Silver |In exchange for | No |For all + certificates | silver $ | | + 8. US notes | No new issues. |Unlimited. |Except customs + 9. Treasury notes | No new issues. |Unlimited |For all + of 1890 | | | + 10. National bank |Capital of banks|No |Except customs + notes. | | | + 11. Federal reserve |Per cent. of |At banks of |For all + notes. | gold reserves |reserve system | + ---------------------------------------------------------------------- + Metal |Exchangeable at |Redeemable at |In circulation + |treasury for | treasury in |Oct 1, 1915 + 1. Gold coins |Gold certificates| |616,000,000 + |U.S., Treas., or | | + |Fed, res. notes | | + 2. Silver dollar |Silver | |65,000,000 + |certificates | | + 3. Silver, |Minor coins |Lawful money[a]| + subsidiary | |in sums or mul-|162,000,000 + | |tiples of $20 | + 4. Nickel | | Do. \ + > 62,000,000[d] + 5. Copper | | Do. / + + Paper | | | + 6. Gold certificates| Subsidiary and |Gold coin |1,172,000,000 + | minor coins | |[e] + 7. Silver | Silver and |Silver dollars | 482,000,000[f] + certificates | minor coins | | + 8. US notes | Subsidiary and |Gold | 337,000,000 + | minor coins | | + 9. Treasury notes of| Silver and |Gold | 2,200,000 + 1890 | minor coins | | + 10. National bank |Subsidiary silver|Lawful money[b]|761,000,000 + notes |and minor coins | | + 11. Federal reserve | Gold[c] |Gold[c] |133,000,000 + notes | | | + ------------------------------------------------------------------- + Total[g]...........................................3,792,200,000 + + [Footnote a: "Lawful money" includes gold coin, silver dollars, U.S. + notes, and Treasury notes.] + + [Footnote b: Redeemable also in lawful money at bank of issue.] + + [Footnote c: Redeemable also at Federal reserve banks in gold.] + + [Footnote d: Not usually included in the estimates of total money + in circulation.] + + [Footnote e: Represented dollar for dollar by gold kept in the U.S. + treasury.] + + [Footnote f: Represented dollar for dollar by silver kept in the U.S. + treasury.] + + [Footnote g: Besides, there were about $312,000,000 in the U.S. + Treasury not offset by outstanding paper. The total money stock (in + circulation and in the Treasury, eliminating certificates representing + gold and silver), was about $4,233,000,000, of which 70 per cent was + metal (largely represented in circulation by paper certificates) and + 30 per cent was paper. Of the 70 per cent 50 was gold, 18 was silver, + and 2 was copper and nickel.] + +§ 4. #Light-weight fractional coins.# The standard metal is usually +too valuable to be suitable for coins of the smaller denominations. +Therefore, when gold is the standard, copper, nickel, and silver +remain in restricted use. But when coins of these metals are issued +at weights corresponding with their bullion value, difficulties arise. +Not only are they too heavy for convenience, but with every slight +rise in their bullion value as compared with that of the standard +metal, they become worth more as bullion than as coin and begin to +disappear from circulation. This happened often throughout the Middle +Ages and until the nineteenth century. The attempt was generally made +to coin gold and silver at a ratio of weight corresponding exactly +to their market values at a given moment and, every time the market +conditions varied, the best full-weight coins of one of the two metals +were taken out of circulation. [4]The country thus suffered for lack +either of the larger gold coins or of fractional coins. At length, to +remedy this difficulty, fractional silver coins, often called +"token coins," were issued, in limited numbers, of less than full +proportionate weight and bullion value. + +This plan, having been partially tried, was generally adopted by the +United States in 1853 at a time when the silver dollar of 371.25 fine +grains was legally rated at the same value as the gold dollars of +23.22 grains, and was freely coined. The fractional coins were made +a little over 6 per cent lighter per dollar than the dollar coin; two +half-dollars or four quarters or ten dimes contained 93.52 cents worth +of silver. Since then silver bullion has become worth much less in +terms of gold, and for years past the bullion value of the silver in +a dollar of silver small change has been between 40 and 60 cents. Why +then has the fractional coinage a monetary value equal to the standard +money, dollar for dollar? + +The answer is, because it is artificially limited in quantity, so that +it does not pass the point of saturation in the field of its use. Its +value rests on its monetary use; it is fiduciary money, not commodity +money. It is limited simply by letting "the needs of the people" +determine its amount. This is done by issuing it only in exchange for +other money of the larger denominations, and by redeeming it in other +money on demand. Fractional coins are issued on the request of banks +in exchange for standard money. One needing "change" gets it at the +bank; when the bank finds its supply falling short it gets more from +the government mints. As business increased in 1898, the demand for +nickels, dimes, and quarters became unprecedented, and the mints +worked night and day to supply them. If these coins were made in +great quantities and forced into circulation by the government through +paying them out to creditors and officials, their quantity would +become excessive and they would fall in value (be at a discount) +compared with standard money. But as this is not done, and as, +moreover, they are redeemed on demand at the treasury (and practically +at every bank and post office) in other money, any slight tendency +to depreciation in any locality is at once corrected. As it is, the +government makes a seigniorage profit on the fiduciary coinage, as +shown in the following table. [5] The fractional coinage is maintained +at a parity with the standard money in accordance with the monopoly +principle, expressed in the limitation of the amount. + + _Receipts:_ + + Earnings (charges for refining, assaying, manufacture + for other countries, etc.)......................... $392,000 + Bullion recovered, by-products, old materials, etc... 143,000 + Profits on seigniorage, subsidiary silver............ 3,013,000 + Profits on seigniorage minor coinage and recoinage... 2,387,000 + ---------- + Total receipts.......................................$5,935,000 + + _Expenditures_: + All kinds............................................$1,138,000 + ---------- + Net revenues from mint service.....................$4,797,000 + +§ 5. #Worn coins and Gresham's law.# Coins may be light-weight as the +result of another cause--namely, the abrasion (wearing off) of the +coins in circulation. Nearly always when this has occurred the worn +coins have still been accepted as money,[6] and ordinarily without any +depreciation. That is to say, they have a value as money greater than +the value of the bullion that is in them. Everybody takes them without +hesitation as readily as if they were full weight. If, however, at +this point, new full-weight coins are put into circulation, these at +once disappear while the old ones remain in circulation--a fact that +has always been somewhat mystifying. + +In explanation of the phenomenon was formulated "Gresham's law" of +the circulation side by side of coins of different bullion value: bad +money drives out good money. Sir Thomas Gresham (whose name has but +recently been given to this so-called law), explained the principle +to Queen Elizabeth when counseling her regarding the recoinage of the +debased money of the realm as was done in 1560. He showed that when +old, worn coins were in circulation and the mint began putting out +full-weight coins, the old lighter ones remained as money, while the +new ones, being heavier, were picked out by jewelers and by those +needing to send money abroad. + +Gresham's law has a paradoxical wording and is frequently +misunderstood. "Bad" money means not counterfeit money, but merely +money that has not as great a bullion value compared with its money +value as some other kind of money then in circulation. But not every +piece of such money will drive out every piece of good money. The law +applies only under certain conditions, and within certain limitations. +The "good" will be driven out only if the total amount of money in +circulation is in excess of what would be needed if all were of full +weight and of best quality. Paradoxically speaking, if there is not +too much of the bad money, it is just as good as the good money. But +even if good money is driven out, it may not leave the country. It +may be hoarded, or be picked out by banks and savings-institutions to +retain as their reserves, or be melted for use in the arts. Gresham's +"law" becomes thus a practical precept. As applied to the plan of +recoinage it is: Withdraw the worn coins as rapidly (in equal numbers) +as you put new coins into circulation. + +The continued circulation of "bad" money along side of "good" money +(light-weight along side of full-weight coins), so long as the total +number of coins is not in excess of the money demand for full-weight +coins, is explained thus on just the same principle as is the +circulation at parity of a light-weight fractional coinage, in the +preceding section. + +§ 6. #A general seigniorage charge on standard money.# The fiduciary +coinage problem presents itself under a some-what different guise in +case a seigniorage charge is made on all coinage, even of that metal +used as the standard unit. In this case coinage is free but not +gratuitous. In this case no bullion is brought to the mint unless the +coined pieces the owners receive have a value equal to the bullion +value plus the seigniorage charge. The power to impose a seigniorage +charge is a monopoly power. Artificial limitation is present. +Evidently, the number of coins that can be issued without depreciation +is limited to that number which would circulate if they were made +full weight without a seigniorage charge.[7] This number of pieces of +full-weight metal is the saturation point of the money demand of the +country. If more than that could in any way be put into circulation it +would become worth less as money than as bullion, and would be melted +or exported. + +Assume that this full supply of money at a given moment is 100,000 +pieces or dollars; then consider the effect of imposing a seigniorage +charge of ten per cent on further coinage. The government alone having +the right of coinage, the need of money would give the circulating +medium a monopoly value. The value of the money would rise. When +it had risen until the coin would buy any more than one-ninth more +bullion than was in it, the citizens would begin to take metal to the +mint. After the ten per cent charge was taken out they would receive a +coin which, the containing one-tenth less bullion, would be worth +very nearly the same as the metal taken to the mint. No considerable +depreciation could take place unless the volume of business fell off +so that less money was needed than before. In that case there would +be no outlet for the excess of coins until they fell to their bullion +value, i.e., till they lost the entire value of the seigniorage, the +monopoly element in them. Melting or exporting them before that point +was reached would cause to the owner the loss of whatever element of +seigniorage value they contained. We thus have arrived at the general +principle of seigniorage: when the number of coins issued is limited +to the saturation point, a seigniorage charge does not reduce their +money value; they are worth more as money than as bullion. And this +holds good of a large seigniorage charge as well as of a small one, +even up to the extreme limit of a charge of 100 per cent. In this last +case the government would retain the whole of the bullion brought to +it and would give in return a piece of money made of material (metal +or paper) with a negligible value. + +§ 7. #Coinage on governmental account.# The fiduciary coinage problem +may be presented also when coinage is not free, and the times and +amount of coinage are determined by law or by legally authorized +officials. In this case the bullion must be obtained by purchase +in the open market (and paid for by some form of legal money, or by +bonds). Coinage is then said to be "on governmental account." + +Now, assuming that the normal money-demand (the volume of business, or +sum of exchanges) remains unchanged, let us consider what will result +if the government begins to issue money in this way, when, as in the +preceding case, 100,000 units of full-weight money are in circulation. +This action might be taken most simply by recoining all the +full-weight pieces that came into the treasury, making them contain +1/10 less precious metal, and paying out 1111 pieces for every 1000 +received. Every time this was done there would be an excess of 111 +pieces above the normal money-demand, and 111 full-weight pieces would +be exported or melted (Gresham's law). The process (in strict theory) +may be repeated 90 times, at which point 90,000 full-weight coins have +been received, 100,000 light-weight coins have been issued to take +their place and 10,000 full-weight coins have gone out of circulation. +The total seigniorage charge would be 1-10 of 90,000, or 9000 units. +No depreciation has taken place, and the pieces, by reason of their +limitation, bear a money value in excess of the bullion that is in +them. + +Now the government, with the next 1000 pieces collected by taxation, +could buy enough bullion (in the open market) to make another 1111. +The excess of 111 pieces could not now be promptly removed by the +melting down or exporting of 111 coins, for all those remaining in +circulation have a bullion value 1/10 below their money value. As this +process is repeated the excess must continue to grow from 100,000 to +111,111, and the value of the money piece in terms of bullion continue +to fall from 10 to 9. At this point the 111,111 pieces would contain +just the same amount of bullion and have just the same value as the +100,000 pieces did before. Thereafter no further profit would accrue +to the government from issuing coins of that weight. To make a further +profit it must again reduce the amount of pure metal in the coin. + +This process was often repeated in the Middle Ages. A ruler, either by +making a higher seigniorage charge or by coining on his own account, +debased the quality or reduced the weight of the money of his realm. +For a time the new coins, having the same monetary use, circulated at +par with the old coins. The ruler, pleased with this almost magical +power of getting a revenue with little trouble, continued to issue +coins until suddenly the heavier coins began to be exported or melted, +and the value of the other money fell, to the mystification alike of +the prince and of his people. The reason is now perfectly plain: the +number of coins was not kept within the proper limits and they went +down to their bullion value. The only way a further profit could be +made in this way was to debase the coin again. By successive steps the +coinage came to consist almost entirely of cheaper alloy. + +§ 8. #The gold-exchange standard.# In a number of silver-using +countries and colonial dependencies near the end of the nineteenth +century, the fluctuations of the value of silver in terms of gold was +a constant source of difficulty in the payment of foreign obligations +to gold standard countries. Yet there were strong reasons in the +habits of the people and in the industrial conditions of the country +to forbid the adoption of gold and the disuse of silver as the actual +money in circulation. The method adopted, that of the gold-exchange +standard, involved these features. + +(1) Closing the mints of the country to the free coinage of silver, as +was done most notably in India in 1893 and in Mexico in 1904. + +(2) Adoption of a fixed ratio of exchange between the silver coins in +circulation and some gold coin which is made the standard of value in +all transactions (as the dollar or the pound sterling), the money in +circulation thus being all or nearly all of a fiduciary nature. + +(3) Regulation and limitation of the amount of money in circulation so +that a fixed parity between it and gold may be maintained (a) by the +limited issue of coins only on governmental account, (b) by the sale, +at a fixed rate, of foreign exchange bills payable abroad in the +standard unit, the money paid for the bills being withheld from +circulation in a special reserve, (c) by the purchase of foreign bills +of exchange at a fixed rate, thus paying out and putting again into +circulation some of the fiduciary money in the special reserve. + +These monetary changes furnish numerous illustrations and +demonstrations of the quantity theory of money as applied to the +entire circulating medium of a country.[8] + +§9. #Nature of governmental paper money.# The problem of seigniorage +presents itself in its most extreme form when money is made of paper. +Paper money is issued either by a government or by a bank. We will +consider governmental notes here, reserving until Chapter 7 the case +of bank notes. + +The issue of paper money in some cases grew out of the practice of +debasing metal. However this may have been, governmental paper money +may be looked upon as money for which a seigniorage of one hundred per +cent is charged. The gain of seigniorage from paper money is greater +and is just as easily secured as that from coinage of metals. +Governmental paper money is called "political money," in contrast +with commodity money. However, all coins that contain an element of +seigniorage, or monopoly value, are to that degree "political money." +The typical paper money is irredeemable; that is, it cannot be turned +into bullion money on demand. It is simply put into circulation, +usually with the "legal-tender" quality. Money has the _legal-tender_ +quality (as the term is used in the United States) when, according to +law, it must be accepted by citizens as a legal discharge for debts +due them, unless otherwise provided in the contract. The prime purpose +of making money legal tender is to reduce the danger of dispute as to +payments; but another purpose often has been to force people to use a +depreciated money whether they would or not. The purpose of the issue +of political money is usually to gain the profit of seigniorage for +the public treasury, and often it has been the desperate expedient +of nearly bankrupt governments. Governmental paper money differs +from bank notes in that its value does not necessarily depend on the +promise of redemption by the issuer. It differs from promissory notes +and bonds in that its value is not based on the interest it yields, +but mainly on its monetary uses. The issue of paper money may save the +government the payment of interest on an equal amount of bonds. The +promise to receive paper in payment for taxes or for public lands may +help to maintain its value by reducing its quantity, but nothing short +of its prompt redemption in standard coins makes it truly redeemable. + +§ 10. #Irredeemable paper money.# The most notable examples of paper +money in the eighteenth century were the American colonial currencies, +the continental notes, and the French assignats. In all the American +colonies before the Revolution, notes or bills of credit were issued +which were in most cases legal tender. Parliament forbade the issues, +but to no effect. Without exception they were issued in large amounts +and without exception they depreciated. The continental notes were +issued by the Continental Congress in the first year of the war +(1775), and for the next five years. The object at first was to +anticipate taxes, and it was expected that the states would redeem and +destroy the notes, but this was not done. The notes passed at par for +a time, but depreciated rapidly as their number increased. It has been +estimated that the country had less than $10,000,000 of coin before +the war, and when, in 1780, over $200,000,000 of notes were in +circulation they were completely discredited: hence the phrase "not +worth a continental." Specie then quickly came back into use. A few +years later the leaders of the French Revolution, failing to learn the +lesson of the American experience, issued, on the security of land, +notes called assignats in such enormous quantities that they became +worth no more than the paper on which they were printed. The paper +money issued under the English bank restriction act of 1797-1820 is +especially notable because it gave rise to the controversy which did +much to develop the modern theory of the subject. Parliament forbade +the Bank of England to redeem its notes in coin because the government +wished to borrow the coin the bank held. The result was the issue of +a large amount of bank money not subject to the ordinary rule of +redemption on demand. It was virtually governmental paper money. The +notes depreciated and drove gold out of circulation, and it was not +until 1821 that specie payments were definitely resumed. + +The United States, under the Constitution, did not try legal-tender +paper money till 1862 when paper notes (called greenbacks, because of +the color of ink with which the reverse side was printed) were first +issued, later increased to a total of about $450,000,000. Other +interest-bearing notes were issued with the legal-tender quality and +circulated as money to some extent. Greenbacks depreciated in terms +of gold, and gold rose in price in terms of greenbacks until, in June, +1864, it sold at 280 a hundred. Fourteen years elapsed after the war +before these notes rose to par, in terms of gold (in December, 1878), +and they became legally redeemable in gold January 1, 1879. This was +called "the resumption of specie payments." + +Almost every nation has at some time issued political money. During +the Franco-Prussian War in 1870, France, through the medium of its +great state bank, made forced issues of notes of a political nature, +which only slightly depreciated. Many countries--Russia, Austria, +Portugal, Italy, and most of the South and Central American +republics--have had or still have depreciated paper currencies. + +At once, at the outbreak of the great war in 1914, the governments of +the warring nations began to exercise a strict control over the issue +of paper money, sought to gather into the public treasury all the +specie, and to give paper (either governmental notes or bank +notes) practically a forced circulation, making it almost the sole +circulating medium. The values of the paper moneys have fallen in all +the countries, especially in Germany and Russia. In such cases the +money partakes somewhat of the characters both of bank notes and of +political money. Resorted to in desperate extremities, political +money has usually proved to be a costly experiment. A result usually +unintended is the derangement of business and of the existing +distribution of incomes. The rapid and unpredictable changes in prices +gives opportunity for speculative profits, but injure legitimate +business. This incidental effect on debts and industry offers the main +motive to some citizens for advocating the issue of paper money. It +is peculiarly liable to be the subject of political intrigue and of +popular misunderstanding. It is this danger, more than anything else, +which makes political money in general a poor kind of money. + +§ 11. #Theories of political money.# There are two extreme views +regarding the nature of paper money, and a third which endeavors +to find the truth between these two. First is that of the +cost-of-production theorists, who declare that government is powerless +to influence value, or to impart value to paper by law. They deny that +there is any other basis for the value of money than the cost of the +material that is in it. Money made of paper, on a printing press, has +a cost almost negligibly small, and, therefore, they say it can have +no value. The facts that it does circulate and that it is treated as +if it had value are explained by the cost-of-production theorists as +follows: while the paper note is a mere promise to pay, with no value +in itself, it is accepted because of the hope of its redemption, just +as any private note. Depreciation, according to this view, is due +to loss of confidence; the rise toward par measures the hope of +repayment. + +Taking a very different view, the extreme fiat-theorists assert that +the government has unlimited power to maintain the value of paper +money by conferring upon it the legal-tender quality. The meaning of +_fiat_ is "let there be," and the fiat-money advocates believe that +the government has but to say, "Let there be money," to impart value +to a piece of paper. The typical fiat-money advocates in the United +States were the "Greenbackers," who wished to retain the greenbacks +issued in the Civil War and to increase the amount greatly. They saw +in paper money an unlimited source of income to the government. +They proposed the payment of the national debt, the support of the +government without taxes, and the loan of money without interest to +citizens. All might live in luxury if the extreme fiat-money theorists +could realize their dreams. The depreciation that has taken place +in nearly every case where government notes have been issued, the +fiat-theorists declare to be due to a mild enforcement of the law of +legal tender. To them the fact that paper money may circulate for +a time at par appears a reason why it always should. They do not +recognize that there is a saturation point in the use of money, and +that its use is still further limited by the fear of larger issues. + +The almost universally accepted opinion among economists rejects both +of these views, tho recognizing in each a certain limited aspect of +the truth. The cost-of-production view quite overlooks the features +in which paper money differs from ordinary credit paper. The value of +one's promises to pay depends on his reputation and his resources; the +resources constitute the basis of value. Bonds have value because they +yield interest and are payable at a definite time in standard money. +But paper money, lacking this basis for its value, has another basis +in its money use, in its power to buy goods. + +The theory of paper money here outlined makes the value of paper money +a special case of monopoly value. As the power of any private monopoly +over price is relative, not absolute, so is that of the government +over the value of political money. The money use is the source +of value of the paper notes. It is this which gives the economic +condition for value in paper money and strictly limits the power of +the government--a fact overlooked by the fiat-theorists. Business +conditions remaining unchanged, the limit of possible issue without +depreciation is the number of units in circulation before the paper +money was issued, the saturation point of full-weight and full-value +coins. Whenever governments have failed to stop at that point, +paper money has depreciated. But under wise and honest control and +regulation political paper money might serve the monetary function +very effectively. + + +[Footnote 1: The problem of a legally authorized double standard, +bimetallism, is treated in the next chapter. An irredeemable paper +money may be, for a time, the standard money.] + +[Footnote 2: The faith _(fides)_ is not always that the issuer of the +money (whether it be a bank or the government) will redeem the money +on demand at any future time; for fiduciary money may circulate while +irredeemable, that is, either carrying no promise of redemption in the +standard money or in fact not being redeemed. Yet undoubtedly actual +redemption on demand or a good prospect of future redemption is one +of the circumstances stimulating the faith and the readiness of each +person in turn to receive fiduciary money.] + +[Footnote 3: In the broad sense as above defined, ch. 3, sec. 10.] + +[Footnote 4: See next section on worn coins.] + +[Footnote 5: Receipts and Expenditures of Mint Service in 1914:] + +[Footnote 6: It makes no difference what may be deemed the cause of +their acceptance; whether it be habit, public opinion in business +circles, or the act of law making them a legal tender; the essential +thing is that they continue to be accepted as money.] + +[Footnote 7: In this and following numerical examples no account is +taken of the possibility that the standard metal may depreciate in the +world market in terms of all other goods as a result of its diminished +use as money in one or more countries. This properly belongs in a +complete theoretical treatment of the subject.] + +[Footnote 8: See "Modern Currency Reforms" (1916), by E.W. Kemmerer, +professor of Economics and Finance in Princeton University, for a +detailed treatment of this remarkable series of monetary changes, +probably unequaled in instructiveness to the student of monetary +theory.] + + + + +CHAPTER 6 + +THE STANDARD OF DEFERRED PAYMENTS + + § 1. Relative positions of gold and silver; historical. § 2. Gold + production, first half of nineteenth century. § 3. Concept of the general + price level. § 4. Index numbers. § 5. Gold production and monetary + legislation, 1850 to 1879. § 6. Definition of the standard of deferred + payments. § 7. Increasing importance of the standard. § 8. Fluctuating + standard and the interest-rate. § 9. Notable changes in prices. + § 10. Nature and object of bimetallism. § 11. The movement for + national bimetallism in America. § 12. Rising prices after 1896. § 13. + Defectiveness of the gold standard. § 14. Various ideal standards + suggested. § 15. The tabular standard. + + +§ 1. #Relative positions of gold and silver: historical.# It is not +possible within the limits of our space to enter here into the details +of the world's monetary history. It must suffice for our purpose to +sketch briefly the period preceding the nineteenth century. Both +gold and silver were used as moneys in Europe in the Middle Ages, tho +silver was much the more common. The two metals continued to be used +side by side in Europe and in the new settlements in America, silver +for the smaller and gold for many of the larger transactions. +Both were made legalized forms of money (and standards of deferred +payments) in units of specified weights and fineness, the weights +bearing a certain ratio to each other. Thus it was possible for a +debtor to discharge his obligations with that one of the two metals +that at the moment was the cheaper at the legal ratio. Fluctuations in +the prices of gold in terms of silver were at times such as to cause a +large part of the full-weight coins of one or the other metal to leave +circulation (in accordance with Gresham's law). So from time to time +the ratio was slightly changed by law in the various countries to +permit the circulation or to bring back the kind of money that had +been undervalued in terms of the other. But it is a very remarkable +fact that from the time of Xenophon until the discovery of America +(a period of nearly 2000 years), the market ratio of silver to +gold bullion in Europe remained pretty close to 10 to 1, being only +temporarily altered by sudden and unusual occurrences. From 1492 to +1660 the ratio changed to 15 to 1, where it remained with remarkable +stability until about the year 1800. At the establishment of the mint +of the United States in 1792 that ratio was found to exist. Men +had come to look upon the ratio of 15 to 1 as the natural order, +determined (it was sometimes said) providentially by the deposit of +the two metals in due proportion in the earth's surface. But as we +now see it, this in part was mere chance and in part was due to the +equalizing effect of the wide use of both metals so that the one could +be easily substituted for the other in case of a divergence of the +market ratio from the legal ratio as money. From the year 1500 until +1800 the Western hemisphere was the main source of the precious +metals, the alluvial deposits were widely scattered, were gradually +discovered, were usually found in small quantities, and were +extracted in primitive ways. The existing stock of precious metals, +gold and silver, more than other products of mine and field, is at any +time the accumulation of many years' production, and is changed very +little, proportionally, by a large change of output in any year or +short period. It changes in volume as does a glacier fed by the snows +of many years, not as does a river, filled by a single rainfall. For +a short time after the discovery of America (from 1493 to about 1544) +the average coining value[1] of the world's production of gold, +nearly all found in America, was about 1-1/2 times as great as that of +silver; but thereafter for three centuries from about 1545, the annual +value of silver produced was between 1-1/2 to 4 times as great as that +of gold, averaging about twice as great. Silver was the money chiefly +in use in the ordinary transactions in all of the principal countries +of the world. + +§ 2. #Gold production, first half of nineteenth century.# We have now +to note some great changes in the production of gold in the nineteenth +century, changes both absolute and relative to that of silver. The +market ratio of the two metals had been gradually changing before 1792 +and continued to change. Gold was slowly becoming more valuable in +terms of silver and the legal ratio of 15 to 1 in the United States +(at which both metals were admitted free to the mint) proved to have +undervalued gold. Gold largely left circulation and silver and bank +notes formed the greater part of our circulating medium. Then, in +1834, soon after the production of gold had begun to increase somewhat +more rapidly than that of silver, the legal ratio of the United States +was changed to 16 to 1. This brought a good deal of gold back into +circulation and gradually drove out most of the silver (the heavier +coins disappearing first). + +In the decade 1841-50 the average annual value of the gold production +had, for the first time since the early sixteenth century, exceeded +that of silver. Then, from 1848 to 1850, came the great gold +discoveries in California and in Australia. In 1851 the value of gold +produced was one and one-half times that of silver; in 1852 was three +times, and in 1853 four times as great; and then slowly declined, but +continued every year as late as 1870 to be over twice as great. +This caused the displacement of silver by gold and drove out a large +proportion of the silver coins of smaller denominations. This led to +the law of 1853, authorizing subsidiary coinage (on government account +only) of lighter weight.[2] Let us observe the effect on prices that +was brought about by the discoveries of 1848-49, and, first, we +must consider briefly the method of measuring and expressing general +changes in prices. + +§ 3. #Concept of the general price level.# The price of any good +is some other good or group of goods given for it in trade.[3] The +standard unit of money coming to be the most convenient expression for +price (whether or not money be actually passed from hand to hand in +that particular trade), prices usually are monetary prices, and +more specifically are prices in gold, or in silver, or in whatever +constitutes the standard money unit. But the price of each good is +a definite, separate fact, which expresses the ratio at which that +commodity is sold. The price of any particular kind of goods may +fluctuate in either direction as compared with the prices of other +goods at the same time. For example, iron and many other goods +may rise while wheat and many other goods fall in price. There is, +therefore, no such thing as an actual _general_ change in the prices +of goods in terms of money, but it may be seen that the prices of +large classes of goods, often of nearly all goods, change upward or +downward at the same time and in the same general direction. We +thus have need to distinguish between changes in the valuations of +particular kinds of goods in terms of each other and general changes +in the valuation of a number of different goods in terms of the +monetary unit. + +To get some idea of whether such a general trend occurs, the algebraic +sum of all the changes in the particular prices of a selected group +of goods may be taken, and for convenience this may be reduced to an +average price (by dividing the sum by the number of articles). Such +an average is called a general price and, when comparing it with +the general price of another time, we speak of changes up or down +in _general prices,_ or in the _general scale of prices,_ or in the +_price level._ + +When gold is the standard unit, its value is the converse of general +prices; as prices go up the value of gold goes down, and gold is said +to _depreciate_. As prices go down, the value of gold goes up and gold +is said to _appreciate_. Rising prices mean falling value of gold (and +at the same time falling purchasing power), and _vice versa._ + +[Illustration: FIG. 2. INDEX NUMBERS OF PRICES. The four series of +prices here shown begin at different periods; the American in 1840 +(Aldrich report 1840-1889 and Bureau of Labor from 1890 on); the +English in 1846; the German in 1851; the French in 1857. We have +adjusted each of these series to a base of the average prices for +1890-1899, in accord with the basic period used by the American Bureau +of Labor. + +The reader must be on his guard against misunderstanding the diagram. +It does not represent the heights of the prices of the different +countries compared with each other either at any one date or for the +entire period. For example, the heights of the lines at the year +1860, do not indicate that American prices were lowest and French the +highest at that date, or, indeed, tell anything whatever directly +on that point. The various series of prices are compared within +themselves, every year with the average of the prices for 1890-1899 in +each country, respectively. The only comparison allowable, therefore, +between the several lines, is that between the fluctuations, both as +to their times and as to their directions, both as to the larger tidal +movements and as to the lesser wave-like movements within the business +cycles. The Figure does indicate that both American and German prices +have risen somewhat as compared with the English and French prices, +since the period before 1860. + +This figure should be studied in connection with Figure 1, in ch. +4, sec. 9, on gold production. The Figures indicate that the rapidly +growing monetary use of gold offset a large part of the effects of +increasing gold production between 1840-1860 and 1884-1914. Between +1884 and 1896 prices actually continued to fall after gold production +had begun to climb. Likewise the growing monetary use of gold +accentuated strongly the effects, between 1873 and 1883 of a +comparatively small decrease in gold production.] + +§ 4. #Index numbers.# The process of calculating general prices and +changes in them has in it, inevitably, something of arbitrariness and +incompleteness. For not all prices can be included, but only those +of articles of somewhat standardized grades and those that are pretty +regularly sold in markets where prices are publicly quoted. Any list +of articles that can be selected is of unequal importance to different +persons and classes of persons, at different places, at different +times, and for different purposes. And yet the study of general prices +as shown by any broadly selected list reveals changes which in some +measure affect the interests of every member of the community. + +General prices are conveniently compared from one time to another +through the use of index numbers. An _index number_ of any article is +the per cent which its price at any certain date is of its price at +another date (or of the average for a series of prices) taken as a +base or standard. Thus if the average price of cotton in the base year +were 10 cents (taken as 100) and the price rose to 12 cents, the index +number would be 120. _A tabular index number_ is the per cent which +the price of a selected group of articles at any certain date is of +the price of the same group of articles at a date which has been taken +as the base.[4] + +The principal index numbers of the leading countries are here shown. +The fact that from 1862 to 1879 inclusive prices in the United States +were expressed in an irredeemable paper standard makes comparisons for +that period misleading. A better idea is obtained by using as the base +for each of the several series, the average of prices in each country +for the years 1890 to 1899. + +§ 5. #Gold production and monetary legislation, 1850 to 1879#. The +unprecedented increase in gold production between 1849 and 1853, and +the continuance of production in volume about four-fold as great as +that of the decade 1840-49 was reflected at once in a rise of prices. +This was a period of prosperity in business culminating in the +crisis of 1857 (felt more or less in all the leading countries). This +prosperity accelerated the effect of increasing quantities of the +standard money. Credit was stimulated and the rate of circulation and +the efficiency of money were increased. Prices rose to a temporary +maximum in 1857 and then fell as a great international financial +crisis occurred. The great new supplies of gold had been readily taken +("absorbed") into the monetary circulation of the world, to meet +the needs of rapidly growing commerce and industry. In the European +countries,[5] prices in terms of gold, tho fluctuating somewhat, kept +at about the same level from 1860 to 1870. The years 1871 and 1872 +were very prosperous and showed rapidly rising prices which reached a +maximum in 1873, when a financial panic occurred. + +In that very year, just as the gold production for the first time +since 1851 had fallen below $100,000,000, several notable changes in +monetary legislation were made which made gold more important in the +circulation of a number of countries. + +In 1873 Germany made gold the standard throughout the new German +Empire (having prepared the way by legislation in 1871 which made +gold a legal tender alongside of silver), and provided that silver was +thenceforth to be used only in the subsidiary coinage. The same year +Belgium, and the next year the other countries of the Latin Union +(France, Switzerland, and Italy) took steps which resulted in +demonetizing silver; that is, in limiting its coinage to governmental +account, and in making gold their one standard money. + +The United States at that time had neither gold nor silver regularly +in circulation (except in California), and there was a long-continued +discussion of "a return to specie payments," which meant the return +to a metallic standard, and the redemption of greenbacks on demand. +Meantime in 1873 a law was passed making the gold dollar "the unit of +value," and dropping out the standard silver dollar from the list of +coins authorized to be issued at the mint.[6] From 1873 until 1879, +prices (in greenbacks) were falling in this country very rapidly +because the country with the increase in population, wealth, and +business, was "growing up to" its unchanging currency supply. For a +like reason at the same time gold prices throughout the world were +falling. While this country was lowering its level of prices from an +inflated paper money to a gold commodity basis, the gold basis itself +was sinking to a lower level. The very demand of our treasury and +banks for gold caused the retention of our own gold product (which +between 1864 and 1876 had been nearly all exported) and required an +enormous net importation of gold between 1878 and 1888. This +reduced suddenly by one-half the amount available each year from our +production for the rest of the world. + +§ 6. #Definition of the standard of deferred payments.# These various +changes in the purchasing power of the standard money had great +effects upon industrial conditions. Particularly had they shifted the +positions and claims of debtors and creditors, because of the enormous +importance of money as "the standard of deferred payments," Let us now +get a more definite understanding of that term. + +As a medium of exchange, money comes to be the unit in which most +prices are expressed and compared; in other words, it becomes +the common denominator of prices.[7] This makes it also the most +convenient unit in which to express the amount of credit transactions +and of existing debts.[8] A credit transaction is a trade lengthened +in time; one party fulfils his part of the contract, the other party +promises to give an equivalent at a later date. The equivalent may be +in any kind of goods; for example, in barter one may part with a horse +on the promise of a cow to be received later; or a small horse on +the promise of a large one; or a flock of sheep on the promise of +its return at the end of the year with a part of the increase of the +flock. A simple standard in which to express the debt is the thing +borrowed, as horse, sheep, wheat, house. Again, the thing to which +the value of debts is referred may be a thing quite different from the +goods borrowed and, with the growth of the monetary economy and the +use of the interest contract, money comes more and more to be used as +the standard. At length the law declares that, in the absence of any +other agreement, the amount of a debt is to be payable in terms of the +unit of standard money, which thus is made legal tender as well as +the customary standard of deferred payments. A _standard of deferred +payments_ is the thing of value in which, by law or by contract, the +amount of a debt is expressed and payable. + +§ 7. # Increasing importance of the standard.# Until the use of money +develops, the use of credit is difficult and limited; it becomes +easy when the value of all things is expressed in terms of a common +circulating medium. It therefore generally is true that the importance +of money as the standard of deferred payments increases with the +use of money as a medium of trade. The volume of outstanding debts +expressed in terms of money now very greatly exceeds the total value +of the circulating medium. Changes in the general level of prices +have, therefore, great effects upon all existing debts. The value of +all debts changes in the same proportion as does that of the standard +unit of money; when this rises or falls in value, it means increase +or reduction, in the same ratio, of the purchasing power of every +creditor. It is as if he had in his possession metal dollars equal +in amount to the face of the debt, and they had changed by so much +in purchasing power. The debtor's interests in such changes are, of +course, just the reverse of the creditor's interests. + +Outstanding contract debts may be roughly divided into two classes: +short-time loans, running less than a year; and long-time loans, +running for a year or more.[9] Fluctuations are rarely rapid and great +enough to affect appreciably the debtors and creditors in the case +of short-time loans. The results are appreciable in the case of loans +running from one to five years, and may be very great in the case of +loans made for still longer periods, such as the bonded indebtedness +of nations, states, municipalities, and business corporations, and +as mortgages given by farmers on their land or by owners of city real +estate. A multitude of interests are thus affected by a change in the +value of money. When money rises in purchasing power, receivers of +fixed incomes are gainers. When it falls in purchasing power, they +lose. Receivers of fixed incomes from loans include not merely private +investors, but also many educational and charitable institutions which +dispense their incomes for public purposes. Wages and salaries of many +kinds go up and down less rapidly than do other prices, and thus +to some extent wage-earners are in the position of passive +capitalists[10] as regards changes in the monetary standard. In a +capitalistic age, therefore, almost every individual is affected in +some way by a change in the value of money. + +§ 8. #Fluctuating standard and the interest-rate.# In connection with +the standard of deferred payments there is presented a problem of +the effect that fluctuations of the standard may have upon the +interest-rate.[11] As the general price-level falls or rises, the +monetary standard conversely appreciates or depreciates.[12] If these +changes are slight in amount and imperceptible in their direction +they may not affect considerably the motives of borrowers and lenders. +Therefore, the rate of interest this year in long-time loans would be +just that resulting in the expectation, on all hands, of a stationary +level of general prices. Suppose that rate to be 5 per cent on the +standard investment (such as real-estate loans and good bonds). Then +the lender of $1000 will receive each year a $50 income and at the end +of the investment period $1000 principal, each dollar of which will +purchase the same composite quantum of goods that a dollar would have +purchased at the time the loan was made. Likewise, the borrower would +pay interest and principal in a standard that reflected an unchanging +general level of prices. But, now, if the general level of prices +unexpectedly falls 1 per cent within the year, the creditor of a loan +maturing at the end of the year would receive (principal and interest) +$1050 which will purchase 1 per cent more goods per dollar than the +sum he loaned, or (approximately) $1060 worth of goods. Hence, he +has received, in quantum of goods, a yield of 6 per cent on his +investment. If this change continues for five years, the lender of a +five-year loan would receive each year $50 having a purchasing power +successively 1, 2, 3, 4, and 5 per cent greater than the same sum +had at the making of the loan; and at the end of the five years would +collect the principal, having a purchasing power 5 per cent greater. +The lender, on his part, would have to pay interest and repay the +principal in a money that is to be obtained only in exchange for a +larger sum of goods than that which could be bought with each dollar +that he borrowed. This means that, with individual exceptions, +creditors generally gain and debtors lose by falling prices. + +But this is fully true only in respect to loans already made. For just +to the extent that such a movement of prices comes to be more or less +regularly in the same direction, both borrowers and lenders are able +to take it into account, and as experience shows, do take it into +account.[13] When prices fall men become more eager to sell wealth, to +lend the proceeds, and more reluctant to borrow for investment at the +prevailing rate of interest and at the prevailing prices. There is an +incentive to divest one's self of ownership (e.g., by selling stocks) +and to become a lender (e.g., by buying bonds). This whole situation +is reversed in a period of rising prices. The result is that the rate +of interest in any long continued period of falling prices (such as +from 1873 to 1896) has a trend downward and in a period of rising +prices (such as from 1897 to 1915) has a trend upward. This movement +of readjustment would not go on indefinitely, even if the same +trend of prices continued; for in the strict theory of the case the +adjustment would be complete when the interest rate had changed by +just the amount of the annual change in the level of prices. For +example, if 5 per cent is the static normal rate of interest, then +when prices are falling 1 per cent each year, the adjusted rate of +interest would be 4 per cent; and when prices were rising 1 per cent +each year, the adjusted rate of interest would be 6 per cent. Such +adjustments serve to some extent to neutralize the effects of changes +in the standard of deferred payments so far as concerns new loans made +in view of just such a change and in expectation of its continuance. +But no one can foresee exactly, and most persons take little account +of, such a change until it has continued for several years in the +same direction. The adjustment is therefore never very prompt or very +exact. In some years the general level of prices has risen more than +5 per cent, or more than enough to offset the entire interest received +by most lenders. A man with dollars to invest would have been as well +off if he had kept them buried during that period.[14] + +§ 9. #Notable changes in prices#. In most cases the true effects of +monetary changes escape recognition. In a few cases, however, the +change has been so great as to cause an economic revolution. Such +was the change in prices following the discovery of America, which +occurred soon after the old feudal dues had come to be generally +expressed in terms of money instead of labor services. In modern +times, since the mass of debts has become greater than ever before, +such changes bring even graver economic consequence. The increase in +the output of gold in 1849-57,[15] caused what was the most rapid, if +not the greatest money inflation that had occurred since the sixteenth +century. The substitution of gold for silver by some countries at that +time, by making a great additional market for gold, helped to check +the fall in its value. Indeed, a considerable decline in the output +of gold after 1870 combined with its widening use to cause in 1873 the +beginning of a great fall of gold prices. The resulting increase +in the burden of outstanding debts was felt by all debtors, but +particularly by great numbers of the agricultural classes both in +Europe and in America. Their tribulations were aggravated by the fact +that at that time (especially from about 1873 to 1896) the prices +of their products were falling much more rapidly than were general +prices, as a result of the very rapid extension of the agricultural +land supply.[16] There was complaint, agitation, and demand for relief +on the part of many interests in France, Germany, England, and the +United States. As a result, the money question became in this country +a leading political issue and continued to be such between 1873 and +1900. + +§ 10. #Nature and object of bimetallism.# First came "the greenback +movement," which, lasted until after 1880.[17] This then gave way to +an agitation for bimetallism. _Bimetallism_ is the plan of using two +metals as standard moneys. Bimetallism is legally authorized when both +metals are admitted to the mints for free coinage at an established +ratio of weight. Bimetallism may be legally authorized, but not +actually working, for, if the market-value long continues to vary +appreciably from the legal ratio, only one of the metals may in fact +be left in circulation. This situation is called _limping_ bimetallism +(or the halting double standard), tho this is a contradiction of +terms. National bimetallism is confined to a single country, as was +the case in the United States before the Civil War, or in France +before 1867. International bimetallism is that resulting from an +agreement among several nations to use two metals on the same terms. + +The theory of bimetallism is that the government can act on the value +of the two metals through the principle of substitution. The metal +tending to become dearer will not be coined, the other will be coined +in greater quantities. The degree of influence that can thus be +exerted on the value of the two metals depends on the size of the +reservoir of the metal that is rising in value. When it all leaves +circulation, the law on the statute book permitting it to be coined +becomes a mere phrase. In such a case there is bimetallism _de jure,_ +but monometallism _de facto._ The greater the league of states the +greater is the likelihood that the plan will continue to work. The +only notable historical instance of international bimetallism is +that of the Latin Union, which united France, Belgium, Italy, and +Switzerland in an agreement remaining actually in force from 1866 to +1874. A strong movement developed between 1878 and 1892 in favor of +forming a great international bimetallic union of states. + +One object of the movement was to put an end to the great fluctuations +in the rates of exchange of money between the silver-using and +gold-using countries, fluctuations which occasioned much uncertainty +and loss to individuals engaged in foreign trade. The rise in the +price of gold-exchange in the silver-using countries (notably India) +meant also an increase in their burden of taxation. These countries +collected their revenues in silver, but they had to pay their debts, +principal and interest, in gold. Another object of this movement was +to prevent the burden of individual debts from increasing by reason +of the rise in the value of the single standard, gold. It was, indeed, +hoped that by bringing silver much more into use, the value of gold +would be reduced, thus bringing relief to the debtor classes. Still +another object of the bimetallic movement was to aid the silver miners +and silver-producing districts by creating a larger market for silver. + +Several international conferences were held which were taken part +in by some of the leading financiers of the world representing their +respective governments. The United States was foremost in advocating +the policy, France at first favored it, as did in large measure the +British Indian administration, tho England was in the main opposed. +The movement came to nothing. + +§ 11. #The movement for national bimetallism in America#. When all +hope of international bimetallism failed, the efforts of many of its +advocates were turned to the plan of legalizing national bimetallism +in the United States at a ratio of 16 to 1. This was very different +from the market ratio. Gold had become before 1860, in fact, the +standard of our money system, and after 1873 it was the only metal +admitted to free coinage. Silver, little by little, had been losing +purchasing power in terms of gold, until from being worth, in 1873, +one-sixteenth as much, ounce for ounce, it became, in 1896, worth but +one-thirtieth as much as gold. The power of silver to purchase general +commodities fell much less than the change in its ratio to gold would +indicate, gold having risen in terms of most other goods as well as +of silver. Nevertheless, the proposal to open the mints to the free +coinage of silver at the ratio of 16 to 1 in the year 1896 threatened +a sudden and marked cheapening of money.[18] Probably gold would have +been entirely driven out as money and silver would have taken +its place as the standard. In any event "free silver" would have +accomplished the purpose of making the standard of deferred payments +cheaper. It was at first a debtors' movement, but to succeed it had +to enlist the support of other large classes of voters. And thus +it developed into the more sweeping theory that wages, welfare, and +prosperity were favored by a larger supply of money quite apart from +the effect it would have upon debts. + +In its extreme form the free-silver plan was a fiat scheme, for some +of its supporters believed that by the mere passage of the law the two +metals could be made to bear to each other any ratio desired. But its +most intelligent advocates recognized that the force of the law was +limited by economic conditions. The victory of the gold standard in +the campaign of 1896 was, it would seem, due more to the well-founded +fear that a sudden change of the money standard would cause a panic +than to a popular understanding of the question. + +The free-silver advocates got what they desired, a reversal of +the movement of general prices, through an occurrence for which no +political party could claim the credit. In 1883 the gold production of +the world was less than $100,000,000. From that date, with the opening +of newer gold-yielding territory in South Africa and in the Klondike, +the annual output of gold had been increasing rapidly and almost +steadily. The methods of extracting gold theretofore had still been in +large part of a primitive sort. But intricate machinery was taking the +place of crude tools, chemical processes had been introduced (notably, +the cyanide process), and the principal product began to come from +the regular and certain working of deep mines rather than from chance +surface discoveries. In many parts of the world were enormous deposits +of low-grade ores, before useless, that could be worked economically +by the new methods. + +The general price level fluctuated, but on the whole tended downward +between 1884 and 1893 (the year of panic), and reached a minimum in +the year 1895 in Germany, 1896 in England, and 1897 in America. It +is noteworthy that the very year 1896, which marked the height of the +political agitation to abandon the gold standard for silver, saw the +gold production for the first time in all history surpass the two +hundred million dollar mark. The gold output had caught up with, and +began to surpass, the normal monetary demands of the world, meaning by +that phrase, the amount of gold needed to maintain a stationary level +of prices. + +§ 12. #Rising prices after 1896#. The whole character of the monetary +problem then changed. A period of rising prices set in, which has +continued to the present time. By 1913 prices had risen just about 50 +per cent above the low level of 1896. The rise has been, and still +is, at the average rate of nearly 3 per cent each year. This caused a +reversal of the former positions of advantage and disadvantage on the +part of debtor and creditor respectively. The purchasing power of a +3 per cent annual interest on notes and bonds has been offset by the +decrease in the purchasing power of the principal of the debt. The +burden of the average debt began relatively to decrease. A wide field +for enterpriser's profits was opened up by the rapid displacement of +prevailing prices in all quarters of the industrial world. The price +of manufacturer's products rose in advance of the rise of costs of +many raw materials and especially of the labor costs of manufacture. +The average enterpriser's gain was the average wage-worker's loss. +Wages (and salaries), as nearly always in the case of a change of +price levels, moved more slowly than did the prices of most of the +commodities which are bought with wages, thus causing great hardship +to large classes living on comparatively slowly moving incomes.[19] +Extremes meet, and these classes include both those living on +passive investments, and those dependent on their daily labor for a +livelihood. + +Thus we escape the evils of a rising standard of deferred payments, +only to meet those of a falling standard. And as long as we have so +fluctuating a standard these difficulties must arise again and +again, continually repeated, causing unmerited gains and losses +to individuals. Let us conclude with a brief consideration of the +fundamental principles involved in this problem. + +§ 13. #Defectiveness of the gold standard#. Money is, in general, for +both borrowers and lenders the most convenient standard of deferred +payments. But from the usage of speaking of all things in terms of +gold, arises the popular notion that the value of gold is always +the same, while the value of other things changes. In truth, a fixed +objective standard of value is not possible of attainment. Altho the +value of gold is stable as compared with most things, it rests on the +estimates made by men and is constantly changing with conditions. The +current new supplies of gold are comparatively regular. For centuries +at a time there was little change in the methods of mining gold and +there were no radical changes in its output. The nature of the use of +gold, likewise, is such as to made changes in the amount of it needed, +under ordinary conditions, more stable than is that of most other +goods. Moreover, the stock of gold in monetary uses is but slowly +worn out; it is, therefore, a large reservoir into which flows a +comparatively small stream of annual production; the existing stock +is twenty or thirty times the annual output. Yet the value of gold +expressed in other things is never quite stable, and sometimes +several influences combine to affect it greatly and suddenly. Recent +inventions, chemical and mechanical, moreover, have considerably +altered the conditions of production. While, therefore, it is the +best standard yet devised and put into actual practice, it is very +imperfect. A standard better than a single metal, more stable than a +single commodity, is desirable if it can be found. + +§ 14. #Various ideal standards suggested.# It may, perhaps, be agreed +that the ideal standard of deferred payments is one that would insure +justice between borrower and lender. Yet different views may be and +have been taken as to what constitutes justice in this matter. The +suggestion is attractive that repayment should involve the return of +enjoyment equal to that which could be purchased with the sum at the +time of the loan. Such a standard is impossible of perfect realization +in any general way, for men's circumstances are constantly changing. +To insure even to the average man the same amount of enjoyment is only +roughly possible. The same goods do not afford the same enjoyment +when conditions, either subjective or objective, have changed. Another +suggestion is that the goods returned should represent the same +sacrifice as those loaned. Here again the difficulty is in the lack of +a standard applicable to all men. Whose sacrifice? That of the lender, +who may be rich, or that of the borrower, who may be poor? Some have +supposed that the condition of equal sacrifices was met by the labor +standard, according to which the sum returned should purchase the same +number of days of labor as when borrowed. But what kind of labor is to +be taken, that of the lender or that of the borrower or that of some +one else? Labor is of many different qualities, which can be exactly +compared only through their objective value in terms of some one +good.[20] + +It must be recognized that any possible concrete standard of deferred +payments will sometimes work hardship in individual cases. The best +average results for justice and social welfare will be secured by +measuring debts in some standard that will change least often, and +least rapidly, in relation to the great majority of people of all +classes in the community. + +§ 15. #The tabular standard.# Apart from the difficulties of its +practical operation, a standard better than a single metal and +more stable than a single commodity would be a _tabular standard_, +consisting of a number of leading commodities in fixed proportions, +such as is used in calculating index numbers expressing the general +scale of prices. Such a standard averages the fluctuations of +particular goods and would give a fair approximation in practice to +the ideals of equal sacrifice and equal enjoyment (on the average tho +not in individual cases). While some natural materials are growing +more scarce and call for more sacrifice, other products are by +industrial progress becoming more plentiful. This kind of standard has +been viewed with favor by many monetary authorities, and despite the +administrative difficulties ways may yet be found for putting it into +practice. + +After determining the tabular standard, the actual regulation of the +quantity of money to make prices conform to the standard might be +accomplished in one of several ways. It might be done by letting the +value of the gold dollar fluctuate as it does now, while requiring +a greater or less number of dollars to be given in fulfilment of all +outstanding contracts. For example, if prices by the tabular standard +fell from 100 to 95 in the time between the origin of a debt of $100 +and its payment, the debt would be discharged by paying $95; if prices +rose to $110, the debt would be discharged only by the payment of +$110. + +By the plan of a "compensated gold dollar" the legal weight of the +gold coins would be increased or decreased from time to time to +conform with the tabular standard. Still a third method would be to +regulate the issue of standard paper money, contracting and expanding +its amount by issue and redemption, by deposit in and withdrawal from +depository banks, at regular intervals to bring prices into conformity +with the tabular standard. These are as yet but distant possibilities, +and for some time to come gold will continue to serve as the standard +money in the same manner as in the past. + + +[Footnote 1: The amount of silver is here expressed at its coining +value; this is not the commercial value, but rather the number of +silver dollars 371.25 fine grains weight that could be made out of +the silver produced. Silver and gold of equal coining value are, +therefore, as to weight always in the ratio of 16 to 1.] + +[Footnote 2: See above, ch. 5, sec. 4.] + +[Footnote 3: See Vol. I, p. 45 ff. See also above, ch. 4, sec. 8.] + +[Footnote 4: Numerous tabular index numbers have been worked out for +different countries and periods. The main results of the more recent +ones have been brought together with critical comments, by Professor +Wesley C. Mitchell, in Bulletin 173 of the U.S. Bureau of Labor +Statistics, July, 1915, from which the figures here used are quoted.] + +[Footnote 5: The price movements in the United States between 1860 and +1879 must be left out of consideration here, for the excessive issues +of greenbacks drove gold out of circulation and made greenbacks the +standard money, except in California and elsewhere on the Pacific +Coast where, by public opinion, gold was retained as the circulating +medium.] + +[Footnote 6: This change was what later was referred to in political +discussions as "the crime of '73." The dollar referred to was the +_standard_ silver dollar; at the same time the coinage of a _trade_ +dollar was authorized (intended to be used only in foreign trade), +which, after 1876, was not legal tender in the United States.] + +[Footnote 7: See Vol. I, p. 262.] + +[Footnote 8: See Vol. I, p. 263, on credit transactions, and p. 302, +on the interest contract.] + +[Footnote 9: See Vol. I, p. 304.] + +[Footnote 10: See Vol. I, p. 319.] + +[Footnote 11: This could not be treated in connection with the +interest-rate in Vol. I, Part IV, for the reason that even its +elementary treatment must presuppose the fuller study of the nature of +money and the study of changes in the level of prices, that has just +been given in this and the three preceding chapters. The theory of +interest in Vol. I, therefore, is a static theory in respect to the +standard of deferred payments, and requires adjustment to apply to a +condition of a changing price-level.] + +[Footnote 12: See above, sec. 3.] + +[Footnote 13: Mention was made in Vol. I of the prospect of profit +as affecting the motives of commercial borrowers; e.g., pp. 298, 335, +348, 495.] + +[Footnote 14: The modern explanation of this phenomenon was worked out +in the period of falling prices before 1896 and hence was referred to +as the theory of "appreciation and interest" (meaning the relation of +the appreciating dollar to a falling rate of interest). More generally +the theory is that of the relation of a changing standard of deferred +payments and the rate of interest.] + +[Footnote 15: See ch. 4, sec. 12, and above secs. 1, 2, 4, 5.] + +[Footnote 16: See Vol. I, on agricultural leases, p. 159, wheat +prices, p. 436, and changes in the land supply, p. 442.] + +[Footnote 17: See ch. 5, sec. 11.] + +[Footnote 18: The advocacy of this proposal was called "the +free-silver movement" because it involved resuming the free coinage of +silver at the legal ratio of 16 to 1.] + +[Footnote 19: This happened to coincide with a relative increase of +the price of food-products and of other necessities of daily life at +a greater rate than general prices. This aspect of the much discussed +rising cost of living must be carefully distinguished from that of +the change of the _general_ price level, and also from that of the +relatively slower change of wages. See Vol. I, pp. 437, 445-446 on +population and food supply.] + +[Footnote 20: See on the labor theory of value, Vol. I, pp. 210, +228-229, 502.] + + + + +PART III + + +BANKING AND INSURANCE + + + + +CHAPTER 7 + +THE FUNCTIONS OF BANKS + + § 1. Nature and classes of banks. § 2. Functions of banks. § 3. The + essential banking function. § 4. Time deposits. § 5. Demand deposits. + § 6. Discount and deposit. § 7. Nature of banking reserves. § 8. Bills + of exchange, domestic. § 9. Issue of notes. § 10. Divergent views of + typical bank notes. § 11. Banking credit as a medium of trade. § 12. + Productive services of banks. § 13. Income of banks. + + +§ 1. #Nature and classes of banks.# Banks perform a variety of useful +functions in every modern community. All these functions touch in some +way upon the use of money, and banking problems always are related to +money problems. It is our purpose now to understand the general nature +and work of banks in relation to the general business activity of the +community. A bank, as one first comes to know it, is a building (or +a room in some building) in which there is a fire- and burglar-proof +safe. In this room are men receiving and paying out money and acting +as bookkeepers. Gradually one comes to understand that the bank is +perhaps not the building but the business organization that is there +performing these transactions. + +In the United States there were in 1913 about 26,000 banks +reported.[1] These may be classified first according to the source +from which they derive their charters or authority to do a banking +business as: national, state, and private. The last are unchartered +and act under the general state laws governing private contracts; +in general they are unsupervised.[2] Banks may be classified also +according to the two main types of business they perform, as banks +for savings and commercial banks. Most banks do mainly a general +commercial business; some are distinctly banks for savings; but in +truth this dividing line can be less and less sharply drawn between +banks as wholes; rather the distinction must be made between the +savings function and the commercial discount function, which are more +and more being performed by one and the same bank. The trust company +usually well exemplifies this union of functions. This will best be +explained in connection with the subject to which we now turn, the +analysis of the functions which banks perform. + +§ 2. #Functions of banks.# Almost every bank performs various +functions useful to its customers, but some of which are not +essentially bound up with banking, and may be performed by +institutions that are not truly banks. Among these are: + +(a) Maintaining a safe deposit vault, where space may be rented by an +individual to keep his valuable papers, jewels, etc. The customer +does not usually deliver to the bank possession of the valuables, +but himself retains the key to the box which the bank has no right +to open. In larger cities this work is often done by separate +institutions. + +(b) Acting as money-changer to buy and sell moneys of different +nations. This function is of less importance in America than elsewhere +because of the great size of our country and of the small portion +of our boundaries touching those of other nations using different +monetary units. Moreover, the function is in large part performed for +Americans by ticket agencies at the ports of embarkation and by the +steamship companies en route. + +(c) Selling bonds and other investments to customers. In smaller +communities the customers of a bank turn to it as the best source +of information for safe investments of personal or trust funds. This +opens to it a new possibility of service. Large investments, however, +are usually made through the agency of more specialized investment +brokers. + +(d) Acting as trustee and business manager for passive investors, and +especially as executor and administrator of estates or as guardian of +a minor heir. This function has been taken up rapidly since about 1890 +by the trust company[3] organized under state laws. + +§ 3. #The essential banking function.# The one essential function of +a bank, however, is selling (lending) its credit to its customers in +some form which will conveniently serve the same function as money. A +bank is sometimes defined as a business whose income is derived from +lending its promises. The bank's credit is sold in the form of its +promises, the evidences of which are its receipts, depositors' +account books, drafts and checks on other banks, and bank notes. The +indispensable condition to the exercise of this function by a bank is +public confidence in its ability to fulfil its promise to pay whenever +it is due. This confidence is built upon the bank's paid-up capital; +its surplus and undivided profits: the further liability of the +stockholders to make good any losses up to an amount equal to the +capital stock each holds ("stockholder's double liability"); +the financial prestige of the bank's officers, directors, and +stockholders; the bank's established reputation and "good will" in the +community after a period of successful operation; the character of +its loans and of the securities which it owns; and, finally, by the +reliance placed in the control and inspection by official examiners. +The bank may then sell its credit in any one or in all of the +following five ways: (1) by receiving time deposits; (2) by receiving +demand deposits; (3) by the method of discount and deposit; (4) by +selling exchange of funds to distant points; (5) by issuing bank +notes. + +§ 4. #Time deposits.# Time deposits are funds to the credit of +customers which, by agreement, are to be left for some specified +minimum time or on condition that the bank may require notice in +advance of the depositor's intention to withdraw them. The notice that +may be required is usually thirty to ninety days; but only in times +of general financial crises or of runs on particular banks is this +requirement enforced. A sufficient deterrent to irregular withdrawal +of funds is usually found in the loss of interest if deposits are +withdrawn at other than stated times. The bank's right to require +notice makes prudent the investment of a much larger proportion of its +deposits and for a longer time; it reduces the proportion of deposits +needed for reserves, and yet reduces the danger of a "run" upon the +bank in time of financial distress. These are reasons why banks can +and usually do pay interest on time deposits (at from 2 to 4 per +cent), as until more recently they rarely did on demand deposits[4]. +From the standpoint of the depositor a time deposit is, by its very +nature, an investment and not a demand credit available for current +monetary uses. Only that portion of a person's capital that for some +more or less considerable period is not likely to be needed for other +purposes ought to be put into time deposits. A bank, however, is +generally a much safer place in which to keep a fund of purchasing +power for the future than is the strongest private treasure box. +Receiving time deposits is the one essential function of savings +banks, but this function is increasingly performed by other banks[5]. +Sometimes time deposits are cared for by a separate department and +kept separate from the general business of a commercial bank. + +§ 5. #Demand deposits#. Demand deposits are those payable on demand, +the demand in practice being by means of personal checks requesting +the bank to pay to (or on the order of) a specified person, or to pay +to bearer. A customer's bank account consisting of demand deposits is +called a checking account. Since the turn of the century it has become +increasingly the practice to pay a low rate of interest (about 2 per +cent) on current balances, oftener to large depositors. Banks attract +demand deposits mainly by the convenience and economy which they offer +to their customers in the guarding of funds from theft and fire and +in saving the time, trouble, and expense of carrying money for making +payments. A deposit in a bank is to the depositor for most purposes +"just as good" as money in the pocket and for many purposes is +even better. Thus the banks have become the custodians of a large +proportion of the money (or funds) needed for current use by +individuals and business corporations. + +§ 6. #Discount and deposit#. The process of discount and deposit is +the purchase of the promissory note of a customer,[6] the price being +a credit in the form of a demand deposit on the books of the bank. +This--the central and most characteristic banking operation--has +something of mystery in it at first view. The simplest idea of making +a deposit is that of bringing to a bank window bags and rolls of money +or other funds (credit papers such as checks and drafts, calling for +the payment of money). The bank in that case becomes the debtor and +the depositor becomes the creditor of the bank. But in discount and +deposit the depositor brings no money, and the credit paper that he +gives is his own promise to pay whereby he becomes the bank's debtor. +For example, when a bank discounts a thousand dollar note for three +months and credits its customer with the proceeds, its deposits are at +that moment increased (let us say) $985. Notice that hereby the bank +does not add a cent to the cash in its vaults while it has added to +its liabilities payable on demand. As an off-setting asset it holds +the note of its customer receivable at some future time. + +§7. #Nature of banking reserves#. Banks would have nothing to gain by +receiving deposits or by issuing notes if they were obliged to keep +in the vaults actual money to the amount of their deposits and +outstanding notes (unless they were paid by depositors for taking care +of deposits). Banks have found it necessary in practice to keep on +hand money amounting to only a fraction of all their outstanding +obligations in order to be able to pay promptly all due demands, +excepting in periods of general financial distress. The sum thus kept +on hand is called the _reserve_ or the _reserves_ of the bank, and +this is frequently expressed as a percentage of reserves against +deposits or against note issues, respectively. Frequently, as in the +United States, a minimum percentage of reserves is fixed by law.[7] + +A bank's reserves consist, first, of the lawful money which it +actually holds in its vaults at any moment and secondly, of certain +other credit items in other banks or with the government, of such +a nature that a bank is permitted to count them as tho immediately +available. + +The explanation of the adequacy of a mere fractional reserve is +found in the nature of the individual monetary demand[8] and in the +effective way in which a checking account serves as a substitute for +actual money.[9] Every customer, if he would avoid overdrawing his +account, must at most times keep a goodly balance to his credit that +he does not immediately need. Many individuals and corporations must +at times keep very large balances. The times of maximum monetary need +of the customers of a bank never exactly coincide and many payments +are made among the customers of a single bank, requiring only +bookkeeping transfers. A fractional reserve is therefore ordinarily +fully adequate, altho with any less than a 100 per cent reserve +any bank would be insolvent if all of its demand obligations were +presented at the same instant. Such a contingency is made impossible +by business custom and public opinion especially among the larger +customers of banks, but the panic of small depositors often brings +about dangerous conditions. + +§ 8. #Bills of exchange, domestic.# Foreign and domestic exchange +is the sale of orders for the payment of specified sums of money +at distant points. But for this, payments at distant points would +ordinarily have to be made by sending the money in some way. It must +often occur, for example, that hundreds of payments, aggregating +millions of dollars, must be made by persons in and near Chicago to +those in and near New York, while, at the same time, equally large +sums are due from New York to Chicago. The wasteful process of +shipping these sums back and forth is avoided by the cancellation of +indebtedness between the two localities. It has been the practice for +each small bank to keep a part of its legal reserves in correspondent +banks in one or more of the larger cities on which it draws bills +of exchange for its customers and to which in turn it remits for +collection drafts and checks which it has received. From time to +time, as balances of accounts increase on the one side or the other, +shipments of actual money become necessary, but these are only a small +fraction of the total amount of the bills of exchange. Similarly, the +settlement of accounts between any two localities can be made by +the shipment of comparatively small sums of money. Under the Federal +Reserve Act the reserve banks are in various ways assuming the +functions of the correspondent banks. + +The wider use and acceptance of individual checks at long distances +from the banks upon which they are drawn limit by so much the +proportion of special bills of exchange drawn by the banks themselves. +Domestic exchange involves just the same principles as foreign +exchange of funds, except that in the latter, usually, two different +units of standard money are used. In connection with the discussion of +foreign trade below, foreign exchanges will be explained and further +light will be thrown upon the adjustment of the money supplies and +levels of prices of the various sections of a single country as well +as between different countries. + +§ 9. #Issue of notes#. The issue of bank notes as a mode of lending a +bank's credit calls for consideration here. Yet it must be observed +at once that comparatively few banks in the world have now the legal +right to issue their own notes. In some cases the right has been +granted as a monopoly to certain banks in return for specified +payments and services. But in general the function of bank note +issue has come to be treated as so closely connected with that of +the coinage and regulation of the standard money that it has been +increasingly limited in each country to a central national bank, +or group of banks, which is in many respects practically if not +technically an organ of the government. This public nature of bank +note issues has been strikingly evident in Russia, England, France, +Germany, and other countries since the outbreak of the war in 1914. + +No two countries have quite the same system and kind of bank notes. +It is well to consider first, therefore, the qualities of typical bank +money. This consists of notes issued by banks on the credit of their +general assets, without special regulation by law. With such a form of +note we have had until 1914 no experience in the United States since +1866, at which time a federal tax of 10 per cent on state bank notes +made their issue unprofitable. Since the passage of the Federal +Reserve Act we have temporarily two kinds of national-bank notes, the +old bond-secured notes, in use since 1863 (very different from the +typical form),[10] and the new kind of Federal reserve notes very +nearly typical in character but issued only by the Federal reserve +banks, not by individual banks. + +A bank, by the issue of notes, puts into circulation as money its own +promises to pay. The customer, in borrowing money or in withdrawing +deposits or cashing checks and drafts from other banks, is paid with +the bank's notes instead of with standard money. These notes may be +returned to the issuing bank either to be redeemed in specie or to be +paid in some other form of credit, such as deposits or exchange. The +limit of the issue of such notes is the need of the community for that +form of money, and if they are promptly redeemed in standard money on +demand, they never can exceed that amount. A holder of a note (in the +absence of special regulations) has the same claim on the bank that +a depositor has. As it is to the interest of the bank to keep in +circulation as many notes as possible, there is a temptation to abuse +the power of note issue, to which many banks in America yielded in the +period of so-called "wild-cat" banking before the Civil War. + +§ 10. #Divergent views of typical bank notes#. Some persons seeing in +bank notes but a form of ordinary commercial credit (like a promissory +note or an individual's check) have contended that their issue should +be entirely unlimited and unregulated except by the ordinary law of +contract which makes the bank liable to redeem the notes on demand. +Such bank notes would not be legal tender, and every one would be free +to take or refuse them as he pleased. Each bank would thus put into +circulation as many notes as it could, and as they would constantly +be returned for redemption when not needed as money their volume would +expand and contract with the needs of business. + +It may be conceded that there is much truth in this view, but not the +whole truth. For, in reality, when bank notes are in common use, every +one is compelled to take the money that is current. This offers a +constant temptation to the reckless and unscrupulous promotion of +banking enterprises, as has been repeatedly shown (notably in America +in the days of "wild-cat" banking before 1860). The average citizen +cannot know the credit of distant banks, and thus has not the same +power of judging wisely in taking bank notes that he has even in +making deposits in the bank of his own neighborhood. Between bank +notes and ordinary promissory notes there are other differences. Bank +notes pass without endorsement and thus depend on the credit of the +bank alone, not, like checks, on the credit of the person, from whom +received. Unlike ordinary promissory notes, they yield no interest +to the holder. They go into circulation and remain in circulation for +considerable time by virtue of their monetary character in the hands +of the holders. Thus they approach political money in their nature, +and the banks are near to exercising the sovereign right of the issue +of money. + +At the other extreme of view have been those who consider bank notes +to be essentially of the nature of political money. If they are so, it +is argued, the power of issue should not be exercised by any but the +sovereign state. In this view it is overlooked that bank notes, unlike +inconvertible paper money, depend for their value on the credit of the +bank, not on their legal-tender quality and on political power.[11] +They must be redeemed on penalty of insolvency; government notes need +not be, and yet will circulate at par if properly limited. Adequate +provision for the prompt return and redemption of bank notes makes +them "elastic" in their adaptation to monetary needs, which fluctuate +with changes in commerce and industry from season to season and even +from day to day. + +The predominant opinion to-day is that in their economic nature bank +notes share to some extent the character both of private promissory +notes and of political paper money. They stand midway between the two. +Everywhere it has come to be held that the issue of paper money of any +kind is in its nature a public monopoly, and yet everywhere the +bank note policy has come to be that of permitting the issue only to +certain institutions, under strict public legislation and regulation, +and of requiring in return for this privilege some substantial +services or payments to the government. + +§ 11. #Banking credit as a medium of trade.# The credit which, in five +ways, banks sell (see above, section 3) serves, in most cases, the +purposes of money to their customers. This is least true of time +deposits, for the motive of the depositor in such cases is usually to +_invest_ his funds for a time rather than to keep them available as +money. However, there are many cases in which persons save for some +moderately distant use--such as the purchase of furniture, of a piano, +of a house. The safety and convenience of time deposits, combined +with the reward of a small rate of interest, cause great sums, in the +aggregate, to be deposited as _temporary_ savings, which otherwise +would be hoarded in the form of money and thus withdrawn from +circulation. In all such cases the time deposit is serving both as +an investment and as a monetary fund for future use. This is a great +economy in the use of money, for experience shows that in the savings +banks of America the average reserves of actual money kept against +deposits are only about 1-1/2 per cent. In countries where banks are +little known, the amount of actual money hoarded is therefore vastly +greater than it is in the United States where there are $5,000,000,000 +of individual deposits in _regular_ savings banks, besides large sums +in time deposits in commercial banks. + +Demand deposits, while not money, clearly perform the function of a +reserve of purchasing power for depositors and reduce by so much the +amount of money each must keep at hand to meet his current needs of +purchasing power. If the depositor's credit balance bears no interest, +he has no motive to keep a balance greater than he would require +of actual money, and he has the motive to spend it or invest it in +income-bearing capital whenever his balance (plus his cash in hand) +exceeds his monetary needs.[12] Thus demand deposits are often spoken +of (somewhat inaccurately) as "deposit currency," being funds at +the command of depositors which are as disposable and as active and +current for the monetary function as so much actual money would be. +It is estimated that the rate of turnover of deposits in the United +States is about 50 times a year. We may view the demand deposits +subject to check as either a substitute for money or as a means by +which the rapidity of circulation and the monetary efficiency of +actual money held in bank reserves is multiplied many fold.[13] + +The method of payment by bank drafts in domestic exchange reduces the +need for, or increases the efficiency of, money in just the same way +as does the use of checks. By the mutual credit of banks in different +parts of the country, very large payments may be made in both +directions with the movement of only the comparatively small amount +of physical money needed to pay the balance after the cancellation of +drafts, bills of exchange, and checks. + +The use of bank notes reduces the amount needed of other kinds +of money more directly, tho not more effectively, than do deposit +accounts. Bank notes _are_ money, and so long as their amount is +limited by prompt redemption they circulate _instead of_ so much of +other kinds of money. Redemption is possible by the use of a reserve +of standard (or of legal tender) money very much smaller than the +amount of notes outstanding. + +§ 12. #Productive services of banks.# There have always been some +erroneous ideas regarding the magic power of banks to multiply the +power of money. But there should be no more of mystery about +banking credit than about the nature of money itself. Banks are the +labor-saving machinery of finance. They gather loanable funds, reduce +hoarding, make money move more rapidly, and create a central market +between borrowers and lenders for the sale of credit. While not +creating more physical wealth directly, they add to the efficiency +of wealth; they simplify and quicken the movement of nearly all +commercial transactions. Banks perform incidentally a further service +in developing better business methods in the community. They enforce +promptness and exactitude in business dealings. In supplying credit to +enterprises, banks are constantly passing judgment on the collateral +security presented to them and on the soundness of the enterprises +that are seeking support. This gives to bankers great economic power, +capable at times of misuse in political and social affairs, especially +where a group of selfish men come to exercise a practical monopoly of +business credit in any community. + +§ 13. #Income of banks.# The income of banks is drawn from different +sources, according to the size of the community and the nature of the +banks. While in the villages and smaller cities the commercial banks +perform a number of functions, in the larger cities they usually +specialize in a far greater degree. The trust companies, however, with +their greater versatility, are increasing in number. The income +of banks is derived from discounts, interest on their own capital, +charges for exchange and collection, dividends, interest and rents on +investments, and profit from their bank notes. The capital with which +a bank starts in business[14] could be loaned with less trouble and +more cheaply without starting a bank, but used as a banking capital it +can be loaned in part while still serving to attract deposits, which +are the main source of the income of banks to-day. Charging smaller +customers for exchange is a source of income to some banks, but in +many cases this service is freely performed for regular customers and +becomes a considerable expense. Banks make few investments in real +estate or other physical property; it is, in fact, their duty to keep +out of ordinary enterprises, but they are forced sometimes to take for +unpaid debts things that have been held as security. Profits on +bank notes have at times been the main, almost the sole, motive for +starting banks; but that is not the case to-day when the right of +issue is so strictly limited. + +[Footnote 1: These are classified as follows: + + _Number_ --_Per Cent_-- + _National charter_: 28.56 + National banks 7,404 28.56 + _State charter_: 67.52 + State banks 14,011 54.05 + Loan and trust companies 1,515 5.84 + Savings banks 1,978 7.63 + _Private_: 3.92 + Private banks 1,016 3.92 + ------ ------ ------ + 25,924 100.00 100.00 +] + +[Footnote 2: Opinion favors prohibiting the use of the word bank +to any except regularly incorporated organizations, or at least +subjecting private banks to the same supervision as the chartered +banks.] + +[Footnote 3: Not to be confused with a trust in the sense of a +monopolistic enterprise, with which it has no connection except by +mere verbal accident, through the word trust.] + +[Footnote 4: See next sec.] + +[Footnote 5: The Federal Reserve Act of 1913 has given encouragement +to this practice by reducing to 5 per cent the reserve required to be +kept against time deposits. See ch. 9, sec. 7.] + +[Footnote 6: Usually with deduction of interest in advance; a process +called discount. See Vol. 1, pp. 275, 302.] + +[Footnote 7: The legal requirements as to minimum reserves vary +greatly from no specific per cent to 40 or more in different +countries, for different classes of banks, and for different purposes. +Some examples of legal reserve requirements in the United States occur +in the two following chapters.] + +[Footnote 8: See above, ch. 4, sec. 5.] + +[Footnote 9: See below, sec. 10.] + +[Footnote 10: Including, now, some Federal Reserve bank notes secured +by United States bonds.] + +[Footnote 11: In some cases, as during the bank restriction in +England, 1797-1821, bank notes become inconvertible--practically +political money.] + +[Footnote 12: Payment of interest on credit balances reduces the +motive to withdraw for investment elsewhere any such excess, and +mingles in the depositor's thought monetary and investment motives.] + +[Footnote 13: In the United States in 1914 there were individual +deposits reported in banks other than savings banks to the amount of +about $13,400,000,000 + + In national banks .................................. $6,000,000,000 + + In state banks ..................................... 3,250,000,000 + + In loan and trust companies .......................... 4,000,000,000 + + In private banks ..................................... 150,000,000 + +Nearly all these were doubtless demand deposits (what proportion were +time deposits we have no data for determining), and were available as +immediate purchasing power for the depositors. The total money (other +than bank notes) in the commercial banks of the country was hardly 11 +per cent of this amount. In that year the total amount of money of all +kinds in circulation (and in banks) in the United States (outside the +Treasury), including gold and silver and certificates represented +by bullion in the treasury, United States notes of all kinds, and +national bank notes, was about one fourth of the amount of these +individual deposits in commercial banks. This may suggest the enormous +influence that banking has in determining the average efficiency of +the circulating medium of the country.] + +[Footnote 14: See above, sec. 3.] + + + + +CHAPTER 8 + +BANKING IN THE UNITED STATES BEFORE 1914 + + § 1. The First and Second Banks of the United States. § 2. Banking + from 1836 to 1863. § 3. National Banking Associations, 1863-1913. + § 4. Defects of our banking organization before 1913. § 5. Lack of + system. § 6. Inelasticity of credit. § 7. Periodical local congestion of + funds. § 8. Unequal territorial distribution of banking facilities. + § 9. Lack of provision for foreign financial operations. § 10. The + "Aldrich plan." + + +§ 1. #The First and Second banks of the United States.# + +A knowledge of the history of banking is helpful to an understanding +of the present banking system in our country. The form of our present +banking system has been affected by various economic and political +events which will be sketched here in broad outline to give a +background for our present study. + +Alexander Hamilton, the great first Secretary of the Treasury in +Washington's cabinet, advocated the charter of a central national +bank as one portion of his larger plan of national financiering. His +purpose was realized in the chartering, in 1791, of the First Bank of +the United States, for a period of twenty years. The capital for this +institution was in small part subscribed by the government, but mostly +by private capitalists. The management of the bank was left almost +entirely in private hands. The central bank established branches +in many parts of the country, issued bank notes which circulated +everywhere without depreciation, acted as the governmental depository +of funds and as governmental agency in various ways. It seems to +have been successful and useful as a banking institution until +the expiration of its charter in 1811, but it was touched by the +contemporary controversies over state rights and was from the first +opposed by those who feared the growth of a strong central government. +This opposition prevented the extension of its charter. + +In 1816, however, after only a moderate discussion, the Second Bank +of the United States was chartered for a period of twenty years. This +also, in its purely banking aspects, seems to have been distinctly +successful, conducting numerous branches in various parts of +the country, maintaining at all times the parity of its notes, +facilitating domestic exchange throughout the country, and enjoying +unquestioned credit and solvency. However, this bank became, even in +a greater degree than did the First Bank, the creature of political +rivalries. In the period of rising democratic sentiment typified +and led by Andrew Jackson, the bank came to be looked upon as the +embodiment, or the stronghold, of plutocratic interests, and Congress +permitted its charter to expire by limitation in 1836, near the close +of Jackson's administration. + +§ 2. #Banking from 1836 to 1863#. The Federal Government, which up to +that time had deposited its funds in the central bank and its branches +and in local state banks, established the "independent treasury," in +1840 (abolished in 1841 and re-established in 1846). By this plan the +government kept its money of all kinds in various depositories (or +sub-treasuries) in charge of public officials. While from 1792 to 1836 +almost continuously a central banking system was in operation, other +banks, organized under state charters, were steadily increasing in +number. They received deposits, issued bank notes under state laws, +and cared for local commercial needs. The abolition of the central +national bank in 1836 left to the various state banks for twenty seven +years all the banking functions of the country. The banks of some +states (notably those of New England and New York), under careful +regulation and held to strict standards by public sentiment, for the +most part maintained a high credit; but many banks, under lax laws and +regulations, were guilty of great abuses of credit and of downright +dishonest practices. The evils were more especially evident in +connection with excessive issues of bank notes. + +§ 3. #National Banking Associations, 1863-1913#. The next step in +federal legislation was taken in 1863 in the midst of the Civil War by +chartering local "national banking associations." The purpose was in +part to provide banks under national charters for banking purposes +(both of deposit and of issue), and in part it was to make a wider +market for United States bonds at a time when government credit was +at low ebb. The plan adopted followed the experience of New York state +(1829 on) with a system of bond-secured bank notes. Congress provided +that every bank taking out a national charter must purchase bonds of +the United States and deposit them with the treasurer of the United +States, in return for which it would receive bank notes to the amount +of 90 per cent of the denomination or of the market value of the +bonds.[1] Bank notes issued on this plan, being secured by the bonds, +rest ultimately on the credit of the government, not on the credit of +the bank. They are not promptly sent back for redemption to the banks +issuing them, as should be done if they were typical bank notes. They +may circulate thousands of miles away from the bank that issued them, +and for years after the bank has gone out of business. They are not +an "elastic currency," increasing or diminishing with the needs of +business. The changes in their amount depend upon the chance of the +banks to make more or less in this way than by any other use of their +capital, and this in turn depends largely on the price of bonds and on +the rate of interest they bear. From 1864 to 1870, fortunes were made +from this source, but thereafter banks could make little more from +note issues than they could by investing the same amount in other +ways. Many banks for a long period did not avail themselves in the +least of their privilege of issue. The notes were subject to a tax.[2] + +A national bank (as the law now stands) may be organized, with $25,000 +capital in towns not exceeding three thousand population, with $50,000 +in towns not exceeding six thousand, with $100,000 in cities not +exceeding fifty thousand, and with $200,000 in large cities. Three +cities, New York, Chicago, and St. Louis, have long been designated as +central reserve cities, and some 47 other cities as reserve cities, +in which the reserves of banks were required to bear a considerably +larger proportion to their deposits than in other cities.[3] Other +banks might count as part of their legal reserves their deposits in +reserve city banks, up to a certain proportion. The national banks in +the larger cities thus became the great capital reservoirs of cash for +the whole country. + +National banks have been subject to stricter inspection than have been +the banks in most of the states, a fact which has strengthened public +confidence in their stability. Except in this and the other respects +above mentioned, a national charter offered few, if any, attractions +to small banks, a majority of which have found it more advantageous to +operate under state charters because of less stringent regulations as +to amount of capital, reserves, and supervision. + +§ 4. #Defects of our banking organization before 1913#. Taken +altogether, the banks in the United States since 1868 have represented +great banking power and very efficient service for the community in +times of normal business. But in several respects it long ago became +evident that our banks were operating less satisfactorily than those +of several other countries. American banking organization had failed +to keep pace with the increasing magnitude and difficulty of its +task. Especially at the recurring periods of financial stress, such as +occurred in 1893, 1903, and 1907, our banking machinery showed itself +to be wofully unequal to the strain put upon it. Financial panics +were more acute here than in any other land, and the evil clearly +was traceable in large part to defects in the banking situation. In +academic teaching and in public conferences of bankers, business men, +publicists, and students, the subject was continually discussed +after 1890. At length Congress in 1908 created a "National Monetary +Commission" to inquire into and report what changes were necessary and +desirable in the monetary system of the United States or in the laws +relative to banking and currency. After the most extended inquiry +and discussion that the subject had ever received, the commission +submitted its report in January, 1912. The defects to be remedied, +as enumerated in the report,[4] may be reduced to the following five +headings: (a) Lack of system, (b) Inelasticity of credit, (c) Periodic +local congestion of funds. (d) Unequal territorial distribution of +banking facilities. (e) Lack of provision for foreign banking. + +§ 5. #Lack of system#. Only in a loose sense could the banks of the +United States be said (before 1914) to constitute a system at all. +Both national and state laws dealt with individual banks only. It was +not legal for a bank to establish branches in another city as is done +in most countries. The several national banks in one city were legally +quite separate. It was only by voluntary agreement that in some of +the larger cities they came together into clearing-house associations. +They made possible some measure of coöperation which, small as it +was, proved at times of stress to be of much service within a limited +sphere for the local communities. But even with the aid of these +organizations the banks were unable in times of emergency to avoid the +suspension of cash payments. + +There was no provision whatever for the concentration of bank revenues +so that each bank would be supported by the strength of the other +banks, if a movement began to withdraw deposits in unusual amounts. +Each bank then was compelled for self-protection to call for any sums +it had deposited with other banks,[5] and to keep for its own use all +the reserves it might have in excess of its own immediate needs. This +threw a great strain upon the banks in the reserve cities, which +in normal times had become the depositories of a good part of the +reserves of the banks in other places. Thus developed a spirit of +panic, like the fright of theater-goers crowding toward the door at +the cry of fire. + +The maintenance of the government's independent treasury contributed +to the difficulties by causing the irregular withdrawal of money from +circulation and thus depleting bank reserves in periods of excessive +government revenues and by returning these funds into circulation only +in periods of deficient revenues. Efforts to modify this system by +a partial distribution of the public moneys among national banks had +resulted, it was charged, in discrimination and favoritism in the +treatment of different banks and of different sections of the country. + +§ 6. #Inelasticity of credit#. Our banks, considered both separately +and collectively, were unable to increase their loaning powers +quickly and easily to respond to business needs. The need of greater +elasticity of credit was felt in the more or less regular seasonal +variations within the year, and in the more irregular variations +in cycles of years from periods of prosperity to those of panic and +depression in business. The inelasticity was necessitated by illogical +federal and state laws restricting absolutely the further extension of +credit when the reserves fell below the percentage of deposits (15 or +25 per cent) fixed by law. Reserves thus could not legally be used to +meet demands for cash payments at the very time when most needed. +This feature has been likened to the rule of the liveryman who always +refused to allow the last horse to leave his stable so that he would +never be without a horse when a customer called for one. The refusal +of credit by the banks at such times when they still had large amounts +of cash in their vaults increased the need and eagerness of the public +to draw from the bank all the cash they could, and often precipitated +the insolvency of the banks. Clearly some means were needed to enable +the loaning power of the individual banks to be increased at such +times, so that no customer with good commercial paper need fear to +be refused a loan, even tho the rate of interest might have to be +somewhat higher for a few days or weeks than the normal rate. + +Our bond-secured bank notes lacked almost entirely the quality of +elasticity needed to meet these changing business needs.[6] Their +value being dependent primarily upon the amount and price of United +States bonds, they might be most numerous just when least needed as a +part of our circulating medium. + +§ 7. #Periodical local congestion of funds#. In times of general +confidence each bank finds it profitable, and is tempted, to extend +its credit to the extreme limit permitted by the law governing the +proportion of reserves to deposits. Of the 15 per cent reserves +required in most banks, three-fifths (9 per cent) might be kept in +banks in reserve cities, and of the 25 per cent in reserve city banks, +12-1/2 per cent might be kept in central reserve cities, where it +counted as part of the depositing banks' legal reserves, was a fund +upon which domestic exchanges could be drawn, and usually earned a +small rate of interest (usually 2 per cent). Very large reserves were +kept in New York city where they could be loaned "on call," and the +largest use for call loans was in stock-exchange speculation. Thus +every period of prosperity encouraged an unhealthy distribution of +reserves, gave an unhealthy stimulus to rising prices, and "promoted +dangerous speculation." + +§ 8. #Unequal territorial distribution of banking facilities.# Another +aspect of this concentration of surplus money and available funds in +the larger cities was the comparatively ample provision of banking +facilities in the cities and in the manufacturing sections, and +imperfect provision in the agricultural districts. The whole financial +system seemed designed to induce the poorer country districts to lend +funds at low rates of interest to be used speculatively in cities, +instead of enabling the richer districts, the cities, to lend to the +rural districts for productive enterprise. The rates of bank +discount in different sections of our country have long been most +unequal--lowest in the largest cities, and highest in the rural South +and West--whereas in all parts of Canada, with a different system of +banking, the rates have long been much more approximately uniform. + +Indeed, our national banking development has been predominantly urban +and commercial to the neglect of rural and agricultural interests. +National banks were (until 1913) forbidden to make loans on real +estate, and this greatly "restricted their power to serve farmers and +other borrowers in rural communities." There was "no effective +agency to meet the ordinary or unusual demands for credit or currency +necessary for moving crops or for other legitimate purposes." The lack +of uniform standards of regulation, examination, and publication of +reports in the different sections prevented the free extension of +credit where most needed. Finally, the methods and agencies for +making domestic exchange of funds were, compared with other countries, +imperfect and uneconomical even in normal times and could not "prevent +disastrous disruption of all such exchanges in times of serious +trouble." + +§ 9. #Lack of provision for foreign financial operations.# Not without +its influence on public opinion was the consideration that we had "no +American banking institutions in foreign countries." Many bankers and +business men felt, as did the commission, that the time had come when +the organization of such banks was "necessary for the development of +our foreign trade." Foreign banks in South America and the Orient, +handling American trade, were believed to favor their own countrymen +rather than the interests of American merchants. In contrast with the +European nations with their centralized control of banking, we had "no +instrumentality that" could "deal effectively with the broad questions +which, from an international standpoint, affect the credit and status +of the United States as one of the great financial powers of the +world. In times of threatened trouble or of actual panic these +questions, which involve the course of foreign exchange and the +international movements of gold, are even more important to us from a +national than from an international standpoint." + +§ 10. #The "Aldrich plan."# The National Monetary Commission submitted +with its report a plan which was known by the name of the commission's +chairman, Senator Aldrich. This plan was embodied in a bill for +a National Reserve Association, a bank for banks which bore some +likeness to the great central banks of Europe. In the many details +of the plan an effort has been made to remedy every one of the +difficulties above described and to supply all the needs indicated. +The plan was favored pretty generally by bankers, but called forth +many adverse opinions. In the year of a presidential election, +however, Congress took no action in the matter. All parties were +pledged to some kind of banking reform, but particular proposals were +not discussed in the campaign. + + +[Footnote 1: Whichever was the smaller. In 1900 this was changed so +that notes could be issued to the full amount of the denomination of +the bonds.] + +[Footnote 2: In recent years this has been one half of 1 per cent when +2 per cent bonds, and 1 per cent when bonds bearing a higher interest, +were deposited.] + +[Footnote 3: In reserve cities 25 per cent and in other cities 15 per +cent. The details of the regulations in the old law (given in part +below, sec. 7) were ll altered by the legislation of 1913.] + +[Footnote 4: The expressions within quotation marks in the following +sections are taken from this report.] + +[Footnote 5: See further on this in sec. 7 on periodical congestion of +funds.] + +[Footnote 6: See above, sec. 3.] + + + + +Chapter 9 + +THE FEDERAL RESERVE ACT + + § 1. General banking organization. § 2. The Federal Reserve Board. + § 3. Federal reserve banks. § 4. Federal reserve notes. § 5. Reserves + against Federal reserve notes. § 6. Reserves against Federal reserve + bank deposits. § 7. Reserves in member banks. § 8. Rediscount by + Federal reserve banks. § 9. Changes in national banks. + § 10. Operation of the Act. + + +§ 1. #General banking organization#. President Wilson and the newly +elected Congress with its Democratic majority made banking reform one +of the main objects on the program for the special session beginning +March 5, 1913. The result was the Glass-Owen bill, which became law +as the Federal Reserve Act December 23 of that year. The bill was +actively discussed within and without the halls of Congress, and +many of its features were attacked by bankers individually and acting +through the bankers' associations, at various stages of its progress. +As a result it underwent numerous amendments in details, and tho it +remained in most essentials as it was first proposed, it was at last +accepted even by its critics as on the whole a beneficent act of +legislation. Indeed, its strongest critics had been the friends of +the Aldrich plan, and the Federal Reserve Act embodies, in a greater +degree than its authors were ready to admit, the main features of the +Aldrich plan. In one important respect, however, it is different; it +provides for more decentralization of control and of reserves than did +the Aldrich plan. It created not one central banking reserve, but, in +the end, twelve regional, or district, banks each to keep the reserves +of its district. The Jacksonian tradition of opposition to a central +bank[1] in part helps to explain this; in part the contemporary +congressional investigation and discussion of the so-called +"money-trust" and the consequent desire to decrease the importance of +"Wall Street" and of New York city banking power. + +On the accompanying map are given the outlines of the districts as +constituted and altered down to 1916.[2] + +[Illustration: FEDERAL RESERVE BANK DISTRICTS] + +§ 2. #The Federal Reserve Board#. At the head of the banking system +stands the Federal Reserve Board of seven members, five of them +appointed by the President and Senate of the United States for this +purpose, and two serving _ex-officio_--the Secretary of the Treasury +and the Comptroller of the Currency. One of the five shall be +designated by the President as Governor and one as Vice-Governor of +the Board, but the Secretary of the Treasury is _ex-officio_ chairman. +The term of the appointive members is ten years and the salary is +$12,000 a year. + +The powers of the board are numerous and important. The board is made +the head of a real _system_ of banking, the twelve parts of which can, +in times of emergency, and at the board's discretion, be compelled +to combine their reserves by means of lending to each other +(rediscounting), to the very limit of their resources, at rates fixed +by the board. By this means the reserves of the several district banks +may be "piped together" and thus be practically made into one central +bank under governmental control, altho centralization was in outward +form avoided by the bill. Alongside of the Reserve Board, is placed a +Federal Advisory Council, consisting of one member from the board of +directors of each of the twelve district banks. This council has only +the power to confer with, make representations and recommendations to, +and call for information from, the Federal Reserve Board. + +§ 3. #Federal reserve banks#. The twelve Federal reserve banks which +opened for business November 16, 1914, are of a type of institution +new in our financial history. They are "banks for banks" belonging to +the system in their respective districts. Every national bank must, +and any state bank or trust company may,[3] subscribe for stock to +the amount of 6 per cent of its capital and surplus, and thus become +a "member bank." The capital of each Federal reserve bank was to be +at least $4,000,000; in fact only two of those organized (Atlanta and +Minneapolis) had at their opening less than $5,000,000 capital; the +largest (New York) had $21,000,000, and the average was $9,000,000. +The member banks are to receive dividends of 6 per cent, cumulative, +on this stock, and net earnings above that amount are to be paid to +the Government as a franchise tax.[4] + +Each reserve bank has nine directors, consisting of three classes of +three men each. Classes A and B are elected by the member banks by a +system of group and preferential voting designed to prevent the large +banks from outvoting the smaller ones. Directors of class A are chosen +by the banks to represent them, and are expected to be bankers; those +of class B, tho chosen by the banks and tho they may be stockholders, +shall not be officers of any bank, and shall at the time of their +election be actively engaged within the district in commerce, +agriculture, or some other industrial pursuit. Directors in class +C are appointed by the Federal Reserve Board, one of them being +designated as chairman of the board of directors and as Federal +reserve agent. They represent the public particularly, and may not be +stockholders of any bank. + +Any Federal reserve bank may: + +a. Receive deposits from member banks and from the United States. + +b. Discount upon the indorsement of any of its member banks negotiable +papers, with maturity not more than ninety days, that have arisen +out of actual business transactions, but not drawn for the purpose of +trading in stock and other investment securities. + +c. Purchase in the open market anywhere various kinds of negotiable +paper. + +d. Deal anywhere in gold coin and bullion. + +e. Buy and sell anywhere bills, notes, revenue bonds, and warrants of +the states and subdivisions in the continental United States. + +f. Fix the rate of discount it shall charge on each class of paper +(subject to review by the Federal Reserve Board). + +g. Establish accounts with other Federal reserve banks and with banks +in foreign countries or establish foreign branches. + +h. Apply to the Federal Reserve Board for Federal reserve notes to be +issued in the manner below indicated. + +§ 4. #Federal reserve notes#. In 1914 there were outstanding about +$750,000,000 of what we may now call the old-style bank notes +(bond-secured). These were by the new act not forcibly retired at +once; but, as the law is shaped, they probably will be retired at +the rate of about $25,000,000 a year, and will all disappear from +circulation in thirty years.[5] + +Whenever the banks having old-style bank notes outstanding desire to +retire any of their circulating notes, the Federal reserve banks +are required[6] to purchase the bonds in due quota (not to exceed +$25,000,000 in any one year). On the deposit of these bonds with the +Treasurer of the United States, the Federal reserve banks may receive +other circulating notes (essentially of the old style) called Federal +reserve bank notes, or may receive 3 per cent bonds not bearing the +circulating privilege. + +The new kind of notes provided by the act are called Federal reserve +notes. They are not secured by the deposit of government bonds, but +they are secured beyond all question in other ways. First, they are +obligations of the United States receivable for all taxes, customs, +and other public dues, and are redeemable in gold on demand at the +Treasury of the United States. Secondly they are receivable by all +member banks in the twelve districts and by all Federal reserve banks, +and redeemable by the latter in gold or lawful money (which includes +greenbacks and gold and silver certificates). Thirdly, their credit +and prompt redemption is insured by certain elastic rules as to +reserves in gold which must be kept for the redemption of outstanding +notes. Fourthly, they are secured by collateral, consisting of notes +and bills accepted for rediscount from member banks, which must be +deposited by a Federal reserve bank with the Federal reserve agent of +its district, dollar for dollar for every note it receives. Fifthly, +the notes become "a first and paramount lien on all the assets of the +bank." This is what gives the notes their character of asset currency. +It is evident that the notes unite in a manner without example +the characteristic of asset bank notes with the characteristics of +political paper money.[7] + +No notes, it will be observed, are issued by or on request of the +member banks, but only on request of a Federal reserve bank. After the +notes have been issued, the bank may reduce its liability any day by +depositing lawful money with the Federal reserve agent who is right +there in the bank. The Federal reserve banks and the United States +Treasury must promptly return to the banks through which they were +issued all notes as fast as they are received, and "no Federal reserve +bank shall pay out notes issued through another on penalty of a tax of +ten per centum." The regulations do not apply to the member banks, +but their effect must be to keep notes from circulating long in any +district except that for which they were issued. + +§ 5. #Reserves against Federal reserve notes.# The rule applying in +normal times to reserves against note issues is that each bank must +provide a reserve in gold equal to 40 per cent "against the Federal +reserve notes in actual circulation, and not offset by gold or lawful +money deposited with the Federal reserve agent." At least 5 per +cent is to be on deposit in the Treasury of the United States. The +proportion of reserves to the liability for note issues by any bank, +however, may be allowed to fall below 40 per cent, on condition that +the Federal Reserve Board shall establish a graduated tax of not more +than 1 per cent per annum (it evidently might be made less if the +board chose) upon such deficiency, until the reserves fall to 32-1/2 +per cent and thereafter a graduated tax of not less than 1-1/2 +per cent on each additional 2-1/2 per cent deficiency or fraction +thereof.[8] + +This tax must be paid by the reserve bank, but it must add an amount +equal to the tax to the rates of interest and discount charged to +member banks. The effect of these rules is to give a power of note +issue in time of emergency without compelling the reserve banks to +lock up their reserves held against notes. Suppose for example that +the circulating notes were in normal times $1,000,000,000 and the +reserves, therefore, were $400,000,000 and the rate of discount 5 per +cent. Then the circulation might be doubled with the same reserves, +the proportion thus falling to 20 per cent of outstanding notes, and +the rate of discount to customers rising to 13.5 per cent (5 plus +8.5). Or, to take a most extreme supposition, suppose that the +withdrawal of gold had been so great as to reduce the reserves against +notes to $50,000,000; yet outstanding notes might be doubled (becoming +$2,000,000,000,) the proportion falling to 2.5 per cent, the rate of +discount rising to 24 (5 plus 19). + +§ 6. #Reserves against Federal reserve bank deposits.# Every Federal +reserve bank shall, under normal conditions, maintain reserves in +lawful money of not less than 35 per cent against its deposits. But +the Federal Reserve Board may suspend any reserve requirement in the +Act for a period not exceeding 30 days and from time to time renew the +suspension for periods not exceeding 15 days; but in that case it +must establish a graduated tax upon the amounts by which the reserve +requirements may be permitted to fall below the levels specified as to +note issues. Altho the amount of the tax on the deficiency of reserves +against deposits is not indicated in the act (as it is in respect to +excess note issues) it is plainly the thought that the Board, to which +discretion is left, will follow somewhat the same rule in both cases. +The great discretionary power as to reserve requirements thus lodged +in the hands of the Board makes possible at times of emergency the +use of the reserves both of the reserve banks and of the member banks, +down to the last dollar, if need be, without violation of law. This +gives practically unlimited opportunity to expand credit both by +the issue of bank notes and by discount and deposit in periods of +financial crises. + +§ 7. #Reserves in member banks.# A fundamental change is made in the +rules as to the reserves against deposits that must be maintained by +the member banks. A new distinction is made between time and demand +deposits. Time deposits are defined as those payable after thirty days +or subject to not less than thirty days' notice; and demand deposits +as those payable within thirty days. In every case the reserve +requirement against time deposits is only 5 per cent. This gives +encouragement to banks to maintain savings departments. + +The requirements as to reserves against demand deposits are not +uniform, being the lowest for banks in smaller cities (the great +majority), larger for banks in the reserve cities, and largest for +banks in the three central reserve cities (New York, Chicago, St. +Louis). The act substitutes the new Federal reserve banks for the +banks in reserve and central reserve cities as the depositories of +funds that may[9] be counted as a part of the reserves of member +banks. The new rule requires that one-third must be in the bank's own +possession, a fraction slightly over a third must be in the Federal +reserve bank, and the remainder may be kept in either place. This may +be tabulated as follows: + + _Not in In reserve In central + reserve cities cities reserve cities_ + + Total reserves, per cent 12 15 18 + Must be in its own vaults 4/12 5/15 6/18 + May be either place 3/12 4/15 5/18 + Must be in a Federal reserve bank 5/12 6/15 7/18 + +These requirements as to total reserves are, as compared with +requirements of national banks under the old law, a reduction +respectively of 20 per cent, 40 per cent, and 28 per cent. The total +decrease in the amount of reserves required for all three classes of +national banks was about $400,000,000 on the amount of deposits held +in September, 1914. + +§ 8. #Rediscounts by Federal reserve banks.# More important than +any other single feature of the act is, however, that by which each +Federal reserve bank is to rediscount notes, drafts, and bills of +exchange arising out of actual commercial transactions, when indorsed +and presented by any of its member banks. This, quite apart from +the note issues, gives a power to the banks collectively, under +the general supervision and control of the board, to expand credits +indefinitely at any time for real business purposes. Any business man +able to offer any commercial paper of sound quality should now be able +to borrow on it at some rate of discount, even in the most stringent +times. And, in turn, every member bank will now be able at such times +to rediscount such paper and thus secure credit toward its reserve +requirement on the books of its Federal reserve bank. Suppose, for +example, that a member bank (in a central reserve city) saw its +reserve in the Federal bank fall below 7 per cent of its deposits. It +could by rediscounting $7000 worth of notes increase by $38,888 the +amount to which it might legally extend credit to its customers (i.e., +$7000 is 18 per cent of that sum). The deposits of the Federal reserve +bank would then be increased $7000, against which it must have a +reserve of 35 per cent, or $2450. If the reserves of any Federal +reserve bank fall too low, it can in turn rediscount its paper with +the other Federal reserve banks.[10] If the time comes when no one of +the twelve banks can longer maintain a 35 per cent reserve, the +board may reduce or suspend the requirement, levying a tax graduated +according to the deficiency. The provision here for elasticity of +credit combined with union and solidarity of all the central banking +reserves of the country to meet unusual demands in emergencies, +exceeds any needs which can be expected to arise. + +§ 9. #Changes in national banks.# There is here created a national +system of reserves, but it will be observed that membership in the new +system of the Federal reserve banks is not limited to national banks, +but is open on equal terms to banks organized under state laws. While +in most respects the general banking law remains as it was, certain +changes are of importance. The percentage of reserves henceforth +required of all member banks (as above indicated) is a substantial +reduction of the former requirement for national banks. In some other +respects the powers of national banks are enlarged. One with a capital +and surplus of $1,000,000 may with the approval of the Board establish +foreign branches, and one not situated in a central reserve city may +loan on farm lands for a term not longer than five years, but not to +exceed one third of its time deposits or 25 per cent of its capital +and surplus. National banks may now be granted permission by the board +to act as trustee, executor, administrator, or registrar of stocks and +bonds, thus having the rights that have proved in many cases to be of +advantage to trust companies organized under state laws. + +§ 10. #Operation of the Act#. It was fortunate that this act was +nearly ready to be put into operation when, August 1, 1914, the great +European war broke out. The able appointees to the Federal Reserve +Board commanded the confidence of the bankers and of the public. The +knowledge that the reserve banks would early begin operations was +reassuring during the grave financial stress of the next three months, +and the opening of the district banks in November, 1914, at once made +possible the release for commercial uses of cash reserves and +credits to meet the needs of reviving business.[11] Only an extended +experience can show how this enormous new banking organization will +operate as a whole and in its details. + +Because of the very wide discretionary powers given to the board +in the administration of the act much depends on the character and +ability of the members of the board as well as on a sound public +opinion that will keep this great power from use in partisan and +selfish ways. No doubt amendments of the act will appear necessary, +but there can be no question that the Federal Reserve Act has +inaugurated a new epoch in the banking and financial history of our +country.[12] + + +[Footnote 1: See ch. 8, sec. 1.] + +[Footnote 2: The law provided that an organization committee should +designate not less than eight nor more than twelve cities as Federal +reserve cities and should divide the continental United States, +excluding Alaska, into districts each containing one such city. Twelve +districts were designated. Wherever, therefore, the act speaks of "not +less than eight nor more than twelve," or of "as many as there are +Federal reserve districts," we may, for convenience, speak of twelve.] + +[Footnote 3: On agreeing to comply with reserve and capital +requirements of national banks and to submit to Federal examination.] + +[Footnote 4: Except that until the surplus of any reserve bank amounts +to 40 per cent of its paid-in capital stock, one half of its net +earnings shall be paid into a surplus fund.] + +[Footnote 5: These notes are all secured by the deposit of bonds of +the United States, a large share of them bearing interest at the very +low rate of 2 per cent. Two per cent is less than the market rate for +government loans, for 3 per cent bonds without this privilege +sell above par. Therefore these 2 per cent bonds were held almost +exclusively by banks, and would have lost a good share of their value +had the note-deposit privilege been withdrawn.] + +[Footnote 6: Through the Federal Reserve Board or they may do it +voluntarily, sec. 4.] + +[Footnote 7: The Act does not explicitly say by whom the notes are +issued: it says that they are "to be issued at the discretion of the +Federal Reserve Board"; that "the said notes shall be obligations of +the United States." Further on the notes are spoken of as "issued +to" a Federal reserve bank, and again as "issued through" a Federal +reserve bank, but not _by_ it. But the phrase occurs (sec. 16) "its +[i.e., the Federal reserve bank's] Federal reserve notes." The notes +thus are technically issued by the United States, but not as ordinary +political (fiat) money, for they are not given a forced circulation +by the Government in paying its indebtedness. But the banks "shall pay +such rate of interest on" the amounts of notes outstanding as may be +established by the Federal Reserve Board (i.e., to the Government of +the United States). Practically the notes (as respects choice of time +of issue, amounts, profits from them, commercial assets to secure them +and to redeem them) are asset currency issued by the several Federal +reserve banks.] + +[Footnote 8: This may be shown in the following table: + + When reserves against notes are the tax rate upon the total + are-- deficiency shall be-- + + Below 40.0 to 32.5 per cent 1.0 per cent + " 35.5 to 30.0 " " 2.5 " " + " 30.0 to 27.5 " " 4.0 " " + " 27.5 to 25.0 " " 5.5 " " + " 25.0 to 22.5 " " 7.0 " " + " 22.5 to 20.0 " " 8.5 " " + " 20.0 to 17.5 " " 10.0 " " + " 17.5 to 15.0 " " 11.5 " " + " 15.0 to 12.5 " " 13.0 " " + " 12.5 to 10.0 " " 14.5 " " + " 10.0 to 7.5 " " 16.0 " " + " 7.5 to 5.0 " " 17.5 " " + " 5.0 to 2.5 " " 19.0 " " + " 2.5 to 0.0 " " 20.5 " " +] + +[Footnote 9: The complete application of the new rule is deferred for +a period of three years from the passage of the act.] + +[Footnote 10: See on "piping" provision, sec. 2, above.] + +[Footnote 11: See sec. 7 above.] + +[Footnote 12: Several other features of the law well merit +description. Among these features are measures for developing bankers' +acceptances, open market operations, the gold clearing system of +the Federal Reserve Board, and the clearing of checks and parring of +exchange.] + + + + +CHAPTER 10 + +CRISES AND INDUSTRIAL DEPRESSIONS + + § 1. Mischance, special and general, in business. § 2. Definitions. + § 3. A feature of a money economy. § 4. European crises. § 5. American + crises. § 6. A business cycle. § 7. General features of a crisis. + § 8. "Glut" theories of crises. § 9. Monetary theories of crises. § 10. + Capitalization theory of crises. § 11. The use of credit. § 12. Interest + rates in a crisis. § 13. Dynamic conditions and price readjustments. + § 14. Tariff changes and business uncertainty. § 15. Rhythmic changes + in weather and in crops. § 16. Remedies for crises. + + +§ 1. #Mischance, special and general, in business.# Every separate +business enterprise is subject to chances which suddenly decrease +its profits and the prosperity of its owners; such are fire, flood, +illness of its owners, unfavorable changes in prices of materials +or of the products.[1] The interests of many other persons in the +neighborhood may be so bound up with an enterprise that its losses may +mean unemployment, lower wages to workingmen, and bankruptcy to local +merchants and to banks. Sometimes misfortune and disaster affect whole +communities. The lack of cotton while the Civil War was in progress +compelled the factories of Manchester to close in 1864, and the +earthquake and fire in San Francisco in 1906 left a quarter of a +million people homeless. + +But a change of business conditions is constantly occurring that is of +wider extent, that is of less accidental and of more rhythmic nature, +and that appears to be the effect of slowly working and more general +causes. The enterprise of a modern community, as a whole, "general +business," moves along, in a wavelike manner, going through a somewhat +regular series of changes that is called a business cycle. We are now +to study the nature of these cycles. + +§ 2. #Definitions.# Crisis means, generally, a decisive moment or +turning point. The word crisis suggests a brief period, a moment, +something that is sudden, severe, and soon over. In medical usage +it is the period when the disease must take a turn for better or +for worse. As used in economics, the term, however, implies a sudden +change of business conditions for the worse, a collapse of prosperity. +What precedes has not the appearance of disease, but rather that +of exuberant health. Crises in economics may be distinguished as +industrial, speculative, and financial, according as one or another +influence seems to be more potent, but all are essentially financial. +The change that occurs always is connected in some way with the use of +money and credit. + +A financial _crisis_ is the culmination of a period of rising prices, +and a sudden fall which shatters the credit of some banks, brokers, +merchants, and manufacturers. Every crisis is marked by much confusion +and loss and by hasty efforts of individuals and institutions to meet +their pressing obligations. Sometimes this process of liquidation goes +on quietly and in other cases it becomes a wild scramble, each one +trying to save himself, in which case it is a financial _panic_. +An _industrial depression_ is the period of hard times that usually +follows a financial crisis. + +§ 3. #A feature of a money economy.# Financial crises, by their +very nature, are confined to communities in which the money economy +prevails and where there is a developed state of industry. The periods +of industrial hardship in the Middle Ages were connected usually not +with the collapse of prices, but with political oppression, famine, +wars, pestilence, and scourges of nature. Throughout the lands money +was little used and there was no development of credit and of credit +prices. The money economy began, as has been noted, in the cities. +As the use of money spread, as larger commercial enterprises were +undertaken, as borrowing and the payment of interest became common, +there began to appear in city trading circles, on a small scale, the +phenomena of the modern crisis.[2] + +§ 4. #European crises.# In Europe financial crises date from 1763 +and have occurred at more or less regular intervals since. The common +statement that the cycle of a crisis is run in a period of ten +years, finds only partial support in history. The chief crises of the +eighteenth century occurred in 1763, 1783, 1793, these dates marking +the close of wars of some magnitude. The crises were not widespread +or general, but were more marked in England, which was at that time +farther developed industrially and in its money economy than other +countries. Likewise, in the nineteenth century, the crises were of +unequal force in various countries, usually being severer in England. +They may be dated 1803, 1825, 1838, 1847, 1857, 1864-66, 1875, 1890, +1900, 1907, and 1914. These were attributed to various causes; that of +1825 to over-trading abroad; that of 1847 to railroad-building; while +that of 1866 followed the severe disturbance of trade in 1864 caused +by the interruption of the cotton trade and commerce by the Civil +War in America. While in many parts of England the crisis of 1864 was +unusually severe, in other countries it was of little moment. Germany, +after several years of great speculative prosperity, had a most +severe crisis in 1875; while France, although prostrated by the war +of 1870-71, losing a large amount of wealth, and paying a thousand +millions of dollars to Germany as a war indemnity, escaped a +commercial crisis almost entirely at that time. + +§ 5. #American crises.# Since the beginning of the nineteenth century, +the financial connections of the United States with London, the +leading loan market of Europe, have been such that every crisis +in either England or America has extended its effects to the other +country. But the disturbances are so modified by the particular +conditions (of crops, politics, and speculation) that the phenomena +never correspond exactly in time of occurrence, in duration, or in +intensity. The first notable crisis in America occurred about 1817 +in the very violent readjustment of trade after the resumption of +commerce with Europe in 1816.[3] In 1837-39 came in quick succession +two crises, not quite distinct from each other, the second similar +to the relapse of a fever patient. The conditions were rapid westward +expansion, over-speculation in lands, reckless state internal +improvements, great issues of state bank notes, and the financial +measures of Andrew Jackson, which included the dissolution of the +Second Bank of the United States in 1836.[4] The crisis of 1857 +followed a period of great prosperity marked by rising gold production +and prices and a great increase in foreign trade. The crisis of 1873, +possibly the severest in our history, followed great speculation, +especially in the direction of railroad building on an unexampled +scale after the war. The blow, when it fell, was intensified by the +relative contraction of currency then in progress, leading to the +return to a specie basis and lower prices.[5] The crisis of 1884, +a comparatively slight one, occasioned (rather than caused) by the +discussion of the money question, was followed by some years of +noticeable depression. The years 1889 to 1892 witnessed prosperity, +only slightly interrupted in 1890, that culminated in a crisis in May, +1893 (likewise generally explained as due to the unsettled state of +our monetary system), followed by a period of great depression lasting +until 1897. A rapid growth of business was checked but little in 1900 +when a crisis occurred in Europe, especially severe in Germany. In +November, 1902, began in America what has been called "the rich +man's panic" of 1903 in which for a year many securities were sold +by holders because European creditors were recalling their loans. +American business, however, slackened but little, altho building +operations were somewhat checked. General prices, which had been +moving upward since 1897, remained almost unchanged in 1903 and +1904, and then continued going upward until 1907. In the period from +September to November of that year occurred a severe crisis both in +Europe and in America. The industrial depression following this was +marked in 1908, slowly growing less. The crisis at the outbreak of the +war in August, 1914, was quite exceptional, being due to the sudden +demand of Europe upon New York for funds. Within a couple of months +it was over and soon prices were again rising as the result of large +exports of merchandise followed by gold imports. + +§ 6. #A business cycle#. Let us now sketch in broad outline a business +cycle, bearing in mind that this series of changes does not repeat +itself with unvarying regularity, but that it is fairly typical in +the modern business world. The period leading up to a crisis is one +of relative prosperity; then occurs a crisis in which prices fall, +at first rapidly, and afterward for a while going slowly lower. When +prices are at the lowest point many factories are closed, and much +labor is unemployed. Let us start at that point. Conditions are worse +in some industries than in others. General economy and great caution +prevail; few new enterprises are undertaken. For those persons having +available funds this is a good time to buy, and property begins to +change hands. Then hoarded money begins to come out of its hiding +places. Money and credit flow in from other countries, particularly if +business conditions are better abroad than here, for when prices are +lower than they have been, relative to those of other countries, a +country is a good place in which to buy. At the same time that the +money in circulation thus increases, there is a general return of +confidence that increases credit. Not only are there more dollars, but +each does more work. Then old enterprises are resumed and new ones are +undertaken. The purchase of materials in larger quantities causes a +rapid rise in the prices of many raw materials and of all kinds of +industrial equipment. The less efficient laborers and others that have +been out of work, begin to find employment, and then, more tardily, +wages begin to rise. As a result, the costs of many products begin to +rise rapidly. The only classes not sharing in this improvement are the +receivers of fixed incomes. As prices rise, the purchasing power of +their incomes correspondingly falls. + +At length prices begin to go up less rapidly, and the question arises +in many minds whether the movement can continue, and if not, when it +will cease. Men wish to hold on for the last profits, and are willing +to risk something to gain them. When prices rise not only as compared +with former domestic prices, but as compared with current foreign +prices, foreign imports are stimulated and exports fall. This calls +for a new equilibrium of money and requires at length large and +continued exportation of specie. This checks prices, and, reducing the +specie reserves of the banks, compels them to be more cautious. At the +same time the increase of costs in many industries begins to reduce +profits. The fall in the value of many stocks and securities held +by the banks forces many brokers and speculators to convert their +resources into ready money. This is the moment of danger; weak +enterprises find their foundations crumbling, and there are many +failures.[6] The falling prices, the shattered credit, and the +financial losses force many factories to close, and many workmen +are thrown out of employment. This moment of widespread loss is the +crisis, It is followed by another period of low prices and of small +output, and therefore of profits small or negative in many industries. +Business must again enter upon a period of retrenchment, for it has +completed another cycle. + +§ 7. #General features of a crisis.# Altho irregular in time of +occurrence and unlike in their immediate occasions, financial crises +show certain general features. They are a part of the larger movement +here outlined as the business cycle. Some have thought this cycle to +be normally a period of ten years, divided into one year of crisis, +three years of depression, three years of recovery, and three years of +unusual prosperity. This succession of events occurs pretty regularly, +though not in the regular intervals of time. Crises are more severe in +countries with more extensive use of money and credit, but still more +severe where the credit system is more loosely administered and less +efficiently coördinated. They are harder in the United States and +England than in Germany, harder in Germany than in France, harder in +western Europe than in eastern Europe, harder in Christendom than in +heathendom. They are less severe in rural districts, where prosperity +depends more on crop conditions, and business has in it less of +financial speculation. Their effects are least felt in the staple +industries, for when hard times come people economize on the +less essential things. The glove-factory, the silk-factory, the +golf-club-factory are more likely to close than the flour-mill. In +a crisis wages and salaries are less affected than are profits, but +wageworkers suffer in the loss of employment. Those money lenders who +have eliminated chance as far as possible and have taken a low rate +of interest lose little; the risk-takers who draw their incomes from +dividends on stock or from bonds of a less stable kind, often lose +much. + +§ 8. #"Glut" theories of crises#. Many explanations of the causes of +financial crises have been offered.[7] Nearly all of these belong to +the general group of "glut" theories, of which genus there are two +species, under-consumption and over-production theories. These are, in +truth, but two aspects of the same idea.[8] The one view is that too +many goods are produced, the other that too few are consumed. The +over-production theorist seeing that in a crisis warehouses are filled +with goods that cannot be disposed of for what they cost (or at best, +not so as to give a profit), and that factories are shut down and men +are out of employment for lack of demand, declares that productive +power has grown too great. The under-consumption theorist, seeing +the same facts, says that the trouble is lack of purchasing power. He +observes that there are some people who would like to buy more of some +of these things, but that such people lack income with which to buy. +Usually he asserts that this is because production grows faster +than wages, wages being fixed, as he believes, by the minimum +of subsistence--a theory akin to the iron law of wages. In both +over-production and under-consumption theories, the inequality of +demand and supply is looked upon as a general one. There is supposed +to be not merely an unequal and mistaken distribution of production, +but a general excess of productive power. + +The wide vogue held by these views would justify a fuller discussion +and disproof of them here, did space permit. It must suffice to +indicate merely that they have the same taint of illogicalness as the +"fallacy of waste," and the "fallacy of luxury."[9] They overlook the +fact that an income, either of money or of other goods, coming even +to the wealthiest, will be used in some way. It may be used either +for immediate consumption or for further indirect use in durable +form. Through miscalculation there may be, at a given moment, too many +consumption goods of a particular kind, but the durable applications +can find no limit until the inconceivable day when the material world +is no longer capable of improvement. At the time of a crisis, there is +unquestionably a bad apportionment of productive agents, and a still +worse adjustment of their valuations, but these facts should not be +taken as proving that there is an excess of all kinds of economic +goods. + +§ 9. #Monetary theories of crises.# Another group of theories explains +the crises as being due to money, either too much or too little. The +unregulated issue of bank notes has been assigned as the cause of +crises, especially under the circumstances accompanying such crises +as those of 1837 and 1857 in America, when bank note issues greatly +contributed to the unsound expansion of credit. The issue of +government paper money years before, leading to inflation and +speculation, was by many believed to be the cause of the crisis +of 1873. The reverse view is taken by the advocates of a cheap and +plentiful money. They say that these crises were caused, not by the +expansion, but by the contraction of the money stock; for example, not +by the inflation of prices through the issue of greenbacks in 1862 to +1865, but by the contraction of the currency from 1866 to 1873. + +There is only a fragment of truth in these various views. It is always +lack of "money" at the moment of the crisis that causes any particular +failure, and in that sense it is always lack of "money" that causes +a crisis. The question is, whether in any reasonable sense it can be +said that it was lack of a circulating medium before the crisis that +brought it on. There is no support for this view, except in the rare +case when the money standard is undergoing a rapid change, as in the +United States from 1866 to 1873, and the statement then needs much +modification and explanation. The monetary theories of crises are a +bit nearer to the truth than are those of the over-production type, +for the crisis is always connected with prices and credit. But it +is clear that these rhythmic price changes occurring in the business +cycle are not due to the same causes as are the general movements of +the price level, due to an increasing or decreasing output of gold or +again to a paper money inflation. Statistics show that while a general +price level is slowly changing like a tidal movement, the effect +of the rhythmic business cycle appears now in hastening, now in +retarding, the changes in the price level. + +§ 10. #Capitalization theory of crises#. Here we verge upon a +different type of explanation of the financial crisis--one of a +psychological nature. The quantity of money, we have seen, affects +prices more or less according as credit is more or less used in +connection with it. Money plus confidence has a larger power of +sustaining prices, than money without, or with less, confidence. And +throughout the business cycle the amount of confidence, expressed in +such ways as the readiness to grant credits and in the easy extension +of the time of collection, is constantly changing. Over-confidence at +one time is suddenly followed by widespread lack of confidence. This +has led some to say that lack of confidence is the cause of crises. +This is a truism, but it does not explain what is the real cause of +this lack of confidence, which, when the crisis comes, is not mere +unreasoning fear that needs only to ignore the danger to banish it. +Might it not just as truly, if not more truly, be said that the cause +is _over-confidence_ in the period preceding the crisis? + +The essential characteristic of a crisis is the forcible and sudden +movement of readjustment in the mistaken capitalization of productive +agents. Capitalization runs through all industry. The value of +everything that lasts for more than a moment is built in part upon +incomes that are not actual, but expectative, whose amount, therefore, +is a matter of guesswork, or "speculation."[10] Many unknown factors +enter into the estimate of future incomes. The universal tendency +to rhythm in motion (material or psychic) manifests itself in an +overestimate or underestimate of incomes and of every other factor in +value. This is emphasized by a psychological factor called sometimes +the "hypnotism of the crowd," and sometimes, the "mob mind." Most +men follow a leader in investment as in other things. The spirit of +speculation grows till often it becomes almost a frenzy, and people +rush toward this or that investment, throwing capitalization in some +industries far out of equilibrium with that in others. + +The cause of crises immediately back of the maladjusted capitalization +thus is seen to be a psychological factor; it is the rhythmic +miscalculation of incomes and of capital value, occurring to some +degree throughout industry, but particularly in certain lines. This +subjective cause in men is given an opportunity for action only when +certain favoring objective conditions are present. + +§ 11. #The use of credit.# Most noteworthy of these objective +conditions is the general use of credit. The credit system greatly +enhances the rhythm of price. If the value of a thing that is fully +paid for falls, the owner alone loses; but if the value of a thing +only partly paid for falls so much that the owner is forced to default +in his payment, the loss may be transmitted along the line of credit +to every one in a long series of transactions. A credit system, highly +developed, is a house of cards at a time of financial stress. Demand +liabilities are at such a time the greatest danger, so that the banks, +ordinarily the pillars of financial strength, become at such a time +the points of greatest weakness in the financial situation. If many +of the customers were not restrained by their sense of personal +obligation to the banks, by the strong pressure which the banks can +bring to bear upon them, or by the force of public opinion among +business men, from withdrawing the balances to their credit in a time +of crisis, all commercial banks would become insolvent at once in a +crisis by the very nature of their business; for all their ordinary +deposits are nominally payable on demand. + +§ 12. #Interest rates in a crisis.# In normal times there is always +outstanding a great mass of short-time, commercial loans.[11] The +motive of the borrower, in most cases has been to hire more labor and +to buy more materials for use in his business. Ordinarily these loans +can and are renewed without difficulty or are replaced by others, +based on the security of new business transactions in unbroken +succession. Now at the time of a crisis a general contraction of +credit occurs, and all borrowers with maturing obligations are faced +with bankruptcy. The effort of the business man at such a time is not +to make a positive profit, but to save what he can from the threatened +wreck. The demand for short-time loans, therefore, in such times +of stress, fluctuates rapidly, and exceedingly high interest rates +prevail in these loan markets for a few days or a few weeks, rates +which have only a remote relationship with the usual capitalization of +most agents. + +The distress of the business man is magnified by the fact that it +is just at such times that both the equipment he has bought and the +products he has made become temporarily almost unsaleable at prices as +high as he paid for them when he bought them with the borrowed money. +He may know that prices will soon be higher, but he cannot wait. +Various courses are open to him in this emergency; he may borrow the +money at a very high rate of interest, holding the goods for better +prices; or he may sell the goods under the unfavorable conditions; or +he may sell other capital such as stocks and bonds. The end sought +is the same--to get ready money; and the methods are not essentially +unlike--the exchange of greater future values for smaller present +values. The sacrifice sale thus reveals the merchant's high estimate +of present goods in the form of money. The purchaser of some kinds +of property in times of depression is securing them at a lower +capitalization than they will later have. The rise in value may be +foreseen as well by seller as by buyer, but the low capitalization +reflects the high interest rate temporarily obtaining. A.T. Stewart, +once the most famous New York merchant, is said to have laid the +foundation of his fortune when, being out of debt himself, he bought +up the bankrupt stocks of his competitors in a great financial panic. +The high interest at such times is but the reflection of the high +premium on present purchasing power. + +The worst of the evils of crises are confined to the markets where the +greatest numbers of short-time loans are made. Most of the long-time +loans do not fall due in such seasons of stress, and the great mass of +slowly exchanging wealth alters little and slowly in price. Such loans +as fall due can generally be renewed for long periods at rates little +higher than usual, the market for long-time and short-time loans being +in large measure independent of each other. But they are not quite +independent, and some lenders take whatever sums they can collect on +maturing long-time obligations and loan them on short terms at high +rates of interest, or buy goods, whole enterprises, bonds, and stocks, +at the unusually low prices temporarily prevailing. The effect of this +is to raise somewhat the interest rate on long-time paper to accord +with the new conditions. + +§ 13. #Dynamic conditions and price readjustments.# Another condition +favorable to the rhythmic movement of capitalization is a dynamic +economic society. The past century has opened up new fields for +investment on an unexampled scale. Investment has advanced both +intensively and extensively in a series of great waves. New machinery +and processes have given undreamt of opportunities for enterprise in +the older countries, and the physical frontier of investment has moved +outward with the march of millions of immigrants to people the fertile +wilderness. Such factors disturb the equilibrium of prices both in +time and space, give a powerful impulse toward higher values in +the older lands, and stimulate the hopes of all investors. When the +balance between the capitalizations of various industries and between +the incomes of the various periods proves to be false, the inevitable +readjustment causes suffering and loss to many, but particularly in +the inflated industries. But, because of the mutual relations of men +in business, few even of those who have kept freest from speculation +can quite escape the evils. + +Among the dynamic conditions in industry are changes in the general +price level whether due to changes in the production of the standard +money commodity (relative to population) or to changing methods of +doing business. If the price level is falling (i.e., the standard unit +is appreciating), the burden of the great mass of outstanding debts +is growing heavier upon the debtors.[12] Sooner or later some of them +break down under its weight. At such times many attempt to shift their +capital from active investments such as stocks, to passive investments +such as bonds. When the price level is rising, the opposite conditions +prevail. But such adjustments proceed uncertainly and unevenly in +different industries, with much speculation in shifting from one type +of business to another, and with much accompanying miscalculation. + +§ 14. #Tariff changes and business uncertainty.# Another variable +influence in American business has been the tariff. Every tariff +revision, whether the rates go upward or downward, shifts somewhat +the relative opportunities and profitableness of different industries. +Some of these call for far-reaching readjustments of investments and +of productive forces. Some persons gain and some lose by every such +change. It is observed that a reduction of tariff rates seems to have +a more disturbing effect upon business than does an increase. This +probably is because the industries favored by protective tariffs in +America are those most fully within the circle affected by crises; +whereas most of the consumers adversely affected by a rise of tariff +rates are outside the commercial circles where short-time credit +is common and where the rapid readjustment of investment leads to a +financial crisis. It never has been convincingly shown, however, +that there is any large measure of correspondence in time (not to say +causal relation) between tariff revisions and crises.[13] + +§ 15. #Rhythmic changes in weather and in crops#. A psychological +movement, once started, accumulates force and momentum up to a certain +point where a reaction begins. This rhythmic movement as it appears +in the capitalization of enterprises is favored and magnified, we +have seen, by the wide use of credit and by the constantly changing +technical and physical conditions of industry. These call for constant +revaluations of the sources of incomes, thus destroying customary +and habitual valuations. But why should the cycle begin or end at one +point of time rather than at another; and what determines the length +of the cycle? Some of the new dynamic forces such as inventions and +growth of population are distributed pretty regularly along the line, +so that their influences are nearly equalized. But occasionally +some large impulse may serve to start a swing and if this impulse +is somewhat regularly repeated, it may serve to keep up the rhythmic +motion. True, the lack of coincidence in the impact of various +influences which occur accidentally, such as political changes, wars, +and the rapid opening of new routes of transportation, would serve +to hasten or to retard, perhaps for a time quite to alter, what would +otherwise be the rhythm of the cycle. That there is nevertheless, a +noticeable degree of regularity in the recurrence of crises may be due +to the presence of one dominating factor. + +Alternation of good and poor harvests has always seemed to be +favorable to business prosperity. In America since about 1865, farm +products have constituted the larger part of our exports, so that a +succession of large harvests has usually acted to stimulate exports +(one of the features of a period of prosperity), to give us a larger +credit balance in international trade, and to reduce the rate of +exchange. Large harvests of the staple agricultural crops in America +have been known to be closely related to the amount of rainfall in the +three most important growing months. Recently, it has been shown that +the rainfall of the Ohio Valley occurs in cycles of about eight years, +and in a larger cycle of thirty-three years. The cycle of yield per +acre of the nine principal crops is shown to correspond closely with +the cycle of pig iron production (one of the best single indices of +growing business) dated one to two years later.[14] As the cycles of +rainfall and of harvests are not coincident in different countries, it +will require further study to adjust to these observations the fact +of the world-wide extent of the great financial crises. But a better +understanding of objective conditions of this kind will give fuller +meaning to the psychological interpretation of crises. + +§ 16. #Remedies for crises#. The financial crisis must be looked upon +as an economic disease which brings many evils in its train. The need +is not merely to mitigate the severity of the brief period of crisis, +but also to smooth out the curve of the business cycle so as to reduce +periodic unemployment, the lottery element in profits, and the number +of unmerited failures in business. Several measures may aid toward +this end. In the past the crisis has been more severe in America than +in Europe because of certain well-recognized defects which now have +been largely remedied in the Federal Reserve Act.[15] The provisions +whereby any one may get credit on good commercial assets should +make it impossible for a crisis to degenerate into a panic. This +legislation has provided springs to reduce the jolt of the change from +a higher to a lower level of prices. + +Probably other improvements may be made in our banking laws. Competent +students of the subject have urged that the payment of interest +on deposits not subject to notice before withdrawal should be made +unlawful, because demand deposits constitute the greatest danger at +critical times. In principle this objection is sound, tho experience +may show that this evil has been practically remedied by other +features of the Federal Reserve Act. Moreover, bankers could, by +pursuing a more conservative policy, discourage speculative methods of +enterprise. The strong public disapproval of stock-market speculation +on margins may some day be able to express itself effectively in ways +that will not injure healthy business. Greater stability in our tariff +policy would remove a constantly disturbing factor in prices, as would +likewise the stabilizing of the standard of deferred payments. In +the attempt to remedy the great evil of unemployment, public works of +every kind might be planned and distributed in time so as to better +equalize the demand for labor and materials. Finally, much better +commercial statistics are needed, and for collecting them and +reporting the outlook, government organization is required comparable +in range and methods to the weather bureau. + +It cannot be expected, however, that financial crises, in the sense of +general readjustments of prices downward from time to time, ever +can be completely abolished. There will always be changes in general +industrial conditions calling for reevaluation of the existing sources +of income; and in this process there will always be a tendency to +rhythmic swing like that of a river, which carries the stream +of prices now on this side of the valley, now on that. But this +fluctuation of general prices surely can be so greatly moderated in +magnitude and in evil results as to make the word "crisis" almost a +misnomer. It is toward the attainment of this irreducible minimum of +uncertainty and disaster in business that efforts should be directed. + + +[Footnote 1: On the way these affect private profits see Vol. I, pp. +340, 341 (and references there given in note), 348 ff. and 361 ff. +There are thus good reasons for discussing crises in connection with +profits, as well as with money and banking.] + +[Footnote 2: See Vol. I, pp. 51, 154, 300-302.] + +[Footnote 3: See below, ch. 15, sec. 5, on the tariff legislation at +this time.] + +[Footnote 4: See ch. 8, sec. 1.] + +[Footnote 5: See ch. 6, sec 5.] + +[Footnote 6: See diagram of business failures 1890-1914, in Vol. I p. +364.] + +[Footnote 7: In the first annual report of the United States +Commissioner of Labor is given a long catalog of theories that have +been suggested, many of them quite fantastic.] + +[Footnote 8: See Vol. I, ch. 38, on Abstinence and Production. +Believers in the glut theory usually condemn efforts to encourage +frugality among the masses, calling it the "fallacy of saving."] + +[Footnote 9: See Vol. I, ch. 37, secs, 6 and 9.] + +[Footnote 10: See e.g., Vol. I, pp. 271. 335, 365 367.] + +[Footnote 11: See Vol. I, p. 304.] + +[Footnote 12: See above, ch. 6, on the standard of deferred payments.] + +[Footnote 13: See note on tariff legislation and business crises, end +of ch. 15.] + +[Footnote 14: In both cases there is what is called in statistics +a high degree of correlation (viz., .719 and .800), indicating that +there is that percentage of probability that there is some causal +relation between the two sets of figures.] + +[Footnote 15: See above, ch. 9, secs. 5, 6, 8.] + + + + +CHAPTER 11 + +INSTITUTIONS FOR SAVING AND INVESTMENT + + § 1. The nature of saving. § 2. Economic limit of saving. § 3. Commercial + bank deposits of an investment nature. § 4. Investment banking. + § 5. Savings banks in the United States. § 6. Typical mutual + savings banks. § 7. Postal savings plan. § 8. Advantages of the postal + savings plan. § 9. Collection of savings and education in thrift. § 10. + Building and loan associations. § 11. The main features. § 12. The + continuous plan. § 13. The distribution of earnings. § 14. Possible + developments of savings institutions. + + +§ 1. #The nature of saving.# The motives actuating the different +classes of lenders may, for our present purpose, be reduced to two: +to postpone the consumption of income, and to obtain a net income +from wealth (or investment). Saving always is relative to a particular +period and is for more or less distant ends. The child saves its +pennies to go to the circus next week, the working girl saves her +dimes for a new hat next spring, the earnest high school pupil saves +to go to college next year, and the provident man saves for his +family's future needs and for his own old age. But always, to +constitute saving, there must be for the time a net result: the +excess of income over consumptive outgo in that period. This is easily +distinguishable from various forms of pseudo-saving of which many +persons that are really spending all their incomes are very proud. +Such forms are: planning to buy a particular thing and then deciding +not to do so, but buying something else; finding the price less than +was expected, and thereupon using this so-called saving for another +purpose; spending less than some one else for a particular purpose, +such as food, but off-setting this by larger outlay for another +purpose, such as clothing; spending all one's own income but less +than some one else with a larger income. We may define saving as the +conversion, into expenditure for consumptive use, of less than one's +net income within a given income period. + +Saving goes on in a natural economy both by accumulation of indirect +agents and by elaboration so as to improve their quality.[1] It goes +on to-day by the replacement of perishable by durative agents, as in +replacing a wooden house by one of stone or concrete, and by producing +wealth without consuming it, as in increasing the number of cattle on +one's farm. But saving has come to be increasingly made in the form +of money (or of monetary funds), and in this chapter we shall consider +some of the ways in which this can now be done. + +§ 2. #Economic limit of saving#. There is an economic limit to saving, +as judged from the standpoint of each individual.[2] The ultimate +purpose of every act of saving is the provision of future incomes, +either as total sums to be used later or as new (net) incomes to be +received at successive periods. The economic limit of saving in each +case is dependent upon the person's present needs in relation to +present income and conditions, as compared with the prospect of his +future needs in relation to his future income and conditions. Each +free economic subject must form a judgment and make his choice as +best he can and in the light of experience. There is no absolute and +infallible standard of judgment that can be applied by outsiders to +each case. Yet there is occasion to deplore the improvidence that is +fostered and that prevails, especially among those receiving their +incomes in the form of wage or salary. Considered with reference to +the possible maximum of welfare of the individuals themselves, the +apportionment of their incomes in time is frequently woful. It is +uneconomic for families of small income to save through buying +less food than is needed to keep them in health; but it is likewise +uneconomic to spend the income, when work is plentiful and wages good, +for expensive foods having little nutriment and then, for lack of +savings, to go badly underfed when work is slack and wages are small. +There is for each class of circumstances a golden mean of saving. The +saving habit may develop to irrational excess and become miserliness, +but this happens rarely compared with the many cases where men in the +period of their largest earnings spend up to the limit on a gay life +and make no provision for any of the mischances of life--business +reverses, loss of employment, accidents, temporary sickness, permanent +invalidity, or unprovided old age. Despite the development of late of +new agencies and opportunities for saving there is need of doing more +toward popular education in thrift.[3] + +§ 3. #Commercial bank deposits of an investment nature.# If a +commercial bank pays no interest on demand deposits there is no motive +for the depositor to keep a balance larger than he needs as current +purchasing power. When his bank account increases beyond that point, +it becomes available for a more or less lasting investment to yield +financial income. If the sum is small or if the owner is at all +uncertain as to his plans or if he is not in a position to find +another attractive form of investment, the offer by the bank of a +small rate of interest on special time deposits (2 to 3 per cent is +not an unusual rate in such cases) will suffice to cause him to leave +such funds in the bank. Since about 1900 the practice has been greatly +extended of paying interest even on "current balances" of regular +checking accounts (demand deposits). If the new 5 per cent rule[4] as +to reserves against time deposits operates to cause commercial banks +generally to pay a rate ranging from 2-1/2 to 3-1/2 per cent on time +deposits, their amount will doubtless increase greatly. But still, in +the future as in the past, those depositors having funds that can be +invested for considerable periods will seek a higher rate of interest +than can be obtained from commercial banks. + +In their loaning function the "commercial" banks (as the adjective +indicates) serve mainly the special needs of the _commercial_ elements +of the community--business men borrowing for short terms to carry out +particular transactions. Loans made on short-time commercial paper +(quick assets) are very suitable to the needs of a bank that has its +liabilities largely in the form of demand deposits. Time deposits can +be more safely loaned on the security of real estate and for longer +periods. + +Despite their limitations in this respect, the commercial banks must +be recognized as of growing importance in the work of encouraging and +collecting small savings, which in many cases are better invested in +other ways. In 1916, the centenary of the beginning of savings banks +in this country, a nation-wide propaganda was undertaken by the +American Bankers' Association for the encouragement of savings. + +§ 4. #Investment banking#. Enormous amounts of securities issued by +governments or by corporations (railroad or industrial) are now on +the market and to be bought conveniently by private investors. Through +special bond houses some bonds are to be had in denominations as small +as $100 and $500. The regular brokers on the stock exchanges buy and +sell, for a small commission, the regular bonds and investment stocks. +Several large statistical and financial expert agencies[5] in return +for an annual subscription, offer advice to investors regarding +general market conditions and special securities. + +For a large number of investors the personal examination and selection +of sound securities is too difficult a task. To serve their needs many +bonds and trust companies have of late developed special departments +for investment banking. Through these agencies the banks are +constantly placing as relatively permanent investments securities +which they have bought or have aided "to float" or which they handle +only as commission agents. In any case the real investment banker +is bringing to his task special training and a high sense of +his professional obligations, and is employing the services of +statisticians, financial experts, and of practical engineers to +determine exactly the fundamental conditions of each investment. +Investment banking promises to increase steadily in amount and +importance. + +§ 5. #Savings banks in the United States.# For the increasing +number of wage-earners, salaried employees, and persons following +professions, investment as active capitalists is impossible.[6] Their +savings must take the form of passive investments. But there are few +good opportunities for lending money in small amounts, without great +risk, and the requirement of skill, time, and labor to look after the +loans and to collect the interest is prohibitive to a small lender. To +provide a place where small sums could be kept with safety and so as +to yield a moderate rate of income, the first modern savings bank +in the United States was instituted in New York in 1816 after a plan +already developed in England. + +In form these banks are mutual, having no capital stock on which +dividends are to be paid. The boards of trustees are self-perpetuating +and receive only fees for attending meetings. In their legal aspect +these banks have a philanthropic character. Their investments are +limited by law to specified, conservative classes of securities and +loans on real estate. The total increase from investments is, +after paying the expenses of operation and setting aside a surplus, +distributable to the depositors at regular periods. In the United +States the number of such institutions reported in 1914 was 2100.[7] +They have over 11,000,000 depositors, deposits to the amount of +$5,000,000,000, an average deposit of $444 per depositor, or of $50 +per capita of the whole population. These figures are very unequally +distributed geographically, the divisions ranking as to total deposits +in the following order: the Eastern Middle, New England, Middle +Western, Pacific, Southern, and Western divisions. The first two of +these groups of states have about 75 per cent of all the deposits, the +Southern states hardly 2 per cent, and the Western (North Dakota to +Oklahoma) only 1/4 of 1 per cent. + +§ 6. #Typical mutual savings banks#. About one third of these banks +are on the mutual plan, having no capital stock (most of them in the +East) and these contain about four fifths of all the deposits. +The stock savings banks have individual deposits of over a billion +dollars, and have outstanding capital stock to the amount of about +$90,000,000 (about 9 per cent of their deposits). These stock savings +banks to a much greater extent than do the mutual banks transact also +a commercial business. + +The banks on the mutual plan are therefore the most important, the +typical savings banks. The average rate of interest they paid +to depositors in 1914 was 3.86 per cent. About one half of their +resources are invested in loans, mostly to small borrowers on the +security of real estate, and most of the remainder consists of bonds +and other securities of the safer kinds. + +Savings banks are subject to the supervision and inspection of the +banking departments in the several states, a fact that exerts a +salutary effect though not insuring absolutely against either mistaken +judgment or dishonesty on the part of the bank officials.[8] + +Savings banks seek to keep invested as large a part as possible of +their assets, keeping only in ready cash enough to meet a possible +temporary excess of withdrawals over deposits. In contrast with the +policy of commercial banks with their demand deposits, the sound +policy for savings banks is to reserve the right to require notice of +intention to withdraw. The period of such notice varies from a +minimum of ten days to a maximum of about sixty days. In ordinary +circumstances it is not needful or usual for a bank to exercise this +right, but it is a needful safeguard in times of commercial crises. +This requirement of notice is greatly to the advantage of depositors +collectively and thus of the community as a whole. It is not an undue +limitation of the rights of the individual depositor. It is unfair +for the individual, in a period of financial stress, to seek his own +safety in a manner which is impossible for all, and thus to endanger +the interests of all.[9] + +The mutual savings banks in 1914 had (on the average) but six tenths +of a cent of actual cash (and "checks and cash items") in their tills +for every dollar of deposits, but in addition they had for every +dollar of deposits four cents due on demand from state and national +(commercial) banks. In the aggregate these demand deposits amounted to +the large sum of $172,000,000, a large part of which bore a low rate +of interest. + +The depositors in savings banks have a direct legal claim on the bank +as a corporation. The bank's only means of payment are its assets, +consisting of claims upon the owners of such wealth as houses, +factories, railroads, electric light plants, good roads, and school +buildings. Thus virtually the depositors have by their savings made +possible the building and equipping of these actual forms of wealth, +and have an equitable claim upon the usance of them, which claim is +met by the payment of interest and dividends to the savings banks. +Viewed in this way the great social importance of the savings function +appears, and the importance of developing the savings institutions. + +§ 7. #Postal savings plan.# In many countries of the world the +governments have not only authorized private, corporate, and trustee +savings banks, but have provided public agencies where it is possible +for the citizens to deposit small amounts. Thus municipal, and what +are called communal, savings banks are operated by many European +cities; but the most effective and widely used agencies for the +purpose are the national post-offices. Postal savings banks, or postal +savings systems as divisions of the postal service, are now found in +all the larger countries of the world, and in many smaller ones. The +United States of America was almost the last civilized country to +establish such a system, which was authorized by act of Congress in +1910, and went into operation in a few designated cities in January, +1911. The number of offices at which it was in operation was rapidly +increased, and the number in 1914 was about 10,000. + +Any one ten years of age may become a depositor. Deposit must be made +always in multiples of one dollar. Not more than $100 will be accepted +for deposit in any one calendar month, and nothing after the total +balance to the depositor's credit is as much as $1000, exclusive of +accumulated interest. However, amounts less than one dollar may be +saved for deposit by purchasing a ten-cent postal savings card and +affixing ten-cent postal savings stamps until the nine blank spaces +are filled. Such a filled card will be accepted as a deposit of +one dollar either in opening an account or in adding to an existing +account. + +Deposits are not entered in a depositor's book, as is the usual +practice of savings banks, but are evidenced by certificates issued in +fixed denominations of $1, $2, $5, $10, $20, $50, and $100. These bear +interest, from the first day of the month next following that in which +the deposit is made, at the rate of 2 per cent per annum for a whole +year (interest is not paid for any fraction of a year). Interest +is not compounded, unless the depositor withdraws the interest and +redeposits it, but simple interest continues to accrue annually on +a certificate so long as it is outstanding, without limitation as to +time. + +By the end of the first year (1911) of operation the savings system +held a balance to the credit of depositors of nearly $11,000,000; in +the next year (1912) there was added to this about $17,000,000; in +the next year (1913) about $12,000,000; and this average rate of one +million dollars a month net addition to deposits has continued to the +present (1916). These funds are deposited in banks belonging to the +federal reserve system, which must deposit with the Treasurer of +the United States designated kinds of bonds (national, state, and +municipal) as security and pay interest at the rate of 2-1/2 per +cent on the amount of the deposits. The one-half per cent difference +between this rate and that paid to individuals goes far toward paying +the expense of operating the system. + +Provision is made for the issue of postal savings bonds in exchange +for certificates issued in sums of $20 or multiples thereof up to +$500. These bonds bear interest at the rate of 2-1/2 per cent payable +in semi-annual instalments, January 1 and July 1. These bonds are +not counted as a part of the $500 maximum of deposits allowed to one +person, and there is no limit to the amount of bonds which may be +acquired by one depositor. Postal savings bonds are exempt from all +kinds of taxes, federal and local. These bonds are issued only on the +surrender of postal savings deposits, but may be sold by the owner +at any time. Three years after the law went into effect, there were +$4,635,820 of postal savings bonds outstanding. + +§ 8. #Advantages of the postal savings plan.# As compared with +corporate savings banks the postal savings system has certain +advantages. + +(a) It protects the small depositors from the danger of dishonest +private bankers who have preyed upon the immigrants in the larger +cities. To foreigners, accustomed to the postal savings plan in their +home countries, it is especially useful. + +(b) It gives to every depositor the greatest safety possible, as "the +faith of the United States is solemnly pledged" for the repayment of +depositors. + +(c) It brings a savings institution to many a small town and rural +place formerly entirely lacking in facilities for small depositors. +The benefit of this has not immediately appeared to be great, but may +in time prove to be. + +(d) It pays interest from the first of the month following the date of +deposit whereas the usual practice of savings and commercial banks is +to pay only from the beginning of the quarter year or half year. + +(e) It provides for the exchange of deposits for bonds bearing a +higher rate of interest--a unique feature greatly simplifying for the +small saver the process of buying bonds for more lasting investment. + +In some respects, however, the postal savings system falls short of +the advantages of the regular savings banks. These usually accept +for deposit as small an amount as ten cents; they pay interest either +quarterly or semi-annually; they pay on the average (at present) +almost double the rate of interest, and the interest is credited +to the depositor's account at stated intervals and automatically +compounded. The postal savings system, as the law now stands, may be +looked upon, therefore, as supplementing the regular savings banks +rather than competing with them. + +§ 9. #Collection of savings and education in thrift.# Small savings +have been encouraged in many places by penny provident funds, dime +savings banks, and school savings funds, which have been conducted at +public schools, social settlements, and factories, by school officers +and by charitable and educational societies acting through canvassers. +These plans all call for much personal effort and cost, which must be +provided by volunteer services and private gifts. These plans being +undertaken mainly as a means of education in thrift and in the +related moralities, their results are not to be measured merely by the +magnitude of the sums collected. They are not rivals of the ordinary +savings banks, but rather auxiliary methods of encouraging their use. +The funds collected by these agencies are usually deposited in local +savings banks, and depositors are encouraged to open individual +accounts there, whenever they have considerable sums saved. + +In Germany the public schools have been furnished with automatic stamp +vending machines, from which savings stamps in as small denominations +as ten pfennigs (2-1/2 cents) may be had by dropping a coin into a +slot.[10] This method could be used very effectively in connection +either with the postal savings system or with a local savings bank. It +ought to be made easy to deposit funds at every school house, at every +post-office, at every factory counter on pay day, and wherever people +pass in numbers. Allurements to foolish expenditures meet old and +young at every turn; to spend the dime is made all too easy, whereas +to save it and deposit it in a safe place too often calls for wasteful +and discouraging efforts from the person of small means. + +§ 10. #Building and loan associations.# Building and loan association +is the name applied to a coöperative organization of persons with +the purpose of collecting regularly from members small sums which +are loaned to some members for the purpose of building or paying +for homes.[11] The first association of this type was organized in +Frankford, Pennsylvania, in 1831. It and others of its kind have +made Philadelphia notable among all the larger cities as "the city of +homes." The number of such associations has almost steadily increased +in the United States. Pennsylvania continues to rank first in respect +to amount of total assets, with Ohio a close second, and New Jersey +third (the ranking first in proportion to population). Associations +of this type have been hardly second in importance in America to the +savings banks as institutions for savings for persons of moderate +means. The number of their members (nearly 3,000,000) is about +one-fourth of that of savings bank depositors, and the amount of +their assets (1-1/4 billion dollars) is about one-fourth that of the +reported savings banks. But their relative influence in educating and +encouraging to thrift is doubtless much greater than these figures +indicate. There are more than three times as many of them as of +reported savings banks, their management is much more democratic than +is that of the banks, and many of their members attend and participate +in the meetings and understand how they are conducted. Moreover, the +savings made through these associations are constantly passing on into +the houses that are fully paid for, and which continue to yield their +incomes to their owners. Each year these associations collect from +their members as dues and in repayment of loans (made to build houses) +the sum of over half a billion dollars, which is twice as much as the +annual increase in the deposits of the reported savings banks.[12] + +§ 11. #The main features.# A building and loan association is +organized by a group of persons in a neighborhood, uniting to form a +corporation under the laws of the state, every member to subscribe +for one or more shares. The officers elected all serve without pay +excepting the secretary-treasurer, who receives a small fee for his +services. All official meetings are open to all members. The shares +vary in denomination from $25 to $200; the larger figure being common +under the serial plan and $100 being usual under the continuous (or +permanent) plan, described below. Whenever there is a sufficient +sum it is loaned to one of the members for the purpose of building a +house. The borrower must subscribe for shares to the par value of his +loan. + +The receipts of the association are of several kinds. + +(a) Interest is received from members, usually at the rate of 6 +per cent, and from banks at a lower rate on the small working cash +balances kept on deposit. Usually the loans made are large enough to +cover a large proportion of the cost of the house, but the land on +which the house stands must be free from all incumbrance, and its +value gives a margin of safety to the association. Then by the method +of payment of dues the debt is, from the first month, steadily reduced +and the security for the loan therefore grows constantly better. + +(b) Premiums are collected in addition, sometimes in the form of a +higher rate of interest, but the practice of charging premiums has +been mostly abandoned and the total amount of premiums now constitutes +less than 1 per cent of all payments from members. + +(c) Fines for delinquency also are less commonly imposed now and +constitute a small fraction of 1 per cent of total payments. + +(d) Deductions are made on account of withdrawal before the maturity +of the shares; under these circumstances it is usual to pay a portion +but not all of the accumulated profits, sometimes a proportion +increasing as the shares approach maturity. + +Different plans have been and still are followed in respect to the +method of issuing the shares. Under the _terminating plan_ all +the shares begin and mature at the same time (for all members that +continue to the end). Whereupon the association dissolves or starts +anew. The chief difficulty in this plan is that the association has +too few funds to loan at the beginning of its career, and a surplus +of unloanable funds as it nears the maturity of the series. It is +therefore necessary to encourage or to compel the withdrawal of +non-borrowing members on the payment of estimated profits to date. + +The better to remedy this difficulty the _serial plan_ was devised, +by which new series of stock are issued at intervals--yearly, +half-yearly, quarterly, and even oftener. + +§ 12. #The continuous plan.# A further development is the continuous +plan (usually called the _permanent_ or the Dayton plan), by which +much greater flexibility is attained in the organization. Shares +of stock may be subscribed for at any time, each man's separate +subscription of shares being treated as a separate series, and +maturing each at its own time. There is thus, after an association has +been for some time in operation, a continuous stream of new members +(or new subscriptions) flowing into the association, and a continuous +outflow of shareholders whose shares have matured. The maturing shares +of borrowing members discharge their indebtedness to the association; +the maturing shares of non-borrowing members are paid in money, or +may (if the association has use for the funds) be left as an +interest-bearing loan. + +Additional funds are obtained when needed by issuing paid-up stock to +non-borrowers. This is convenient at the beginning of an association +and when the movement in building is more active than usual. But if an +association has funds that cannot be loaned, outstanding paid-up stock +may be called in. In practice a large part of the paid-up stock as +well as of the running stock is subscribed for and held not by large +capitalists but by persons of small means, especially "the more frugal +element in the working classes." Non-borrowing members desiring +to withdraw may do so at any time under certain conditions; but to +safeguard the association, the laws usually require that thirty days' +notice of intention to withdraw shall be given, that not more than +one half of the funds received in any one month shall be paid on +withdrawals, and that withdrawing shareholders shall be paid in the +order of the notices of intention to withdraw. + +The most intelligent and prudent workers were formerly deterred from +subscribing by the fear that sickness, unemployment, or other mishap +might make it impossible to keep up regular payments. Now, however, +fines for late payment have been almost entirely done away with. On +the other hand, extra payments may be made at any time by borrowing +members, to hasten the date when their shares mature and their debt +be discharged. These privileges are possible because of the method of +distributing earnings which will now be described. + + +§ 13. #The distribution of earnings.# Every six months is ascertained +the amount of the gross earnings which, under this plan, consist +almost entirely of interest paid on loans. From this amount are +deducted expenses (and in some states 5 per cent of the total is +placed in a "loss fund" to meet possible losses) and the rest is +divided in proportion to the amount standing to the credit of each +member, being credited to the account of running stock and paid in +cash to holders of paid-up stock. + +The payment of dues is correspondingly simple. The dues at twenty-five +cents a week amount to $13 a year per share of $100. This is the whole +bill; there are no extras. The interest at 6 per cent (the usual rate) +is $6, and the rest, $7, is credited upon the stock. Thus at the end +of the first six months the member has $3.50 to his credit, and is +entitled to his share of the net earnings on that amount. Thus his +share of the earnings is steadily increased by compound interest, and +if he keeps up his regular payments the shares mature in about sixteen +years. This means in most cases that a prudent tenant can become the +owner of a house in sixteen years while paying no more than the rent +would be. As the active investor he becomes his own rent collector +and uses the house with less need of repairs, thus dispensing with +services and costs which are included in contractual rents.[13] + +These associations are properly made subject to supervision and +examination by state officials, in the manner of that exercised over +banks. They have been favored by exempting the shares of members and +the mortgages held by the associations from all state and municipal +taxation. As the houses built or paid for are taxed, this is of course +but just, but it is an exception to the rule of the illogical general +property tax.[14] + + +§ 14. #Possible developments of savings institutions.# The social +importance of increasing and improving the agencies of savings for the +masses is being more fully recognized, but much more might be done in +these directions. Some possible changes have been suggested above, and +a few words more may be added. + +Probably the greatest developments in the near future will be through +the savings departments of commercial banks (favored by the reserve +rules of the Federal Reserve Act) rather than by the increase in the +number of special banks for savings. The initial expense and risk of +starting a savings bank is considerable, and outside of cities of some +size this is prohibitive. Whereas a savings department, with its +funds and reserves separated, can be easily and cheaply operated in +connection with a general bank. It is much to be desired, however, +that a larger measure of popular coöperation might be made possible to +the depositors, both for its educational value and to reduce the real +evil of the autocratic or the plutocratic centralization of the money +power in the small communities. + +Savings banks usually limit the amount of an account to $3000. It +is desirable that depositors should be able easily to convert their +savings-bank deposits over certain amounts into good bonds, bearing +a higher rate of interest (after the method of the issue of postal +savings bonds). There is need of a central market in each community +where such bonds can be bought and sold at any time; and the savings +banks might easily serve to buy and sell for their customers in this +way in the larger bond market. This would be of benefit also to the +states and municipalities which issue bonds for such purposes as +schools, roads, and public utilities, by creating a more open and +regular market to small investors than now is provided for such +securities. This might somewhat reduce the rate of interest and there +would be a gain divided between taxpayers and lenders. + +The general plan and principles of local building and loan +associations might well be extended to groups of rural coöperators, +enabling them to make loans to their members; and to groups of small +investors, permitting them to hold real estate mortgages and bonds and +stocks of corporations, free from taxation other than that paid on the +wealth itself. Members of such organizations could get a higher income +on their investments than a savings bank could pay, and with greater +security than if each attempted to save and invest by himself.[15] + +Savings institutions are necessarily also lending institutions. In +this chapter they have been looked at mainly from the saver's (the +lender's) standpoint, though their service to the borrower is of +coördinate importance. In the case of building and loan associations +this feature is most apparent. Later, the problem of the agricultural +borrower will receive further consideration. + + +[Footnote 1: See Vol. I, chs. 9 and 10.] + +[Footnote 2: See Vol. I, pp. 285-290 for the analysis of saving from +the individual standpoint; and pp. 482-499 for its relation to general +economic conditions.] + +[Footnote 3: See Vol. I, p. 484.] + +[Footnote 4: See above, ch. 9, sec. 7.] + +[Footnote 5: E.g., Babson Statistical Organization, Brookmire Economic +Service, Moody Manual Co., Moody Corporation Service.] + +[Footnote 6: See Vol. I, p. 318.] + +[Footnote 7: Report of the Comptroller of the Currency. Not all of +these are mutual. Statistics, moreover, include in some cases (e.g., +California) the savings deposits of commercial banks but not the +number of such banks, and in other cases (Michigan) some banks that do +chiefly a commercial business. The line of demarcation between savings +banks and savings departments of commercial banks cannot be sharply +drawn. The Comptroller of the Currency reported in 1914 in a different +form the amount of savings deposits and of time certificates +of deposits in _all_ kinds of banks as the enormous sum of +$8,675,000,000.] + +[Footnote 8: In the last twenty-three years, on the average, seven +savings banks a year have failed, the annual excess of liabilities +over assets being about $200,000, or about $30,000 for each failing +bank. The total loss has been about 1/5 of 1 per cent of total +deposits.] + +[Footnote 9: The Federal Reserve Act, by making it possible for loans +to be had at any time (through member banks) on good security, should +reduce the danger of runs on savings banks.] + +[Footnote 10: The author saw in operation a new machine of this kind +which had been installed in a German public school as early as 1910.] + +[Footnote 11: See Vol. I, pp. 290, 297-298, 484, and 486.] + +[Footnote 12: The figures here given and the description of methods +apply to the "local" building and loan associations. The success of +this kind led to the organization of other associations which took the +name "National" building and loan associations, to carry on a business +in a larger field. The number of these has always been comparatively +small, and their operation is less simple, democratic, and economical +than the local associations. They have borne more of the nature of +ordinary profit-making enterprises. They should not be confused with +the local associations.] + +[Footnote 13: On these economies, see Vol. I, p. 298.] + +[Footnote 14: See ch. 17, sec. 4.] + +[Footnote 15: Since this was written the Federal Rural Credits Act has +been passed, embodying the main idea here described.] + + + + +CHAPTER 12 + +PRINCIPLES OF INSURANCE + + § 1. Chance, unavoidable and average. § 2. Uneconomic character of + gambling. § 3. Borderland of gambling. § 4. Insurance: definition and + kinds. § 5. Insurance viewed as a wager. § 6. Insurance as mutual + protection. § 7. Conditions of sound insurance. § 8. Purpose of life + insurance. § 9. Assessment plan. § 10. The reserve plan. § 11. The + mortality table. § 12. The single premium for any term. § 13. Level + annual premiums and reserves. § 14. Different features of policies. + § 15. Insurance assets and investments as savings. § 16. Excessive + costs of insurance operation. + + +§ 1. #Chance, unavoidable and average.# Every action and every +movement in life has in it some element of chance. There are what +may be called natural chances, arising from the uncertainties of the +seasons, or from rainfall, heat, hail, storm, flood, lightning, or +land-slides. Such chances must be taken both by the small enterpriser +and by the large. In earlier conditions of society natural chance +dominated industry, and it still remains and must always remain +important. There is the chance of unexpected political events, such +as war, riot, and legislation on money, tariffs, credit, and business +relations. These things are caused, it is true, by the action of men, +but it is a collective action out of the control of the individual. +There is the chance of human carelessness causing fire, explosions, +and wrecks on misplaced switches. There is the chance of physical or +mental collapse, as the sudden insanity or the sudden death of one +performing responsible duties. There is the chance of sickness that +often wrecks the plans and the fortunes of a whole family. There is +the chance of economic alterations in methods of production and of +transportation, in fashions and demand in this direction or for those +materials. + +Some of these chances are more connected with money-lending, others +with manufacturing, some with agriculture, others with commerce; but +all are present in some degree in every industry. Some events are +unique in nature and seem unlikely ever to occur again; others are of +a kind occurring so irregularly that no reasonable prediction can be +made as to the time and frequency of their occurrences. Still others +occur frequently and to many different persons; but no individual can +tell when and how they will occur to him. A general average of chances +in different lines of business causes some to be called safe, others +extra-hazardous. Chance has its favorable as well as its unfavorable +aspects. Chances are averaged and added algebraically to the profit or +loss in an industry, for an extra-hazardous enterprise must in general +afford a higher average of profit in order to induce men to engage in +it. It is folly to take a risk without ascertaining its degree so far +as general experience enables one to choose. But inasmuch and in so +far as the gains and losses fall unequally upon different individuals, +income depends upon chance. + +§ 2. #Uneconomic character of gambling.# This prevalence of chance +sometimes tempts men to say that business is "a gamble." But a +distinction in principle must be made between gambling and legitimate +risk-taking. The chances enumerated above are not sought, but avoided +as far as possible; yet they must be borne by some one if productive +enterprise is to continue, and the burden must somehow be distributed +throughout the community. Gambling is, however, a kind of risk-taking +which has a very different economic and moral quality. Gambling +creates the hazard, making the gain or loss of income depend on an +event that is not a necessary part of productive enterprise. Typical +gambling is the transfer of wealth on the outcome of events absolutely +unpredictable, so far as the two gamblers are concerned. Examples are +the shaking of unloaded dice or the honest dealing of a pack of cards, +and the betting on prices in so-called "bucket-shops" by persons +having no connection with the market of real things, and seeking to +get something for nothing as a result of mere chance. + +Cheating is not a necessary mark of gambling, altho the cruder +forms of dishonesty, such as the loading of dice or the collusion of +horse-owners or of horse-jockeys to deceive the betting public, are +so common that they seem often to be an essential feature. Gamblers +recognize fair as opposed to unfair methods. Fair gambling is a kind +of minor morality within the immoral field of gambling, like the +honor found among thieves. The chance-taking in gambling has no useful +purpose or result outside itself. Betting and gambling do not produce +wealth, but merely shift the ownership of existing wealth. The +gamblers constitute themselves a little fictitious economic circle, +and they transfer gains and losses on the turn of events that have no +practical objective result within their circle except to determine the +direction of the transfer. Even when fairest, gambling must, in its +average results, be uneconomic. In any economic trade each trader +gains by getting goods that are, on the marginal principle, to him +more valuable than the other kinds of goods he gives up.[1] But in +gambling the winner gets all, the loser gets nothing. If two men of +like incomes gamble the additional desires that the winner is able +to gratify are (by the principle of decreasing gratification) less in +amount than the desires which the loser must forego. As a result the +loser is often depressed and seriously injured by the loss of his +income, the winner makes reckless and extravagant use of his winnings. +Easy come, easy go, is the rule of gamblers. + +Moreover, gambling reduces the amount of wealth by relaxing the +motives of economic activity, diverting energy from productive +enterprise, tempting men into dishonesty to offset their losses, and +leading them into speculation and embezzlement. + +§ 3. #Borderland of gambling.# Ranging between the extremes of +unavoidable risk-taking and of gambling are a number of cases of a +mixed nature. In nearly all wagers, judgment in some degree influences +the choice of sides. One man bets on a horse whose pedigree and +performances he knows thoroly; another judges by the horse's +appearance as it comes upon the track. The professional bookmakers +have the latest possible and most exact information on which to base +their bids. + +In the bets made on one's own prowess, as on speed in running, the +chance-taking is still on the uneconomic side of the borderland, +certainly if the running is for the sake of the wager, not for +pleasure or for a useful purpose. A premium won by a runner for speed +in delivering a message of economic importance presents an essential +contrast to the winnings in a wager. + +Finally, the very borderland of difficulty is reached in the purchase +and sale of goods in the market with a view of profiting by chance +changes in price. The purchasing and holding of land, lumber, grain, +cattle, and other tangible and useful things, that need to be stored, +held for buyers, or taken to market, must be judged liberally. The +quality of gambling depends somewhat on the motive as well as on the +ability of the trader. The enterpriser dealing with real wealth, and +fitted to take the risks both because of his resources and of his +exceptional knowledge, needs the motive of gain in such cases, and in +a sense can be said to earn socially what he gets. The motive of the +uninformed must be a blind trust in luck, and a hope to gain from a +rise in prices which they are quite unable to foresee or to explain. + +§ 4. #Insurance: definition and kinds.# The large element of luck in +industry due to unavoidable chances has something of the same evil +character as gambling. It brings unearned prizes to some and to others +unmerited losses. It must therefore be a benefit to the community, if +this element of unavoidable chance cannot be reduced as a whole, +at least to regularize it and make it exactly calculable for any +individual. In this way each may be encouraged by the more certain +prospect of receiving a reward proportionate to his efforts and +abilities. This desirable condition has in many respects been +accomplished by means of insurance. + +_Insurance_ is the act of providing a guarantee of indemnity against +a financial loss that will result if an event of a specified kind +occurs. The person seeking some surety against the possible loss is +the _insured_; the person contracting to indemnify against the loss is +the _insurer_; the written contract of insurance is the _policy_; +and the price paid by the insured in fulfillment of his part of +the contract is the _premium_; the amount paid when a loss has been +incurred is the _indemnity_; and the person to whom the indemnity is +paid is the _beneficiary_ (who may or may not be the insured). + +The insurance with which we are here concerned is that which gives +financial indemnity. This is given for loss of expected net income, +when by chance either receipts are less or costs are more than +average. The two main classes as regards kinds of loss are property +insurance and personal insurance. _Property insurance_ is that which +indemnifies for loss of one's possession in specified ways, such as by +fire, by the elements at sea (marine), by hail, lightning, or cyclone, +by death (of valuable animals), by robbery, and by breakage (of window +glass). _Personal insurance_ is that which indemnifies the beneficiary +for loss of income as the result of various happenings to persons, +the chief being death, accident, sickness, invalidity, old age, and +unemployment. The principle of insurance is being constantly extended +to new subjects[2] and it is capable of further development in a +variety of directions. + +§ 5. #Insurance viewed as a wager.# Insurance, without question a +highly useful thing, appears, paradoxically, to be in its outer form +a bet. The large merchant with many vessels used in many kinds of +business had in the days before marine insurance an advantage in +distributing his losses over a number of voyages. Antonio, the wealthy +merchant, is made thus to express his security: + + "My ventures are not in one bottom trusted + Nor to one place; nor is my whole estate + Upon the fortune of the present year. + Therefore my merchandise makes me not sad." + +In its early form marine insurance was the attempt of smaller +ship-owners to distribute their losses (as could the wealthy merchant) +over a number of undertakings, lucky and unlucky. It became customary +for a ship-owner to bet with a wealthy man that the ship would not +return. If it did come back, the owner could afford to pay the bet; +if it did not, he won his bet and thus recovered a part of his loss. +Gradually there came about a specialization of risk-taking by the men +most able to bear it. They could tell by experience about what was the +degree of uncertainty, and could lay their wagers accordingly. When +several insurers were in the same business, competition forced them to +insure the vessel and cargo of the ordinary trader for something near +the percentage of risk involved. The insurance thus tended to become a +mutual protection to the ship-owners; what had to be paid in premiums +to cover risk came to be counted as part of the cost of carrying on +that business. + +Every legitimate form of insurance exhibits substantially the same +characteristics; it reduces loss at the margin where it is felt most +keenly. The difference between insurance and gambling, thus, lies +primarily in the purpose of insurance, which is not to increase +artificially the risk that any individual runs, but to neutralize or +offset an already existing chance. The insurance bet is what is called +a "hedge." The difference lies further in the collective method of +insurance, which combines the chances scattered among a number of +persons. Insurance does not increase the total of risks and of losses, +but merely combines, averages, and distributes them equally among all +the insured. This eliminates the chance element to the individual by +converting it into a regular cost. + +§ 6. #Insurance as mutual protection.# Modern insurance is conducted +either by enterprisers for profit, or by mutual companies; but in any +case in large measure the losses in insurance are mutually shared, +as the premiums (plus interest earned) equal the total losses plus +operating expenses and profit, if any is made. Each insured gets a +contract of indemnity for the payment of a sum that will help cover +the losses of others. Such an exchange is mutually beneficial. The +premium comes from marginal income; the loss if it occurs would fall +upon the parts of income having higher value to the insured. The less +urgent needs of the present are sacrificed in order to protect +the income that gratifies the more urgent needs of the future. In +insurance each party gives a smaller value for a greater; each makes a +gain. The greater security in business stimulates effort. This effect +is quite the opposite of that of gambling. + +§ 7. #Conditions of sound insurance.# To be economically sound, +insurance must have to do with real productive agents, and with +a group of occurrences which, as a whole, are approximately +ascertainable in advance--however irregularly they may fall upon +individuals. The beneficiary must have an _incurable interest_ in the +property or person insured; that is, the beneficiary must actually +suffer a loss by the occurrence insured against. Finally, the amount +of the indemnity must not be greater than the loss incurred. Some of +the greatest difficulties in insurance arise from the absence of these +essential conditions. When there is no insurable interest or when +the indemnity is greater than the loss that may be incurred, the +beneficiary may and sometimes does find it to his interest to bring +about the socially injurious event insured against. He artificially +increases the loss against which insurance was taken. When the insured +sets fire to his own buildings, he makes an illegitimate use of +insurance. Constant efforts are made by insurance companies to guard +against these "moral risks," the least calculable of any. Merchants +whose stocks have been mysteriously burned two or three times find +difficulty in getting further insurance. Formerly insurance was not +paid in case of death by suicide; but now usually no such limitation +is contained in a policy after a period of one or more years. As men +rarely plan suicide years in advance, death by one's own hand some +years after taking life insurance is regarded as coming under the +ordinary rules of chance. Yet it is to be feared that this +liberal policy serves as a temptation at times to crime and to +self-destruction. + +§ 8. #Purpose of life insurance.# Property insurance is mainly an +aspect of enterpriser's cost, whereas personal insurance is more +closely connected with the object of saving.[3] We shall in the rest +of this chapter limit the discussion to the one most important form +of personal insurance, that called life insurance (sometimes called +survivors' insurance). + +Life insurance is that form of insurance in which partial indemnity +is provided for survivors against the financial loss incurred by the +death of the insured. Usually the insured is the breadwinner of +the family and the beneficiary is a member of his family, but in an +increasing number of cases the beneficiary is the surviving business +partner, a creditor, or a business corporation with an insurable +interest in the life of one of its employees. + +Life insurance has been much used by persons mainly dependent on labor +incomes[4] rather than on incomes from capital, by those receiving +salaries, professional fees, and by active business men. It has of +late been extended rapidly, as "industrial insurance" to wage earners, +in policies never exceeding $1000, but averaging very much less, +and often being for no more than enough to pay funeral expenses. The +premiums on such policies are usually collected weekly and by agents +making personal visits. The cost to the insured is, therefore, +necessarily very high in proportion to the amount of insurance. + + +§ 9. #Assessment plan.# Life insurance plans may be distinguished, +with reference to the time and method of collecting the premiums, as +assessment and reserve insurance. + +In the simple form of assessment insurance originally the losses were +paid by contributions taken after the losses occurred, each member +paying an equal share without regard to age. In a slightly improved +plan the assessments are made at the beginning of the year, based upon +the expected mortality for the year. The sum just sufficient for this +purpose (omitting expenses) is called the _natural premium_. The +cost of such insurance is closely related to the average age of +the members. The rates are very low in a new organization with a +membership of young men; but each year the average age, and therefore +the mortality of the membership, rises and the annual assessments must +be increased. By constant additions of young members, this rise of +cost may be retarded. But when these members grow older, a still +larger addition of young members is required to keep down the average, +and the mathematically inevitable result is an increasing rate of +assessment. This keeps young men from entering, and finally results in +failure or in some form of "reorganization" that drives out the older +members. The assessment plan carries with it the seeds of its own +decay. + +To meet these difficulties in part, various modifications of the +flat-rate assessment plan are employed, such as classification by age +at entry, so that each member pays a flat-rate according to age +at entry; or large initiation fees at entry which form a temporary +"reserve" to offset increasing mortality in late years. Finally, +the policies may be issued on the natural premium plan, by which the +members of each age class pay exactly what the insurance costs for the +year. Under this plan the company will remain solvent, but with this +and all the other expedients the surviving members are forced to drop +the insurance in later years. + +Assessment insurance is sold by business companies organized +for profit, by fraternal orders, and by various types of mutual +organizations. The business companies have had a dismal history +of hardship to surviving members and of eventual failure. They are +disappearing under the influence of hostile legislation resulting +from a better popular knowledge of insurance principles. The fraternal +orders combine insurance with other objects of a benevolent and social +character. With good management, a favorable death rate, and very low +expenses, some of them have provided protection at very low rates for +many years. Others have failed with disappointment and disaster to +the older members. Still others are struggling with difficulties that +presage dissolution. Many now have some form of reserve accumulations, +and some have so improved their methods that they closely resemble +reserve companies. The assets of all the assessment companies are +now $1.37 per $100 of insurance in force, while the legal reserve +companies have $22.66. The assessment companies now get 10 per cent of +their total incomes from their funded investments, as against 24 per +cent for the old-line companies. Even with the favorable conditions +under which the fraternal orders conduct their insurance business they +are doomed to failure unless they adopt rates and policies based upon +adequate reserve accumulations. Many thousands of present members +are paying for insurance at rates which will not suffice to meet the +future losses. The assessment plan fails to eliminate the one great +risk, that of leaving the survivors without insurance in advancing +years. + + +§ 10. # The reserve plan.# The reserve plan, if honestly administered, +gives complete protection against the difficulties just indicated. The +essential purpose of the reserve plan is to collect during the earlier +years of the insurance policy when the mortality is less, a sum larger +than is needed to meet the current losses. This sum, the reserve, is +kept invested and accumulating an income, sufficient to offset the +increase in losses as years advance. In reserve insurance, therefore, +the premium never increases from year to year, altho it may be so +arranged as to diminish or to cease entirely sometime within the term +for which the insurance continues. + +The premium must always be fixed in advance. The calculations for +determining the premiums on different kinds of insurance policies are +many and complex, but all conform to a few general principles. The +three factors assumed are an average mortality table, a rate of +interest (or yield on investments), and an expense rate in proportion +to the premiums or outstanding insurance. Insurance on the reserve +plan is often called "scientific insurance" because, upon the basis +of these assumptions resulting from experience, it makes exact +mathematical calculations of the premiums and reserves needed for +insurance of any particular kind in respect to age of insured, +number of payments, method of paying the beneficiary, and any other +conditions. The premium thus fixed is, however, only a maximum, and +usually is reduced as the result of conditions more favorable than +those assumed. + +§ 11. #The mortality table.# When large numbers of men are taken as +a group, a certain proportion of those at each age may be expected to +die. A mortality table starts with a group of persons, as 100,000, at +a given age, as 10 years, and shows the number who die and the number +who survive at each year of age until all are dead. The table most +widely used in the United States is the American Experience Table of +Mortality, constructed by Sheppard Homans in 1868. The figures of this +table, at different years, are given below: + + Age Number Living Deaths each year Death rate + per 1,000 + + 10 100,000 749 7.49 + 20 92,637 723 7.80 + 30 84,441 720 8.43 + 35 81,822 732 8.95 + 40 78,106 765 9.79 + 50 69,804 962 13.78 + 60 57,917 1,546 26.69 + 70 38,569 2,391 61.99 + 80 14,474 2,091 144.47 + 90 847 385 454.54 + 95 3 3 1,000.00 + +The actual number of deaths of any group of insured will not +correspond exactly with the figures of any mortality table. But this +is not an essential defect of a table so long as the figures of the +table are approximately correct and are at least as great in the +earlier years as the actual mortality. For any excess of premium thus +collected but increases the safety of the insurance and reduces later +payments. In fact the mortality in nearly all companies in the United +States is much below the figures of the American Experience Table, +partly because of the influence of medical selection on the recently +insured and partly because of the decided improvement in longevity +since the table was constructed. + +§ 12. #The single premium for any term.# It is evident that the +natural assessment premium payable at the beginning of the year for +$1000 of insurance for that year is expressed by the death rate, e.g., +at age 35, the payment of $8.95 by each of the 81,822 living at the +beginning of the year will provide the $732,000 needed to pay the +losses.[5] + +In the same manner would be determined the natural assessment premium +for each year of insurance. Now, when it is possible to invest the +premiums so as to yield a minimum rate of income it is a simple matter +to determine the amount of a single premium, at any age, that is +adequate to pay for insurance covering any selected number of years +(term insurance) up to the entire period of each insured person's +life (full life). It is necessary only to apply the formula of present +worth and that of compound interest on investments.[6] Thus the +expected losses of any year according to the table of mortality, +divided by 1 + rate of yield on investments raised to the power of +years distant, equals the present worth of insuring the entire group +for that year. The sum of the discounted cost of insurance for all the +years of the term divided by the number living at the beginning of the +period, gives the single premium for each of the insured. Let P be the +present worth of all the policies for a group of the same age, p the +present worth of one policy, X the total insured at the beginning of +the period, f the natural assessment premium this year, or the natural +premium required for any year. Then + + f f1 f2 fn + P = __________ + _________ + ________ + _________ + (l + r) (l + r)^2 (l + r)^3 (l + r)^n + + P + p = _________ + X + +The payment in advance of the single premium for any selected period +provides a reserve fund sufficient, on the assumptions made, to carry +all the insurance without further payments. Each year there is added +to the fund the income earned on investments, and there is subtracted +the amount of the losses for the year, until the death of the last +member of the insured group. If the deaths in the earlier years are +fewer than were expected in the mortality table, this will be offset +eventually by more deaths at the advanced years; but in the meantime a +reserve larger than was expected is yielding income, thus providing +a larger sum than is needed to pay all the policies at maturity. This +surplus might be distributed as so-called "dividends" from time to +time to those surviving, or be added pro-rata, at intervals, to the +amount of the policies as accumulated dividends. + +§ 13. #Level annual premiums and reserves.# It is a matter of no very +abstruse mathematics (in principle) to find the equivalent of this +single premium in any one of many other forms of premium payment. +The processes are mainly but variations of present worth and compound +interest calculations. Such calculations, however, lead into many +complexities of practical detail difficult to explain in brief +compass, and are the special task of the actuary (the mathematical +expert dealing with such problems in the insurance business). The most +useful actuarial equivalent of the single premium is the level annual +premium for any period (term or life). Almost all policies now written +have the level annual premium as a feature. The amount of the level +annual premiums at first is greater than the losses; this causes for +a time the steady accumulation of a reserve which yields income. Then, +as the losses grow, they overtake and finally surpass the amount of +the annual premiums. Therefore, the total reserve for any group of +insured increases year by year to a maximum and then declines until +it reaches zero with the payment of the last claim. The individual +reserve for each policy not yet matured increases steadily the longer +it is in force. The total reserve is essential to the solvency of +the company and the payment of all the policies as they fall due. The +companies which issue policies on the level premium plan or reserve +plan are known as "old line" companies, or as "legal reserve" +companies, because the state laws require every company of this type +to maintain the reserves calculated on the basis of a certain rate +of yield. The growth of the legal reserve companies in recent times +constitutes one of the financial marvels of the age. + +§ 14. #Different features of policies.# The premiums thus far +discussed are "net premiums" estimated as just sufficient to meet the +actual payments required by the contracts in the policies. To provide +for the expenses of management an addition is made to the net +premium called the "loading." The entire premium is called the "gross +premium." + +Reserve insurance is still carried on by a few stock companies, but of +late some stock companies have been transformed into mutual companies, +which are the prevailing type. The mutual company legally belongs to +the policyholders. The gross premiums in reserve insurance are, for +the purpose of safety, fixed at a figure larger than the expected cost +of the insurance, and normally the earnings from interest are higher, +the mortality is lower, and expenses are less than those on which the +calculation of rates is based. From the excess of income resulting, +the company sets aside a surplus and then divides the rest among +the policyholders. These returns, virtually but the refund of excess +premiums, are called "dividends" (a somewhat misleading term, not +to be confused with dividends on corporate stock). The policies +that receive dividends are called "participating" and are said to +participate in the earnings. Formerly the majority of policies paid +"deferred" dividends after 5, 10, or 20 years, according to various +tontine and semi-tontine plans, the survivors to these periods +receiving their dividends plus those of the other policyholders who +had died or had withdrawn from the company. This form of payment +having been found objectionable, it was made illegal in New York and +other states, and in most cases dividends are now paid annually. The +stock company, organized for profit, frequently charges lower premiums +for "non-participating" policies, and then retains such profits as may +result from keeping expenses below receipts. + +The most popular policies are term policies (usually for 5, 10, 15, +or 20 years); ordinary life policies with annual premiums; limited +payment life policies (the policy payable at death, with premiums +fully paid up after 10, 15, or 20 years); and endowment policies (the +face of the policy payable after 10, 15, or 20 years if the insured is +still living). An endowment policy must be understood to be a regular +term policy of insurance for the specified number of years, plus a +plan of regular annual savings, which at compound interest, accumulate +to the face of the policy. Many persons are attracted to endowment +insurance by the oft expressed thought that "you don't have to die to +beat it." But this is a mistaken thought. For the premium in endowment +insurance is much higher than that for life insurance alone during the +same period, so that the endowment is merely a pretty convenient but +somewhat costly plan of saving, hitched on to an insurance policy, +with which "actuarially," it has no essential connection. In "scientific" +insurance the insured pays its full actuarial cost for each additional +feature of the policy that he buys. The various policies issued by a +company are approximately equivalent actuarially, on the basis of the +assumptions made, but they are of very different degrees of desirability, +in view of the circumstances of the insuring individual. The choice of +policies deserves a more careful investigation than it usually received. +Moreover, carelessness and ignorance in the choice of a company is +responsible for widespread loss and suffering. + +Policies differ in respect to the mode of payment. The payment usually +takes the form of a lump sum payment at death or at the maturity +of the endowment. In recent times there has been a growing use of +optional forms of payment which give to the beneficiary annual or +monthly installments for a definite number of years or for life. + +§ 14. #Insurance assets and investments as savings.# The discussion of +savings institutions in the last chapter left unmentioned insurance, +which probably is destined to be the most important of all. The assets +of life insurance companies in the United States have already attained +the enormous sum of $5,000,000,000, a sum equal to the reported +savings bank deposits. In the last twenty years life insurance assets +have more than doubled in each decade, and are now increasing by about +a quarter of a billion dollars every year.[7] These great funds, +which in equity nearly all belong to the policyholders, form already +approximately one thirtieth of all the private capital of the country. +They are invested in many ways, in real estate, in loans secured +by mortgages on real estate, in bonds--municipal, railroad, and +industrial. The problem of wise legislation for these organizations, +of their competent and honest management, and of their relation to the +social, business, and political life of the nation, is certain to be +of ever-increasing importance. We are hardly more than emerging from +the experimental stage of life insurance, hardly more than at the +beginning of its development. + +The premium in personal insurance (life, accident, sickness, +invalidity, old age pensions) is in almost all cases paid out of some +current income. The premium paid is just so much subtracted from the +amount available for present direct use and applied to the purchase of +future incomes for one's self or family. The insurance method differs +from the method of depositing savings by its contingent nature, the +resulting income of any individual being possibly much greater than +the amounts actually saved (e.g., when the insured dies or is injured +soon after taking insurance), and possibly less or nothing at all. A +very desirable kind of insurance which is yet little developed is +that for a term ending with the usual retirement age (say 65 years) +combined with an old-age pension for life thereafter. + +It is probable that abstinence will more and more express itself not +in accumulating large capital sums to provide for one's old age or for +survivors, but in providing insurance for survivors, and invalidity +and old-age pensions for the insured and others, payable as terminable +annuities. In any case the results to be expected in the changing +forms and magnitude of private fortunes are certain to be great. + +§ 15. #Excessive costs of insurance operation.# So beneficent is +insurance that the enormous cost of transacting the business under +present methods is much to be regretted. A very large part of the +premiums paid by the insured is retained by the companies.[8] In the +case of reserve life insurance a considerable part of what is not +returned is, however, set aside as reserve virtually held in trust for +the policyholders. In the case of the other kinds of insurance, nearly +all of the amount not returned is either cost of operation or profits, +tho it must be recognized that a part of the cost of some kinds +of insurance is for real services, such as inspection and fire +prevention. It is remarkable that the percentage returned by the life +insurance companies, accumulating, as they do, large reserves in trust +for the policyholders, is greater than it is for the other kinds of +companies (fire, marine, casualty, surety, liability, accident, and +health insurance). + +It is a striking evidence of the importance of the marginal +principle[9] that insurance at such a cost should still be desired by +men. The use of insurance would be much wider and its benefits greater +if this "tare and tret" of doing the business could be reduced. It +seems a reasonable hope, now that the experimental stages are passed, +that this may be done. In the case of all kinds of insurance as yet a +large expense for agents has been necessary to educate men to see +the value of insurance and to purchase it, as well as for many other +competitive expenses. It has been found that much of this expense +can be saved by insurance in groups (for all employees in an +establishment), by compulsory insurance (as of all working men), and +by central state administration serving to regularize and unify the +organizations. This important question will be further considered in +connection with "social insurance" as a measure to benefit the working +classes. + + +[Footnote 1: See Vol. 1, ch. 5, sec. 7.] + +[Footnote 2: The Jeffries-Johnson prize-fight was insured, against +rain, for $30,000. Frequently, race-horses, the fingers of pianists, +the lives of ball-players, and the throats of singers, are now +insured. Summer hotels in England regularly insure for large sums +against more than so many days of rain per season.] + +[Footnote 3: On the former, see Vol. I, pp. 365 and 374; and on the +latter, below, sec. 14.] + +[Footnote 4: See Vol. I, labor-incomes, in Index.] + +[Footnote 5: There is an appearance of a slight discrepancy due to +the omission of fractions of cents. If premiums are collected at the +beginning of the year and losses are paid at the end of the year, and +if interest can be earned meantime at the rate of 3-1/2 per cent, the +natural premium for a one year term policy is about $8.64, that being +the present worth of $8.95 due a year hence, interest being 3-1/2 per +cent. In these calculations there is no allowance for expenses, the +necessary "loading," on which see below, sec. 14.] + +[Footnote 6: See Vol. I, p. 279.] + +[Footnote 7: The following are the chief statistical facts regarding +the life insurance business in the United States, Jan. 1, 1914, +showing separately legal reserve and assessment companies, and the total. + ------------------------------------------------------------------ + | Number of | Policies | Insurance + | Companies | in force | in force + | | | + Legal reserve ..| 260 | 38,206,000 | $20,256,000,000 + Assessment .....| 605 | 8,789,000 | 10,023,000,000 + Total ..........| 865 | 46,995,000 | 30,587,000,000 + ----------------------------------------------------------------- + | Premium | Total | Per cent income + | income | income | from premiums + | | | + Legal reserve ..| $715,000,000 | $946,000,000 | 75.6 + Assessment .....| 138,000,000 | 153,000,000 | 90.2 + Total ..........| 853,000,000 |1,099,000,000 | 77.6 + ---------------------------------------------------------------- + | Payments to| Assets | Assets for each + | policyholders| | 100 insurance + | | | in force + | | | + Legal reserve | $470,000,000 |$4,659,000,000 | $22.66 + Assessment .... | 106,000,000 | 195,000,000 | 1.37 + Total ....... | 576,000,000 | 4,854,000,000 | 15.87 +] + +[Footnote 8: In 1913 the total premiums collected by all kinds of +insurance companies reported (Statistical Abstract of the U.S., 1914, +pp. 549-557) were about $1,512,000,000, and the amount returned to +policy holders the same year was $918,000,000, or about 61 per cent +of all premiums, the amount not returned ($584,000,000) being 39 per +cent. + + Premiums received Returned to policyholders + Amount Percent + + Life insurance + reserve companies ..$715,000,000 $470,000,000 67 + assessment companies 138,000,000 106,000,000 76 + Other kinds ......... 659,000,000 342,000,000 52 + ------------- ----------- -- + Total ........... $1,512,000,000 $918,000,000 61 +] + +[Footnote 9: See above, secs. 2 and 5.] + + + + +PART IV + + +TARIFF AND TAXATION + + + + +CHAPTER 13 + +INTERNATIONAL TRADE + + § 1. Political and trade boundaries. § 2. Benefits of international + trade. § 3. Choice of the more advantageous occupations. § 4. Persistence + of differences between nations. § 5. Doctrine of comparative + advantages. § 6. Equation of international exchange. §7. Balance of + merchandise movements. § 8. Cancellation of foreign indebtedness. § 9. + Par of exchange. § 10. International monetary balance and price-levels. + + +§ 1. #Political and trade boundaries.# By international trade is +meant, in general, trade between persons resident in different +countries; comparatively rare is the case in which one of the two +parties to a trade is a whole nation acting through its government +as a unit (e.g., in the purchase of munitions of war in neutral +countries). Outside of a communistic group such as the family, trade +is a necessary accompaniment of division of labor. As territorial +division of labor began between neighboring tribes,[1] international +trade was the earliest kind of regular interchange of goods. Indeed +the very word "market" meant originally the boundary between tribes. +Thus, from primitive times when wandering savages gave bits of flint +or copper in return for salt or fish, individuals have sought to +adjust their goods to their desires through trade with men of other +political groups. With the progress of the world in the means of +communication and transportation, international trade has widened in +extent and grown in volume. + +Economic relations never have been coextensive with political +relations. The economic groupings of men connected by a network of +trades never have and never will correspond very nearly with political +groupings of men bound together by common citizenship in particular +states. Indeed it is not uncommon for many of the residents in two +adjoining states to trade far more with each other than they do with +their own fellow citizens. Lawmakers and rulers from the beginnings of +formal governments have constantly tried to hinder this kind of trade. +They have done this chiefly because of their belief that they could +strengthen their states in political and economic ways, and could +favor some of their citizens, by confining economic relations within +political boundaries--if not exclusively, more closely than when trade +was left to take its natural course, guided by individual motives. The +regulation of international trade, therefore, has always constituted +an economic problem of great importance in the field of political +action. + +§ 2. #Benefits of international trade#. Now, bearing in mind that +international trade is carried on by individual traders in any two +countries, we may ask what motive impels men to trade across the +political boundaries of a state. The simple answer is that each trader +has something to give and desires to get something in return. Each +is seeking to get something that has to him a greater value than the +thing he gives, and believes he can do this in trade with a foreigner +better than by trading at home. In any trade, both parties gain, or +think they are gaining.[2] In international trade there is the same +chance for mistake as in domestic trade, but no more. In a single +transaction in either domestic or foreign trade one party may be +cheated, but the continuance of trade relations is dependent upon +continued benefits. The once generally accepted maxim that the gain +of one in trade is the loss of another is now generally rejected, +but often still it is assumed to be true of international trade. +The starting point for the consideration of this subject is in +this proposition: Foreign trade is carried on by individuals, for +individual gain, with the same motives and for the same benefits as +are found in other trade. + +The advantages of international trade are indeed but those of division +of labor in general, in the particular case where it happens to cross +political boundaries. The great territorial divisions of industry are +determined first and mainly by natural differences of climate, soil, +and material resources. Thus trade arises easily between North and +South, between warm and frigid climates, between new countries and +old, between regions sparsely and regions densely populated.[3] + +Territorial divisions of industry are determined secondly by social +and economic differences such as those with respect to accumulation +of wealth, amount of loanable capital, invention, organization and +intelligence of the workers, and the grade of civilization. + +Foreign trade normally imparts increased efficiency to the productive +forces of each country. In most cases it is apparent that labor is +more effective and gets a larger product when it is applied in those +ways for which the country is best fitted and for which it offers the +best and most bountiful materials; and that, further, when special +branches of industry have developed at one place, they make possible +the advantages of large production and of high specialization. + +Certain erroneous explanations of the advantages of foreign trade may +be dismissed with brief mention. It is said to give vent for surplus +production and to give a wider market to what would otherwise go to +waste. This involves the same fallacy as the "lump of labor notion," +the destruction of machinery, and the praise of waste and luxury.[4] +If it were true that sale to backward nations were now necessary +to give an outlet for products which would otherwise rot in the +warehouses, a time would come at length when the world would have +an enormous surplus unless neighboring planets could be successively +annexed. Again it is said that the great purpose of foreign trade is +to keep exports in excess of imports so that the money of the country +may constantly increase in amount. The ideal of such theorists is an +impossible condition where the country would constantly sell and never +buy.[5] In the narrow commercial view of the subject the sole object +of foreign trade is to afford a profit to the merchants, regardless of +the welfare of the mass of the citizens. + +§ 3. #Choice of the more advantageous occupations#. Let us consider +the cases of two countries somewhat differently situated, such as an +old country like England and a newer country such as was the United +States in the nineteenth century. Now the relative advantages of +various industries in two such countries are very unlike. The newer +country excels in its broad area, its abundant rich lands, its +bountiful natural resources of forests and mines. These are the +superior opportunities which give the economic motives for settlement +and for continued immigration from the other lands. Most of the +newcomers find it to their advantage to develop the peculiar +opportunities of the new land, rather than to go on producing the same +things in the same way as they did in the old country.[6] Thus they +get a larger quantity of products per day's labor, and are able to +gain by trading a part of these for the products of the older country. +Thus the characteristic industries of the two countries must differ. +Without any government supervision, therefore, but simply through the +choice of enterprises, each seeking the best investment of capital for +himself, industries are developed in which each country is either +most markedly superior, or least inferior, to its neighbors. If +either laborers or capitalists in the new country were to turn to +the less-favored industries they would be forced to accept a smaller +reward than they can earn in the more favored. + +§ 4. #Persistence of difference between nations#. If both men and +wealth interchanged between industries and between countries with +perfect readiness and without any outlay whatever for transportation, +these differences would soon disappear, and perfect equilibrium +of advantage would everywhere result. In every country, in every +occupation, labor and wealth of given quality and amount would receive +the same reward. But the interchange of labor and of products between +countries is never without friction. + +The laborers, enterprisers, and investors in a naturally rich country +are thus in a position of more or less enduring advantage relative to +those of older and poorer countries. Differences of the same nature +appear as between different parts of the same country, as between the +Northern and the Southern states of the American union, between the +Eastern and the Western states, and even between neighboring countries +of the same state. The differences between two countries, however, are +likely to be more marked, the circulation of factors being so active +within a country that it is allowable to speak broadly of prevailing +national rates of wages and of interest. Altho, as Adam Smith said, "a +man is of all sorts of luggage the most difficult to be transported," +the higher wages in a new country attract constantly from the older +lands a portion of their laborers. The higher rate of interest in new +countries constantly attracts investments from abroad; yet, despite +these forces working toward equalization, the inequality may remain +and, through the working of other influences, may even increase in the +course of years. + +§ 5. #Doctrine of comparative advantages.# It may be that two +countries both possess the necessary technical conditions for making +both articles that are to be traded for each other. It may even be +that the people in one country would be able to make not only one of +the two objects of trade, but both of them, more easily and with less +sacrifice and effort than the people in the other. If, for example, +American labor can produce two bushels of wheat in a day and English +labor but one bushel a day; and American labor can produce just as +much iron in a day as English labor--or more--the question always +arises: Is it not foolish and wasteful not to produce both the wheat +and the iron? + +Now, exactly the same case is presented in almost every simple +neighborhood trade. The proprietor may be able to keep his books +better than does the bookkeeper whom he employs. The merchant may be +able to sweep out the store better than the cheap boy does it. The +carpenter may be able to raise better vegetables than can the gardener +from whom he purchases. Yet the merchant does not turn to sweeping and +the carpenter to raising vegetables, because if they did they would +have to quit or limit by so much their present better-paying work, and +would lose far more than they would gain. + +So whenever the people in one country have a greater advantage in one +article than in another, relative to another country, the foreigners, +like the low-paid man, will be willing to exchange at a ratio that +will make it profitable to specialize in the product wherein the +greater superiority lies.[7] + +But this is always hard doctrine for the popular mind, and +particularly for the commercial mind endeavoring to carry on a +business that can not be made "to pay" in the face of foreign +competition. It is easy to believe that a country ought not to import +goods unless it is at an _absolute_ disadvantage in their production. +It is often declared that as our country can produce any kind of goods +"as well" as foreign countries (meaning with as few days' labor), +there is a loss on every unit imported. The fundamental principle of +trade as applied to such cases shows that not the advantage which +one country enjoys over the other as to a single product determines +whether it will gain by producing at home, but the comparative +advantages enjoyed in the production of the two articles in question. + +As a simple example, suppose that a day's labor in country A will +secure two bushels of wheat (2x) and two hundred pounds of iron (2y), +whereas in B a day's labor will secure 1x or 2y. Then A's comparative +advantage in producing x becomes a reason for A's not trying to +produce y. Trade can take place (aside from transportation outlay) +at any ratio between 2x = 2x (A's minimum) and 2x = 4y (B's maximum). +Evidently at any rate between these two ratios each party would gain +something by the trade, e.g., at 2x = 3y A would get 3 instead of 2y +by a day's labor, and B would get 1-1/3x instead of 1x for a day's +labor (2x for 1-1/2 day's labor instead of for two days'). If, +however, A could produce exactly twice as much of everything as B +could, then there could be no motive on either side for trade. But +this never happens. + +§ 6. #Equation of international exchange.# Foreign trade of course +can take place as barter, and in earlier times, particularly, very +commonly did so. But in the existing monetary economy nearly all +trades are expressed in terms of monetary prices. Both the prices +of all the particular objects of international trade and the general +levels of prices in any two trading countries come to be pretty +definitely interrelated. Changes in the one country at once compel +readjustments in the other. To understand in the most general way +how this occurs, a knowledge at least of the elementary principles of +foreign exchange is required, and to this we may now turn. + +Let us begin with the proposition known as the equation of +international exchange, which is sometimes given thus: the value of +the imports of a country must in the long run equal the value of +the exports. But this proposition (especially the words imports and +exports) must be understood in a much broader sense than that of +the movements of merchandise merely. The proposition might better be +expressed: the total credits of a nation (including money actually +sent abroad) must just equal its total debits (including money +imported). Into the balance of accounts between any two nations enter +many items: the cash values of the imports and exports of merchandise; +freights, insurance premiums, and commissions; the expenses of +citizens while traveling abroad; money brought in or taken out by +immigrants; the cost of the governmental foreign services (such as the +salaries of consuls and of diplomatic representatives); subsidies +and war indemnities received from or paid to foreign nations; the +investments of foreign capital; and credit items of many kinds, on +both sides of the account. + +The effect of loans upon the equation differs at different periods +according as they are just being made, are continuing, or are being +repaid. When foreign capital is first invested in a country, whether +it is loaned to the government or to individuals or to corporations, +either gold must be remitted to the borrowing country or goods be +sent. But later the interest payments and the eventual repayment of +the principal of the loan act in the opposite direction. Accruing +interest must be offset annually by exports from the debtor country +and the repayment of the principal requires that either money or goods +be exported equal in value to the original obligations. In popular +opinion an excess of exports of merchandise is an index, if not the +real cause, of national prosperity; but evidently it is no true index +whatever on this point. An excess of exports may at any given moment +indicate that the country is rich and is lending abroad, or that it is +in debt and is paying interest, or that it is repaying the principal. +On the other hand, an excess of imports may indicate either that a +country is poor, and is borrowing from abroad, or that it is rich, +with many foreign investments, and is receiving the income from them +in the form of a regular shipment of goods from the debtors. + +The following statistics of the foreign commerce (merchandise imports +and exports) of the principal countries of the world are given in +significant groupings which call for various explanations. + +Figures are in million dollars ($1,000,000) and are mostly for the +year 1908, (Stat. Abst. 1908, p. 769). At the present writing the war +has altered all the lines of commerce. + + COUNTRIES HAVING EXCESS OF IMPORTS OF MERCHANDISE + + |Excess %|Imports.|Exports.| + United Kingdom ..| 57 | 2886 | 1835 | + Germany ..........| 20 | 1824 | 1523 | + Netherlands ......| 30 | 1130 | 873 | + France ...... | 12 | 1089 | 975 | + Belgium ..........| 33 | 642 | 484 | + + Italy ............| 68 | 562 | 334 | + Aust.-Hung .......| 7 | 487 | 457 | + Switzerland ......| 44 | 287 | 200 | + Spain ............| 10 | 168 | 153 | + Sweden ...........| 26 | 163 | 129 | + Denmark ..........| 16 | 191 | 165 | + Norway ...........| 58 | 101 | 64 | + + Canada ...........| 34 | 298 | 222 | + China ............| 43 | 254 | 178 | + Turkey ...........| 59 | 135 | 85 | + + COUNTRIES HAVING EXCESS OF EXPORTS OF MERCHANDISE + + |Imports.|Exports.|Excess %| + United States ....| 1312 | 1638 | 25 | + Russia ...........| 436 | 542 | 24 | + + British Colonies .| 558 | 615 | 5 | + British India ....| 418 | 486 | 16 | + Australasia ......| 242 | 302 | 25 | + Japan ............| 196 | 206 | 5 | + Cuba .............| 84 | 116 | 40 | + Mexico ...........| 78 | 115 | 42 | + San Domingo ......| 5 | 10 | 100 | + + Argentina ........| 263 | 353 | 34 | + Brazil ...........| 172 | 214 | 24 | + Chile ............| 98 | 116 | 18 | + Uruguay ..........| 35 | 37 | 6 | + Bolivia ..........| 21 | 24 | 14 | + Venezuela .... | 10 | 15 | 50 | + +#§ 7. Balance of merchandise movements.# The first group evidently +consists of the older, creditor countries which are drawing some of +the income of their investments from abroad each year in the form of +food and of raw materials of many kinds. The second group includes +countries of very diverse conditions, possibly all having some +investments abroad; Italy receives large imports in return for the +services of many Italians working in foreign countries, and the three +Scandinavian countries (especially Norway) carry on a large commerce +for other nations which is paid for in these ways. The excess of +imports in the third group probably is the result of new investments +that were being made in Canada by English and American capitalists, in +Turkey especially by Germans, and in China by Americans and Europeans. + +The countries in the second column are doubtless on the whole debtors, +but in varying degrees. The excess exports of some are insufficient +even to pay all the current interest, and they are borrowing still +more (possibly the British colonies, Japan and several South American +countries); others have ceased to borrow and are simply paying +interest; whereas the United States at least with its excess of +exports was at this time both paying interest and getting out of debt. +With the outbreak of the war in 1914 the United States began rapidly +buying up its foreign-held securities, and events are fast making it +a creditor nation. Its imports must therefore in future more nearly +equal if not exceed its exports, the actual outcome being dependent +as well on various other items in the balance as on those here +considered. + +§ 8. #Cancelation of foreign indebtedness.# In the international +business of any two important countries to-day, such as England and +America, the number of credit and debit transactions is enormous. If +each trader had to attend to the forwarding of the means of payment +for his purchases he would, of course, deduct from the amount of his +indebtedness the amount due him from his foreign correspondent, and +might from time to time "remit" the balance in the form of a shipment +of gold. This simple offsetting and cancelation of debits and credits +would greatly limit the amount of gold that would have to be shipped. +But still, under such conditions, there must be a very large number of +shipments of gold by different individuals, and a large proportion +of these shipments would be going in opposite directions at the same +time. Now a merchant in New York called M may have a balance to pay in +London to X and at the same time a merchant in London called Y have a +balance to pay in New York to a man called N. If M can buy from N his +claim in the form of an order, draft, or bill of exchange, and send it +to X, the latter may through his bank collect the sum from Y. In this +way a further cancelation of indebtedness would occur. + +When all persons having either debits or credits to be paid in New +York and in London, respectively, are dealing with the banks in these +cities, and the banks and special exchange brokers are constantly +buying and selling these bills, a market is created for London +exchange in New York (and conversely in London), and a much easier and +more nearly complete cancelation of indebtedness results. In effect, +all the debits and credits between the two countries are merged into +one big ledger balance, and the international shipment of gold bullion +finally made is just the amount needed to balance the accounts payable +at the time. Industrial indebtedness is represented in various forms: +bills of lading for goods shipped, drafts made by the creditor on his +debtor for goods shipped or property sold, checks or letters of credit +for travelers, bonds and notes public and private. These are the +objects dealt in by the bankers who are the agents to carry on the +work of exchange. + +The balance of foreign exchanges is of essentially the same nature as +the domestic cancelation of indebtedness. It is going on constantly +between the two merchants in the same town, between two banks in +the same town who represent groups of merchants, between men in +neighboring towns, and between distant states like New York and +California.[8] The price of exchange to the individual is reduced +by the specializing of the business in the hands of a few dealers, +permitting the cancelation of indebtedness or offsetting of exchange, +and greatly reducing the amount of bullion to be transported in making +the payments. The cost to the bank of providing this exchange for its +customers varies as conditions change, but in any case is not great, +so that in domestic business when any charge is made it is usually at +a fixed rate, and is mainly for the service. + +§ 9. #Par of exchange.# Foreign exchange from America to Europe is, +however, in two features different from domestic exchange: (a) the +cost of shipment of gold is greater; (b) the monetary units of the two +countries usually differ in name, weight, and fineness, and sometimes +in materials. We may define foreign exchange as the purchase and +sale of the right to receive a given kind and weight of metal or its +monetary equivalent in current funds at a specified time and place. +_Par of exchange_ between two countries using the same metal as +a standard is the number of units of the standard coin of the one +country that contains the same amount of fine metal as the standard +coin of the other country. There is no fixed par of exchange between +gold-using and silver-using countries: par of exchange between them +fluctuates with changes in the comparative values of the two metals. +The _gold shipping points_ for importing or exporting gold are +respectively par of exchange plus or minus the cost of moving the +actual metal. These points vary with means of transportation and +communication. The par of exchange between New York and London being +nearly $4.866 and the cost of expressing and insuring a gold pound +between New York and London being approximately $.02,[9] the shipping +point for the export of gold from New York is $4.886 and for the +import of gold to New York is $4.846. At these upper and lower limits, +there is a motive for shipping gold as a commodity. + +When large sales have been made to Europe and credits are accumulating +in New York and the importation of gold is imminent or already begun, +the claims are bought by bankers in New York at less than par. At such +a time one needing to remit a sum to London can buy exchange for less +than par, for every such draft remitted reduces London's indebtedness +and, by so much, the need of shipping gold to this country. As a +rule then, accumulating credits here mean a low rate of exchange, +accumulating debits a high rate of exchange from this to the foreign +country. + +These are the merest rudiments of the subject. The many problems +arising, such as the adjustment of foreign credits to changing needs, +and such as arbitrage (the readjustment of the rates of exchange +prevailing among different financial centers) make foreign exchange +both a complex science and a difficult art. + +§ 10. #International monetary balance and price-levels.# The balance +of all accounts for or against a country (including new loans, current +interest, and repayments) must thus eventually be settled in money. +This cannot fail to affect the general level of prices in both +countries, tho this is brought about often only in indirect and +gradual ways. The flow of money out of a country causes the loan +market of a country to tighten (interest and discount rates to rise) +in proportion as the reserves of the banks are reduced. Then "general +prices" begin to fall.[10] When prices fall, imports decline, as the +country is not so good a place in which to sell: when prices rise, +imports increase, as it is a better place in which to sell. The +opposite effect is produced on exports, and thus in a short time the +national credits and debits are again brought into equilibrium. A +slight movement of money in either direction is enough to influence +prices and set in motion forces to counteract a further flow of +money. Decade after decade the circulating medium of leading countries +changes very slightly in amount, and the fluctuations in its amounts +during periods of so-called "favorable balance of trade" and of +"unfavorable balance of trade" are only the smallest fraction of the +value of goods passing through the ports of the country. + +It is therefore absurd to imagine, as is sometimes done, that a +country could, by continually importing goods, be drained of all its +money, or that by any possible set of devices it could forever have an +excess of exports to be paid for by a continual inflow of gold. +Long before either of such movements could go far, the automatic +readjustment of prices would inevitably check it, and secure and +retain for each country its due portion of the money. + + +[Footnote 1: See Vol. I, ch. 17, sec. 10.] + +[Footnote 2: See Vol. I, ch. 5, secs. 1 and 7.] + +[Footnote 3: See Vol. I, ch. 6, sec. 11, on the origin of markets.] + +[Footnote 4: See Vol. I, chs. 36 and 37.] + +[Footnote 5: Recall ch. 4, in general, on the nature of monetary +demand.] + +[Footnote 6: See Vol. 1 for numerous statements of the effects of +varying quantities of agents upon the economy of utilization; e.g., +pp. 138, 163, 164, 213, 228, and chs. 34 and 35 entire.] + +[Footnote 7: This theory has usually been presented under the name +of "the doctrine of comparative costs." The word "costs" is very +misleading in this connection because it is now always applied to +enterpriser's outlay. It seems best, therefore, to replace it in this +phrase by the word "advantages." Of course, it _never_ can be true +that an article can be "profitably" imported when its monetary costs +(all things considered) are higher in the exporting than in the +importing country. Indeed, the importation of any article is proof +conclusive that the importer thinks that the monetary costs of +an article would be higher in the importing than in the exporting +country. See further, ch. 15, secs. 11 and 13 (note).] + +[Footnote 8: See ch. 7, sec. 7.] + +[Footnote 9: This varies also with conditions; after the outbreak of +the war in 1914 it was for a time as high as $.05 because of high war +rates of insurance.] + +[Footnote 10: The connection between a high rate of interest and +falling price is a dynamic phenomenon of a very temporary nature. +In long-time static conditions the general level of prices and the +prevailing rate of interest are dependent on entirely different sets +of forces. See on the theory of interest, Vol. I, p. 308. In long-time +movements of prices, in contrast with brief changes due to foreign +trade such as are referred to above, high rates of interest are +connected with rising prices, and _vice versa._ See above, ch. 6, sec. +8, on fluctuating price-levels and the interest rate.] + + + + +CHAPTER 14 + +THE POLICY OF A PROTECTIVE TARIFF + + § 1. Military and political motives for interference with trade. § 2. + Revenue and protective tariffs. § 3. Growth of a protective system. + § 4. The infant-industry argument. § 5. The home-market argument. + § 6. The "two-profits" argument. § 7. The balance-of-trade argument. + § 8. The claim that protection raises wages. § 9. Tariffs and + unemployment. § 10. Exports and exhaustion of the soil. § 11. Protection + as a monopoly measure. § 12. Harm of sudden tariff reductions. + + +§ 1. #Military and political motives for interference with trade.# +The considerations set forth in the last chapter raise a strong +presumption in favor of the sovereign state permitting its citizens to +trade freely across its boundaries, as the best way to further their +own prosperity and, on the whole and in the long run, that of the +nation. Indeed, this presumption and belief has been held by +nearly all serious students of the question, with more or less of +modifications and qualifications, ever since Adam Smith published his +work on the "Wealth of Nations" in 1776.[1] But in conflict with this +belief has been the all but unanimous policy of nations from +early times, throughout the Middle Ages, and down to this day, of +interposing some special hindrances (of varying degrees and kinds) to +this kind of trade. Sometimes this has been done by prohibitions, but +more often by taxes imposed upon either imports or exports. Sometimes +the attempt is made to justify the policy of governmental interference +with foreign trade by arguments which crumble before the slightest +examination, and again it is admitted that free trade is true in +theory, but it is declared to be false in practice. The latter view +is not to be entertained for a moment. If free trade in theory (as an +explanation) is complete and true, it will in practice (as a plan of +action) be sound and workable. In truth, however, the practical policy +of governmental interference with foreign trade has always in part +rested on other than the simple economic grounds. + +Interference with free trade with the foreigner has always been in +large measure due to political motives. In every petty medieval state +or self-governing city, the aim was to make the economic boundaries +coincide as nearly as possible with the political boundaries. Except +for the trade in a few articles of comparative luxury this aim was +at that time nearly attainable. The peasantry surrounding a fortified +town and enjoying its protection were compelled to trade there. Down +to our own time it has seemed to statesmen expedient to forbid or +discourage trade that might nourish the economic power of future +enemies. Sometimes governments have used embargoes, bounties, or +tariffs as weapons to injure the trade of other nations and to secure +diplomatic or commercial concessions. Often they have sought by +tariffs to encourage the building of ships and the manufacture of +armaments and of all kinds of munitions by private enterprise within +their own borders, even when the immediate cost of these products was +greater than if they were purchased abroad. In such cases it is +always a question whether an outright expenditure would not be better, +whether the government could not build its own arsenals and shipyards +more economically than it can foster private enterprise by means of a +protective tariff. However, the political (or military) argument for +protection recognizes that it is in itself a costly (not a profitable) +policy, and that the cost is only justified on the grounds that +military necessity warrants the outlay. + +The military argument as applied to the preparation of ships and +munitions has no application to a tariff on those articles which have +no bearing upon military power. But the most recent application of +science and the mechanical arts to the uses of war has given new +significance to a larger policy of industrial preparedness for +military purposes. The year 1914 doubtless ushered in for the world +a new epoch of protective and discriminatory tariff legislation +determined by political rather than by direct economic considerations. + +§ 2. #Revenue and protective tariffs.# An important distinction in +principle is to be made between a tariff for revenue and a tariff +for protection. A _revenue tariff_ is a schedule of duties on goods +entering or leaving a country, so arranged that the collection of +taxes causes the least possible disturbance to domestic industry. +Speaking generally, the duties may be on either imports or exports; +but, as export duties are unconstitutional in the United States, our +tariff discussions are concerned only with import duties. The most +completely revenue-yielding tariff is one touching only articles +which, even at the higher prices are not in the least to be produced +profitably in the home country. A _protective tariff_ is a schedule of +import duties so arranged as to give appreciably higher prices to some +domestic enterprises than they could obtain with free trade. It shuts +out some foreign goods which would otherwise enter, an in so far it +"protects" the domestic producer from the foreign competitors who +would sell at lower prices than those at which he can or will sell. +In other words, "protection" means governmental interference with the +freedom of trade. + +The distinction between revenue and protective tariffs, thus clear in +principle, is not always easy to make in practice. It does not lie in +the intention of the taxing power, but in the actual effects produced. +Most tariffs combine the characteristics both of revenue and of +protective measures. A tariff that reduces imports but does not +cut them off entirely may be called either a revenue tariff with +incidental protection or a protective tariff with incidental revenue. +The difference is one of degree. But notice particularly that the two +features of protection and of revenue are mutually exclusive. To the +extent that one is present the other is impossible. A tariff rate +that in whole or in part excludes the foreign article to that +extent affords "protection" but does not yield revenue. Whenever the +government collects a cent of tariff taxes, the domestic producer in +so far and as respects that unit of goods is unprotected. Likewise, +whenever any domestic producer enjoys "protection" in respect to any +unit of goods, importation is in so far prohibited and the government +is deprived of any revenue whatever derived from the production and +sale of that unit of goods. + +§ 3. #Growth of a protective system.# The protective policy developed +at first accidentally, as it were, out of the practice of levying +taxes for revenue only. Tolls, dues (or duties), customs (that is, in +former times the customary dues paid by merchants, now the dues fixed +by law), tariffs (that is, schedules or lists of rates of duties) were +at first intended to raise revenues for the sovereign, the city, or +the state. The unintended, and to some degree inevitable, result of +the taxation of goods in commerce, whether imports or exports, is +to prevent and discourage trade and to raise the prices of the goods +imported. Any change in tariff duties, therefore, at once alters +the previously existing adjustment of profits and of industries in a +country. + +The first effect of the tariff is the same as that of any new factor +in enterpriser's cost; the same, for example, as that of a new +domestic tax on an article or as that of a rise of freight rates--the +domestic price of the taxed article tends to rise. Other results then +follow. If the article cannot, even at the higher price, be produced +within the country (as in the cases of oranges, spices, and coffee +in England, Norway, and Sweden), its consumption is reduced. The +lessening of demand may, however, depress somewhat the price in +the producing country. But as such a tariff does not increase home +production of the taxed article, it is therefore for revenue, not for +protection. + +But if the article can be profitably produced in the importing +country at the new price, "home industries" will start. Where the +transportation charges are low, as on the coasts and on the main lines +of railways, some imported goods may be bought, while farther inland +where transportation charges are higher home production of some or all +grades of such goods may take place. If the whole demand at home is +supplied and all imports stop, therewith cease all revenues to +the government from that source. A completely protective tariff is +completely prohibitive. + +Experience abundantly shows that, with a few exceptions, due to +climate and natural resources, it is impossible to put into effect the +most moderate schedule of duties without the increase in price at once +causing some men to shift their occupations, and to begin producing +articles of the kinds that have risen in price. At once appears a +group of "protected industries," the owners of which are dependent for +the safety and profits of their investments, and the workmen in which +are dependent for the security of their present jobs (possibly for +the chance to continue the pursuit of highly skilled trades) on the +continuance, if not the increase, of the existing tariff rates. A +tariff may be adopted mainly from stress of financial need (as in our +own history in 1789 or in 1861), but its modification or repeal cannot +be decided by fiscal considerations. The "incidental protection" it +affords has created a wealthy and influential group of employers and a +large body of employees who are irresistibly tempted to exercise their +influence in politics almost solely in favor of continuing and of +increasing the rates to the sacrifice of the higher civic life of +their communities. Of course the beneficiaries of the tariff usually +believe sincerely that it is indispensable for the prosperity of the +country as a whole, and they can do much to persuade others to +the same opinion. This commercial motive for maintaining existing +protective tariffs explains in large part their wide prevalence, +whatever other reasons may be adduced in their justification. + +§ 4. #The infant-industry argument.# Most free-trade writers concede a +limited validity to the claim that protection may be used to encourage +infant industries and thus diversify the industries of the country. If +the natural resources of a land are adapted to an industry, it may be +called into being earlier by a fostering protective tariff. This is +merely anticipating and hastening the natural order of progress. In +the American colonies the manufactures of such goods as iron, cloth, +hats, ships, and furniture sprang up and continued not only without +"protection," but despite numerous harassing trade restrictions made +in the interest of English merchants. Can it be doubted that many +of these industries would have developed and flourished after the +adoption of the Constitution with no other favoring influences than +those of rich resources and of economy in freights? In the Mississippi +Valley since 1880 natural gas, abundant coal, ore, and timber have +made possible a great growth of industries without protection against +the Eastern states. Industries capable of eventual self-support must +in most cases naturally appear in due time. Economic forces will bring +them out. The protective system has often been likened to a hothouse, +anticipating the season by a few weeks and at great cost. The question +is whether the mere possession of the hothouse is a luxury worth the +price, if meantime the products can be got more cheaply by trade. +English manufactures flourished in the nineteenth century because they +were well established, had excellent coal supplies, great stores of +iron ore, and low-paid labor which did not have the opportunity of +better alternatives, as did the American workman. If America had +imported more (it would not have been all) of her iron and coal, the +English mines would have begun to shown signs of exhaustion earlier, +and America's advantage surely would have asserted itself in time. Her +iron manufactures undoubtedly were hastened--they cannot truly be said +to have been created--by the protective tariff. + +The peculiar advantages of a new country attract labor and +enterprise into a few lines. Industries are forced into an earlier +diversification by tariffs. Which is the better economic situation? +Contrast Iowa, Dakota, and Minnesota, or Kansas, if you please, with +New York and Pennsylvania. Is it so certain that a dense population +congested in cities and crowded in factories and mines is a more ideal +social aggregation than is a community of prosperous farmers? The +smoky industrialism fostered by protection often puts a premium on a +low grade of immigrants, crowds then into city slums and into forlorn +mill towns, and keeps them aliens to the American spirit. It would be +surprising if Americanism on the Western plains were not as sound +as in the crowded cities. But the infant-industry argument appeals +strongly to the enterprise and the speculative spirit of Americans, +who like to do all things rapidly and on a large scale. Every village +aspires to be a great industrial center. Americans are impatient of +the suggestion that things "will come in time"; they like things to +come at once. + +It must, however, be recognized that in a new country there is often +a certain monotony and poverty of life because of the lack of +diversified industries. There are not sufficiently varied avenues for +the expression and use of the manifold talents of the nation. There +are unused materials and opportunities, but the initial expense of +experimentation, the initial difficulties of gathering and training a +working force, are discouraging to individual enterprise, prices being +as they are. A protective tariff is not necessarily and always the +best way, but it is one way of helping private enterprise to establish +and conduct such industries through their initial period. But as has +been pointed out by many writers, the infant-industry argument is +self-limiting, and involves always the assumption that the industries +selected as fit for protection are such as ultimately, and within a +moderately short period, can grow into self-dependence. The infant +must sometime grow to be a man and stand on his own legs, or he is +either a chronic invalid or a degenerate. + +#§ 5. The home-market argument.# The home-market argument seeks to +show a more permanent need for a tariff. At the same time it appeals +to the farmers, whom it has been hard to reconcile to a policy which +in America[2] has been peculiarly favorable to manufacturers. The +home-market argument extols the advantages of having near to the +farms customers for agricultural products, and dwells on the greater +steadiness of domestic trade. War or political changes, it is said, +may change the demand for products. This is true, but no other changes +have affected American agriculture so radically as the peaceful +development of domestic transportation and the opening of the West. + +The main economic claim made in the home-market argument is that the +shipping of food to Europe and the importing of manufactures involve +a great cost for double freights which could be saved by manufacturing +at home. The farmer is supposed to pay this cost. The obvious defects +in this view are: first, there is nothing to show that the freight is +not partly or entirely paid by the European, either the manufacturer +or the food consumer; secondly, home trade "saves the freights" for +the farmer only in case he can buy goods under a tariff with less +of his own labor and products than under free trade. The payment of +freight charges is true economy when the goods can be bought at a +distance on more favorable terms than near home. The freight argument +attempts to prove too much for it condemns every trade within the +country, of goods produced a stone's throw away from the consumer. + +The home-market appeal is strongest when addressed not to all farmers, +but to one class of farmers, those whose lands are situated nearer the +manufacturing cities. As city population grows, some land is converted +from the extensive cultivation of corn and wheat to dairying, fruit- +and market-gardening in the neighborhood of cities, and perhaps at +length is used for factory sites or as city lots. There is, thus, a +partial validity in the argument as applied to a comparatively small +number of farmers, who gain as landlords, not as tillers of the soil. +Even greater gains have sometimes been reaped by the owners of timber +lands, ore mines, coal lands, and other natural resources, the values +of which have been raised by tariff legislation. But unless these +gains come from truly productive additions due to the tariff, there is +no benefit to the community as a whole. + +#§ 6. The "two-profits" argument.# Somewhat related to this idea of +the saving of two freights is the "two-profits" argument. It is said +that the tariff keeps "two profits" at home, foreign trade gives but +one. The word "profits" is here used in the popular sense of gain from +a single transaction. Both parties are said to profit and both profits +are thought to be secured at home when two citizens are forced to +trade with each other. The view that there are "two profits" in a +trade is an advance upon the notion that "one man's gain is another's +loss,"[3] but there is an error in elementary arithmetic here, both as +to the number and as to the aggregate amount of profits. The purpose +of a protective tariff is to compel two of the citizens of a country +to trade with each other instead of trading with two citizens of a +foreign state; the number of profits made by each country is therefore +not increased by substituting domestic for foreign trade. + +What, then, as to individual size and aggregate amount of the profits? +The gain is not the same in all trades; the trade is made if there +is a gain to each party, no matter how small it is; but the generous +"profit" on one transaction where the conditions of the two parties +are very different may be greater than the total of petty gains on a +dozen trades between two traders of evenly matched powers. Indeed, +the greater the difference in the conditions and the capacities of two +groups of traders, the greater is the sum of the profits which they +may secure through the members of each group trading with those of +the other, rather than by the members of each group trading only among +themselves. Can it safely be assumed that every trade with a foreigner +is less advantageous than one with a fellow-citizen? Diamond cuts +diamond, but two Yankees left to themselves surely should not be +worsted in bargains with the universe. If they could exchange to +better advantage with each other they probably would discover it as +soon as the interested manufacturers and political orators who can +prove so eloquently that they know the other man's business better +than he knows it himself. Forcing the home trade by making our +citizens trade with each other whether both wish to or not may be +to the advantage of one citizen, but it is not likely to be to the +advantage of both citizens. + +§ 7. #The balance-of-trade argument.# At the foundation of nearly +all belief in the virtues of a protective tariff will be found the +"favorable balance-of-trade" notion. The ideal of the more thorogoing +upholders of a protective policy is to keep merchandise consistently +flowing out of the country, and to have nothing come in--in any case, +nothing that by any fair amount of effort (whatever that be) could be +produced at home. This is called maintaining a "favorable balance of +trade." Sometimes the emphasis is more on the advantages of an excess +of exports of goods, sometimes more on the importance of the need "to +keep money at home." The simple error in these opinions is clearly +apparent in the explanation of foreign exchanges and of the principles +regulating the international flow of money.[4] + +An interesting commentary on the opinion before us is the fact already +noted[5] that an excess of exports is the usual situation in poor +debtor countries having constant interest payments to meet; while, on +the contrary, rich creditor countries have an excess of merchandise +imports. + +The "favorable balance-of-trade" argument, with the emphasis on money +rather than on goods, is that the protective tariff keeps money at +home which, if trade is free, will be sent abroad to buy foreign +goods, thus impoverishing the country. This doctrine as presented +in the seventeenth and eighteenth centuries in Europe, was known as +_mercantilism_. It had great influence upon the commercial policies +of all the great European nations. A superficial glance at the trade +relations of an old, rich country with a new province seems to give +evidence for such a belief. A richer country that is lending capital +(sent to the debtor country in the form of goods) has at the same time +a larger supply of money. The lack of money and the poverty of the +newer country are looked upon by the protectionist as due to the +importation of goods. The common cause of the imports to newly settled +districts and of their scanty stocks of money, it need hardly be +repeated here, is the comparative poverty of settlers and pioneers.[6] +Often these are paying for imports by means of loans, and in any case +their monetary stocks are not decreased either by their foreign trade +or by their domestic trade with the older and richer parts of the same +country. Europe and the United States, in their trade with China and +South America, usually do not get gold in exchange, but merchandise +of various sorts. It is true that in the trade of England and New York +with great gold-producing districts, such as California, South Africa, +and Alaska, gold is received in return for merchandise, for much of +the gold in gold-producing districts is merely merchandise, and its +export does not drain them of their due portion of money. There was +a time when the states of Kansas, Nebraska, Iowa, and their neighbors +were filled with resentment against the money-lenders of the Eastern +states. There was a widespread belief that hard times were due to an +insufficient currency.[7] + +Attempted action took the form of the greenback and free silver +movements, which were defeated by the opposition of the East, but +there can be little doubt that if the Federal Constitution had +not forbidden it, the discontented states would have established a +protective tariff "to keep their money at home." Few advocates of +protective tariffs are ready to admit that the money stock of the +country is dependent on the general wealth of the country and on the +methods of doing business, rather than on a protective tariff. + +§ 8. #The claim that protection raises wages.# The most effective +popular claim made for protection is that it raises, or maintains, the +general scale of wages in the country. This argument takes two forms: +first, when wages are low in a country it is claimed that a tariff is +needed to raise them; and, secondly, when wages are high it is argued +that a tariff alone can preserve them. In Germany the fear is of the +higher paid and more efficient labor of England. In America, where +general wages at all times have been higher than in England, it was +first argued (in the time of Henry Clay) that because of the greater +cost of production, due to high wages, the tariff was needed to start +certain industries; but after the tariff had long been established +and the old argument had been forgotten (ever since 1865), it has +been urged that the tariff, being the cause of high wages, must +be maintained to protect against the "pauper" labor of the older +countries. The higher wages in new countries where a tariff exists are +always claimed to be the fruits of a protective policy. The true +cause of the high general scale of wages in America is the greater +efficiency of industry under existing conditions.[8] Labor is +surrounded here with advantages in the forms of rich natural resources +and of mechanical appliances such as never before were combined. +Because of the scarcity of workers in particular protected industries, +wages may be temporarily higher in them than in some other industries; +but such workers form a small fraction of the population, and it is +impossible to show that the general scale of wages in all occupations +is raised by the tariff protecting this fraction. + +There is, of course, no question that every tariff change affects +certain enterprises and classes of workmen. Enterprisers already +acquainted with and engaged in a business always may hope to gain by +the higher prices immediately following a rise in the tariff rates +on their particular products. Though they are granted no enduring +monopoly by the protection, they for a time enjoy the advantage of +being on the ground, and may reap the first fruits of the favoring +conditions. The enterpriser usually profits when the price of his +product suddenly rises. Usually skilled workmen are affected slowly by +competition when there is any considerable increase of prices in their +special industries. The important question is, Who bears the burden of +the higher prices that result from a tariff? The burden is very soon +distributed. A part of it may be for a short time borne by the retail +merchants, but ultimately nearly the whole of it must be borne by +their customers, the unfortunate, less favored citizens. The weight +falling on each is usually small, often unsuspected, always hard to +measure. The increased benefit is concentrated in a few industries and +accrues to a comparatively few producers. Here is a recipe for riches: +get everybody to give you a penny; it's so little that no one will +miss it, and it will mean a great deal to you. Something like this +happens in the case of many protected industries; every consumer +of the article pays a few cents more, a small group of wage-earners +temporarily gains, and a few enterprises wax wealthy. + +§ 9. #Tariffs and unemployment#. The claim that a low tariff is bad +for the workers is made with peculiar success in any period when +unemployment is greater than usual. It is vain in reply to show that +again and again equally bad periods of unemployment have occurred when +a high tariff was in force, and that often the most highly protected +industries are most affected. It is vain to suggest that fluctuations +of unemployment are related rather to the rhythm of industrial cycles +and panics, than to any particular level of the tariff, whatever it +be.[9] The fact that at the moment is seen is that here are some men +for the time out of work, and here are some foreign goods coming in. +Of course, what is not seen is that if we stop importing goods we +thereby eventually will stop the exportation of goods of equal value +now being sent in payment and this must throw as many men out of jobs +as we helped into jobs by raising the tariff. But the view easy to +take is the short view, and the ulterior consequences seem to the +popular mind to be vain imaginings. + +§ 10. #Exports and exhaustion of the soil#. It has been ingeniously +argued that a tariff may keep some of the natural agricultural +resources of a new country from becoming quickly exhausted. The export +of food takes out of the soil and out of the country fertile qualities +never to be returned. The shipment of several hundred million dollars +of food products year after year represented a tremendous drain from +the soil of the United States, but this has now largely ceased. +The assumption, however, that the use of the food in this country +preserves the fertility of our own fields is in the main mistaken. The +fertile material in the food for human consumption hauled to a town +five miles away from the field is almost as entirely lost as if it +were shipped to Europe. Engineering skill has as yet succeeded in +returning economically to the fields from which it comes hardly a +fraction as much fertile organic matter as that which flows into the +sewers, that is dumped into river and ocean, and that is buried in +heaps at the borders of our own cities. Artificial fertilizers are +increasingly used, to be sure, but they are obtained in other ways. +On the other hand, the increased use of iron, coal, and timber, as a +result of encouraging manufacturers, has very effectually hastened the +exhaustion of the natural resources of the country. + +§ 11. #Protection as a monopoly measure#. It has rightly been observed +that a new country has a limited potential monopoly in certain kinds +of products and that a tariff may make it effective. The rapid opening +up of America with its rich natural resources greatly benefited +the average consumer in Western Europe, altho it caused a loss to a +special class of landowners.[10] Whether the citizens of the older +or of the newer country shall reap the greater benefit in the trade +depends on the reciprocal demand for the two classes of goods, as was +seen in discussing the equation of international demand. A wide margin +of advantage may go to one party and a narrow margin to the citizen +of the more favored land. To put it concretely: America, having great +natural resources for agriculture, might continue to trade food for +manufactured goods even tho England reaped most of the benefits of the +trade. An American tariff on manufactures from England would, under +such conditions, check the demand for English products and compel some +Americans to leave farming. This reduction of the American supply +of wheat or corn and of the American demand for English manufactures +compels a new ratio of trade (expressed in prices). It is conceivable +that trading fewer goods with a larger gain on each trade would give +a larger total of gain to the favored nation. Thus, foreigners may +conceivably be compelled to pay a part of the tariff duties to +enjoy the favored market. This is but a special case of the monopoly +principle; the government by law artificially limits the supply of +goods offered by its citizens. + +This argument is somewhat subtle, but probably is the soundest one in +the theory of protection. The supposed conditions seldom occur in +a marked measure, but they may exist, and probably have existed +in America. When the great system of internal transportation was +developed in the United States before that of the other new countries +(say from 1840 to 1894), this country had such peculiar advantages for +the production of food that the quantity was enormously increased +and agricultural prices fell.[11] At such a time the tariff may have +worked toward checking the fall and earlier reestablishing a more +favorable ratio. It did this by making prices of manufactured goods in +this country artificially higher and thus tempting men from rural to +urban callings. But the limited application of the principle must be +recognized. The potential competition of undeveloped countries on all +sides, seeking to develop their resources, and profiting by the higher +prices of food in the world-market caused by our tariff, threatens +the peculiar advantages of the favored land. Russia, Argentina, and +Australia have rapidly taken the place of America in supplying food to +Western Europe, in part, no doubt, because we refused to take Europe's +goods in trade. A great nation with its manifold interests is not +eminently fitted to practise the gentle art of monopoly. + +The period in America from about 1840 to 1890 shows certain absurd +contradictions in economic policy. By governmental action, national, +state, and municipal, enormous grants of money and lands were made in +aid of transportation. Canals, roads, and railways were built into +new agricultural territory far faster than was healthy and normal. A +prodigal land policy put a premium upon a wastefully rapid extension +of the farming area. These things were done to favor the agricultural +states, but agricultural prices fell so greatly that our farmers for +a long period were nowhere prosperous, and great numbers of them, +both in the East and in the West, were ruined. At the same time a +high tariff on nearly everything the farmers needed to buy was the +political spoil obtained by the Eastern and Middle states. This +further depressed the condition of the farmers and forced them or +their sons into urban industries. A slower development would have +occurred without the waste of national resources in such conflicting +policies of artificial stimulation. + +§ 12. #Harm of sudden tariff reductions.# It is rarely appreciated how +great is the tactical advantage which the advocates of a high tariff +enjoy in popular political discussion. They can so easily impress the +popular judgment with the evident fruits of their own policy and +with the immediate dangers of the policy of their opponents. When +a protective rate is first applied or is increased, it calls into +existence something visible and tangible, which can be measured in +terms of factories built, men employed, and products turned out. The +increased cost of these results is diffused among many consumers and +reaches them in such indirect ways and in such small increments of +price that they are quite unaware of the way they are affected.[12] + +On the other hand, reduction of the tariff works in a direction the +reverse of the enactment. It may cause local crises and may even bring +on general crises. The benefits of the lower prices are diffused and +lost to view; the immediate injury is concentrated and strikingly +evident. Factories are closed, investments depreciate, laborers are +thrown out of employment. The organic nature of local industry causes +these evils to be felt by many classes. Merchants, professional men, +servants, and skilled laborers, that are tributary to the depressed +industry, suffer. The effects are transmitted to commercial and +financial centres and often credit is much shaken. Then follows a slow +and painful process of readjustment. + +The low-tariff advocates in America undoubtedly have underestimated +these immediate effects. They have been too abstractly doctrinaire, +have argued too absolutely for the merits of free trade to be applied +instantly regardless of the existing distribution of investments and +of occupations. They have opposed one extreme system by another, with +no thought of the inexpediency and injustice of sweeping changes. +There is a strong feeling among business men that any tariff, be +it high or low, is better than a shifting policy. Despite the great +preponderance of domestic production over foreign trade, it is +perhaps too much to say that the tariff is unimportant in our present +conditions. It can, however, be truly said that business can adjust +itself in large measure to any settled conditions and that radical +changes, especially sudden and large reductions, are fraught with +evils. Long before a new tariff law goes into effect, even months in +advance of its passage, while it is merely in prospect, the course +of trade is abnormally affected. If the rate is likely to be raised, +large importations take place under the lower rate, and for a +considerable time after the law goes into effect imports are small, +while prices rise and domestic production gradually increases. But if +the rate is likely to fall, importations are for months meager, stocks +of goods are reduced to the lowest point, and when the lower rate +goes into effect, large importations follow to the injury of domestic +producers. In many cases a year or two of notice, time given to +enterprisers to adjust their business, would probably do away with a +large part both of the serious losses and of the lottery-like gains +that otherwise occur. + +The obvious measure of precaution and of justice would be to put +any new rate into effect gradually.[13] The difficulties are of a +political nature and in the desire of the party in power to "make a +showing" at once of the results of its campaign pledges, in the one +case by starting and stimulating industries through a higher tariff +and in the other by reducing prices to consumers through a lower +tariff. Under the new permanent tariff board, constituted to suggest +tariff changes and to administer the tariff laws, it would be possible +to apply some such feature. + + +[Footnote 1: See above, ch. 2, secs. 12, 13.] + +[Footnote 2: In European countries, on the contrary, the rates that +have been mainly effective have been those levied upon food products, +and the agricultural landholders have been the "protected interests," +such as the England "landed aristocracy," the German agrarian +"Junkertum," and the French peasant landowners.] + +[Footnote 3: See above, ch. 13, sec. 2.] + +[Footnote 4: See ch. 4, sec. 6 and ch. 13, secs. 6-10.] + +[Footnote 5: In ch. 13, sec. 7.] + +[Footnote 6: See ch. 4, secs. 4 and 9.] + +[Footnote 7: That there is a certain measure of truth in this opinion +is recognized in our discussion of the standard of deferred payments, +ch. 6, sec. 9. But the relation of a world-wide appreciation of the +standard money commodity with the burden that this change puts upon +debtors has nothing to do with the question now before us, viz.: +Does a protective tariff enable a country to keep and increase its +proportion of the world's stock of gold; and if it could, would it be +a general benefit?] + +[Footnote 8: See Vol. I, especially p. 228, and chs. 34 and 36.] + +[Footnote 9: See on wages in times of crises, ch. 10, secs. 6 and 7; +and on tariff changes, ch. 10, sec. 14, and ch. 15, sec. 13.] + +[Footnote 10: See Vol. 1, pp. 361 and 443.] + +[Footnote 11: See Vol. 1, p. 436, for average wheat prices in England, +practically in the world-market.] + +[Footnote 12: See above, sec, 8. On the next paragraph, see ch. 10, +sec. 14.] + +[Footnote 13: For example, the maximum alteration in any year might be +limited to 3.65 per cent of the value of the goods and in any case not +to exceed one tenth of the old duty, this change to be applied day by +day. Thus, if, on a valuation of $1000, the duty collected under the +old rate has been $400, and under the new law is to be $290.50, three +years would be required for the full change to become effective, the +reduction each day being $.10 per $1000 valuation. The administration +of such a rule would be simple, and it has been favored by men of +practical commercial experience.] + + + + +CHAPTER 15 + +AMERICAN TARIFF HISTORY + + § 1. Prevalence of protective tariffs. § 2. Specific and _ad valorem_ + rates. § 3. Some technical features of the tariff. § 4. The tariff, + 1789-1815. §5. The tariff, 1816-1845. §6. The tariff, 1846-1860. §7. The + tariff, 1861-1871. § 8. The tariff, 1872-1889. § 9. The tariff, + 1890-1896. § 10. The Dingley tariff, 1897-1909. § 11. Sentiment favoring + lower rates. § 12. The Payne-Aldrich tariff, 1909-1913. § 13. The + Underwood tariff, 1913. § 14. Some lessons from our tariff history. + Note on Tariff legislation and business depressions. + + +§ 1. #Prevalence of protective tariffs.# For a century and a half +most serious students of economics have favored a larger measure of +freedom, if not absolute freedom, in foreign trade. But the actual +practice of most nations has never been in accord with the principles +laid down by the philosophers. Great Britain alone among the larger +countries has, since 1846, steadily pursued a low tariff policy for +revenue only, and her example has been most nearly followed by Holland +and Denmark. Germany, which had always had restrictive duties, adopted +still more protective measures under Bismarck in 1879. France, +Italy, and most of the other nations of Europe have strong protective +tariffs. The United States has followed a restrictive policy since +near the beginning of the last century. The explanation of this +contradiction between precept and practice is not entirely simple. +Great interests are affected by foreign trade and certain of these +interests are able to influence opinion and to dominate legislation. +Free trade is not the most desirable thing for every one. The general +policy of free trade between nations, as advocated by most English +economists since Adam Smith, has usually been rejected by the people +and the legislators of other countries. + +In its details American policy in tariff legislation under the +Constitution has been varied and vacillating. The changes have been +determined in most cases by motives of temporary partisan advantage or +by the political activity of the immediate beneficiaries rather than +by clear knowledge and consistent purpose of the electorate as a +whole. Thus its lessons for the student are largely of a negative +nature, but they well repay serious study. + +§ 2. #Specific and _ad valorem_ rates.# Before entering upon the +history of the American policy let us make clear the meaning of +certain technical terms and explain certain methods which are +frequently referred to. + +Rates (and duties) may be by either specific or _ad valorem. Specific +duties_ are those that are calculated and levied according to some +physical test, as so much per pound, per yard, per hundred-weight, or +per ton. _Ad valorem_ duties are those that are calculated and levied +according to the value of the goods (usually as it was at the place of +shipment) determined by an assessor, by invoice of sale, by statement +of the importer under oath, etc. The actual duty collected on any +article may result from various combinations of the two rates (as, to +take an actual example, $4.50 a pound and 25 per cent _ad valorem_ +on cigars and cigarettes) or _ad valorem_ with a minimum valuation so +that on the cheaper goods the rate is specific. + +Specific rates are more easily applied in administration, not offering +the temptation to undervaluation and misrepresentation that _ad +valorem_ rates do; on the other hand, specific rates do not adjust +themselves to price changes as _ad valorem_ rates do. If the prices of +goods go up the specific rate is relatively less and affords less of +"protection" to the domestic producer; whereas if prices go down (as, +in general trend, the prices of manufactured goods have done most +of the time) the specific duties are relatively greater. To take a +historical example, the specific rate of 6-1/4 cents a yard on cotton +goods in 1816 which was at first in fact only about 25 per +cent, within a few years became about 75 per cent and absolutely +prohibitive. For this reason specific rates have most often been used +in acts intended to increase the "protective" duties and often as a +device for immediately raising rates; while _ad valorem_ rates have +been more often used in acts prompted by the desire for less drastic +exclusion and for a more adequate revenue; but there is no essential +connection between the protective policy and specific rates. Indeed, +in the period from 1897 to 1909, when most prices were rising, many +of the specific rates under the Dingley Act, intended to be strongly +protective, afforded less and less "protection."[1] + +§ 3. Some technical features of the tariff. All goods not subject to +duties are said to be on the _free list_. It is customary to group +articles in _schedules_, of which there are fourteen in the law of +1913, designated from A to N (for chemicals, pottery, metals, wood, +etc.), but the rates are not uniform for all the articles in each +schedule. _Drawbacks_ are a certain amount, the whole or a part, of +the duties that have been paid on imported commodities, which is +paid back by the government on the reëxportation of the goods. +_Compensatory duties_ (or compensatory rates) are those levied on +certain manufactured articles with the purpose of raising their price +as much as domestic producers' costs are raised by a tariff on their +raw materials. Examples are a duty on woolen goods to offset a duty on +wool, or a duty on shoes to offset one on hides. They may be intended +to be partial or complete or more than sufficient, and are likely in +any case to work either more or less to the advantage of the domestic +producer than was intended. It may be that the conditions of supply +are such that the home price of the raw materials is raised little +or none by the tariff while the price of the finished product is +considerably raised, or _vice versa._ + +§ 4. #The tariff, 1789-1815.# The main difficulty of government in +1781-1789 under the Articles of Confederation was lack of the power +to obtain revenues by taxation. The separate states alone could levy +duties, and a good many tariff restrictions on freedom of trade +among them developed in this period. The Constitution established the +principle of entire freedom of trade among the states. The first act +of Congress under the Constitution levied a tariff, primarily for +revenue purposes, but clearly having a protective purpose, in the view +of some of the representatives. However, most of the separate rates, +as well as the general average rate, were the lowest ever levied by +Congress, except that there was no free list and that 5 per cent was +imposed upon all goods not otherwise enumerated. _Ad valorem_ duties +up to a maximum of 15 per cent (that on carriages) were laid upon +certain articles of luxury, and low specific duties on a few articles +such as glass, nails, iron manufactures, hemp, and cordage. + +From 1789 until 1812, thirteen tariff laws, all told, were passed. One +after another many rates were raised to get larger revenues, but some +goods were put upon the free list. The foreign trade, in both imports +and exports, grew largely and with considerable regularity, rising +then rapidly to a maximum in 1807. Then followed troublous times, +with British Orders in Council and our embargo and nonintercourse +acts until 1812, and war until 1815, trade falling off at first to +one-half, and at last (in 1814) to less than one-twelfth of the +former maximum. Just as trade was, in the war period, sinking to the +vanishing point, the tariff rates were doubled in hopes of getting +increased revenues needed for the war, but in vain. + +[Illustration: FIG. 3. IMPORTS INTO THE UNITED STATES. 1821-18565 + +Many statistics bearing upon tariff history are graphically brought +together here. This figure should be carefully studied in connection +with the following sections. Observe how invariably in the years +following a crisis, the amounts of dutiable imports and of duties +collected have diminished, whether the tariff meantime was changed or +not.] + +§ 5. #The tariff, 1816-1845.# Tho rates had been rising, manufacturers +had been making efforts to secure higher rates for protection, even +as early as 1803. Effectual exclusion of foreign goods and consequent +stimulus to the establishment of manufactures in the eastern states +resulted, in the period 1808 and 1815, from the embargoes and the war. +On the return of peace imports were resumed on a large scale and the +call for a higher tariff was loud. In the revision of 1816, rates in +a number of cases were fixed higher than those before the war. Average +rates are said to have been about 20 per cent. The rate on both cotton +and woolen goods was 25 per cent (and the minimum on cotton goods was +a specific rate of 6-1/4 cents a yard). High rates were imposed on pig +iron (50 cents a hundred), hammered bar (75 cents a hundred), and +rolled bar ($1.50 a hundred, equivalent to about 100 per cent _ad +valorem_). Rates were raised on many other articles. The average _ad +valorem_ rates collected in 1821 attained the remarkably high figures +of 36 per cent on dutiable goods, and almost 35 per cent on free and +dutiable together. + +In 1824 in response to the growing sentiment in favor of the so-called +"American policy of protection," many rates were still further +increased, as those on cotton goods and woolen goods (to 33-1/3 per +cent) and some kinds of iron. Cheap wool was now taxed 15 per cent and +that valued over 10 cents a pound at 20 per cent (to be 30 per cent +after 1826). In 1828, in the "tariff of abominations" which evoked +much bitter criticism, the rates on all these goods were again raised, +those on woolen goods being in some cases 100 per cent on the value, +and those on iron being from 40 to 100 per cent on the value, and +duties were levied on molasses, hemp, and flax. The results appear +in the statistics of 1830, showing the average _ad valorem_ rates on +dutiable imports to be nearly 49 per cent, and on free and dutiable +together to be over 45 per cent. This marks a temporary high point in +tariff rates. Revenues were then becoming excessive and that year the +rates on tea and coffee and some other goods were reduced. + +Violent protests, especially from the South, were made against the +protective system, and the tariff became a more important political +issue. Then in 1832 a number of changes were made, mostly downward; +the iron tariff, for example, being reduced to about the level of +1824. Average rates were thus brought down to about 33 per cent on +dutiable goods. The compromise tariff act of 1833 provided for a +process of reduction during a period terminating in 1842, the cut to +be small at first, then to be made more rapidly to bring the maximum +rate on any article down to about 20 per cent.[2] These changes, while +as yet incompleted had, in 1840, brought the average rates on dutiable +goods down to but 30 per cent and on free and dutiable together to 15 +per cent. The 20 per cent rate, however, remained in effect only two +months in 1842, when it was replaced by a tariff with higher rates +distinctly protective, passed by the Whig party and which remained in +force four years. + +§ 6. #The tariff, 1846-1860.# The Democratic party coming into power, +passed the Act of 1846, called the Walker tariff, after the Secretary +of the Treasury. As he was a believer in free trade, this act is often +mistakenly described as a free-trade measure. It was, in truth, far +from that. Most of the rates were indeed lower than those that had +been in force between 1816 and 1846 (with the exception of those +between 1840 and 1842), but still some of the rates were high (a few +as high as 100 per cent) and many of them were strongly protective in +nature. The fact that tea and coffee were on the free list is marked +evidence that considerations of revenue did not dominate. The rate +on cotton goods was 25 per cent and the rates on many of the most +important other protected articles (iron, woolen goods, manufactures +of iron, leather, paper, glass, and wood) were 30 per cent. The +average rates under the act for its last eight years (to 1857) were +on dutiable 26 per cent, on free and dutiable 23 per cent. The country +prospered for eleven years under this tariff. In 1857, rates were +again reduced, the more important protective rates from 30 per cent +to a level of 24 per cent. This time partizan considerations played +no part in the discussion. The revenues of the government had been +excessive and the need of a reduction was admitted by nearly every +one. The average _ad valorem_ rates under the nearly four years of the +act of 1857 were about 20 per cent on dutiable and 16 per cent on free +and dutiable (the lowest in the century between 1812 and 1913). + +§ 7. #The tariff, 1861-1871.# The reduction of rates in 1857 was +made just at the time when the country was at the height of a wave of +prosperity and of speculation which culminated in the financial crisis +of that year.[3] As always at such times, the government's revenues +fell greatly. The first purpose in the revision of the tariff in 1861 +was simply to restore the rates in the act of 1846. But the Morrill +act which became a law just before Fort Sumter was fired upon, +contained many higher rates and its purpose was avowedly protective. +This necessarily involved a sacrifice of possible revenues for the +government.[4] Then from the beginning of the Civil War till its close +some rates were raised almost every month with little scrutiny or +debate. The average _ad valorem_ rate jumped from 19 per cent on +dutiable in 1861 (under the law of 1857) to an average of 35 per cent +in the three years, 1862-1865. + +The most important tariff acts of the war were those of 1862 and 1864 +by which large increases were made on many articles. These tariff +acts were passed in connection with far-reaching and burdensome +applications of internal revenue taxes on many kinds of manufactures. +The tariff rates were primarily intended to offset these taxes, "to +impose an additional duty on imports equal to the tax which had been +put on the domestic articles," as was said by the sponsors of the +bill. These rates were similar in purpose to compensatory rates, and +in many cases they were more than sufficient to offset the internal +taxes. Under the last of these acts the duties collected in the six +years from 1865 to 1870 averaged nearly 48 per cent on dutiable and +nearly 44 per cent on free and dutiable. + +The remarkable fact was that soon after the war the internal revenue +taxes began to be repealed one after another, and by 1872 nearly +all those bearing upon general manufactures (apart from cigars and +alcoholic beverages) were gone. The tariff, however, remained almost +unaltered. This repeal of internal revenue taxation had the same +"protective" effect as raising the tariff rates by so much. As if +this were not enough for the protected interests, in 1867 the duty on +woolens was further raised and in 1870 numerous other increases were +made in the duties having a protective character. Some reductions were +made, but these were almost all on articles of a distinctly "revenue" +character such as tea, coffee, sugar, molasses, spices, wines. +Revenues were superabundant for current expenses of government, and +altho there was a large national debt, hardly any of it was redeemable +at the time. There was therefore need to reduce taxation, but the +attention of the consuming and tax-paying public was distracted by the +somewhat passionate political issues of the day. Besides, the public +had not the technical knowledge or the unified opinion on this subject +to protect itself against the greedy lobby in this process of tax +revision. And so, selfish commercial interests could get nearly what +they asked for in Congress, and the politicians at Washington, who had +come to have a well-nigh superstitious faith in the efficacy of very +high protective duties, could quietly use the opportunity to raise the +people's taxes for the people's good. + +These virtual increases in the protective power of the rates in force +are not evident in the statistics of average _ad valorem_ rates, +because the higher rates in many cases were sufficient to exclude +relatively more of the foreign products to which they applied.[5] The +imports came, by a process of selection, to consist more largely of +goods subject to lower rates. So the year 1868 showed the highest +average rate on dutiable goods (48.6 per cent) of any year after the +act of 1828 until that of 1890, and the rate fell somewhat each year +until in the fiscal year 1872 it was 41.3 per cent. + +§ 8. #The tariff, 1872-1889#. In 1872 the country was again, as in +1857, nearing the crest of a wave of prosperity and of speculation. +Imports and customs receipts attained new high points in our history, +and, despite the enormous reductions of internal revenue taxation, +the government's receipts continued to be excessive.[6] The important +revenue articles, tea and coffee, were then transferred to the free +list, as were also raw hides and paper stock and some other articles; +the rate on salt was reduced one-half and that on coal almost as much. +Many other specific rates were reduced and the _ad valorem_ rates on a +long list of articles were cut to "90 per cent of existing rates." +The effects of these reductions were mingled with those of the severe +financial panic occurring in 1873 and of the depression following, +which reduced especially the importation of luxuries bearing the +higher rates. The average rate of the three (fiscal) years 1873 to +1875 was 39 per cent on dutiable (a fall of 9) and 28 on free and +dutiable (a fall of 16). The ratio of imports entering free, which in +1872 was still only about 1 in 14, became the next year 1 in 4. But +government revenues falling short in 1874, advantage was soon taken +of the circumstance to repeal in 1875 with little discussion the +horizontal cut of tariff rates made in 1872. The specific rates that +had been reduced in 1872 were little changed, however. From 1876 to +1883 (8 fiscal years) nearly a third of the imports consisted of goods +on the free list. The average rate on dutiable was over 43 per cent, +and on free and dutiable was 30 per cent. + +The tariff was a leading issue in the campaigns of 1876 and 1880. In +1876, the Democratic party's platform contained a plank for "a tariff +for revenue only." It was a time of great industrial depression, and +as is usual in such cases a large number of the electors held the +party in power responsible for business adversity (as in turn they +credit it with any more or less fortuitous prosperity). The Republican +candidate Hayes, after a long contest in Congress, was declared +elected by a margin of one electoral vote. His opponent, Tilden had +received a quarter of a million more votes in the country as a whole. +In 1880, when business prosperity was rapidly returning, the party +in power was successful by a goodly margin of votes in the electoral +college, tho having a bare plurality of the popular vote. Garfield, +the Republican candidate, was known as one of the more moderate +protectionists and his opponent, General Hancock, who was without any +political record, declared the tariff to be a "local issue," to be +determined in the Congressional districts. The tariff issue was thus +not very sharply drawn. The tragic death of President Garfield left +no clear leadership. The tariff question from 1876 to 1884 was +politically in the doldrums. + +Yet there was undoubtedly a somewhat growing popular demand for some +moderation of the very high duties. To this demand the friends of +protection who were in power felt compelled to concede something--or +to appear to do so. Congress appointed a Tariff Commission of which +the Chairman was secretary of the wool manufacturers' association, and +after a report the tariff act of 1883 was passed. The net results were +almost nil. Some rates were lowered, while others were raised with a +definite protectionist purpose. The average rates for the next seven +years, 1884-1890, were 45 on dutiable (an increase of nearly 2 per +cent) and 30 on free and dutiable (unchanged as compared with the +period ending 1883). In 1884, the Democratic party elected its +presidential candidate (Cleveland) and a majority of the House, but +as it did not control the Senate it could not pass any of the various +proposed measures for a "reform" of the tariff. In 1888 the protective +principle was a leading issue in the campaign. Altho Cleveland +received a few ten thousands larger popular plurality than he had +obtained four years before, and held the electoral votes of 18 of the +states, he lost New York and Indiana by very narrow margins, a result +in which other issues played a large part. Harrison was elected and +the party favoring a high protective tariff came into power. + +§ 9. #The tariff, 1890-1896#. The tariff act (known as the McKinley +act) of October, 1890, followed. This was a general extension of the +principle of protection. The rates on woolen goods were on the whole +increased and made in more cases prohibitive. The rates on wool were +increased. The rates on iron, which was already highly protected, were +little changed except by the increase of the duty on tin-plates. The +duty on sugar (in the main a revenue duty, yielding $55,000,000 +a year) was removed and a bounty was granted to domestic sugar +producers. In the next three (fiscal) years, 1892-1894, the average +rate proved to be over 49 per cent on dutiable (4 per cent increase) +and 22 per cent on free and dutiable (the remission of sugar duties +accounting for the most of this fall of 8 per cent from the average +under the preceding law--4 per cent fall from the last year of its +operation). Particularly noticeable, however, was the increase in the +proportion of goods entering free, which was nearly 55 per cent of +all merchandise as contrasted with about 33 per cent between 1884 and +1890. + +Again the political weather vane shifted. The month after the McKinley +bill became law, the Congressional elections (November, 1890) returned +an overwhelming Democratic majority in the House, altho this was a +period of business prosperity, a fact usually favoring the party in +power. In 1892, Cleveland, being again a candidate, was successful +over Harrison by a largely increased plurality of the popular vote, +and received almost double the electoral vote of his opponent. +The House was Democratic, and the Senate soon became so. Business +prosperity was rising again to a high level, but there were many +features of financial and speculative weakness in the situation, +intensified by growing fear of a cheap money (silver dollar) inflation +under the act of 1878 providing for the annual purchase of silver. +A financial panic occurred in September, 1893, six months after +Cleveland's inauguration. + +Nevertheless Congress enacted the next year, Aug. 28, 1894, the Wilson +tariff act. The changes made by this legislation were not on the whole +very great, but were nearly all in the direction of the lowering of +the tariff. Most notable was the putting of raw wool upon the free +list. Some rates on woolen goods were reduced, but hardly more than +enough to offset the effects, upon manufacturers' costs, of the +reduction of the tariff on raw wool. Likewise small reductions were +made on cotton and silk goods, on pig iron, steel and tin plate +and many other articles; and larger reductions on coal, iron ore, +chinaware, and glassware. To make up for the expected reduction of +receipts from other sources, a duty was laid again upon raw sugar, +and an income tax law was passed (this soon, however, to be declared +unconstitutional). + +Under this law, for three fiscal years (1894-1897) the average +rates were 41 per cent on dutiable and 21 per cent on free and +dutiable,--pretty high rates. The proportion entering free under this +act was actually less than under the McKinley act, partly because +of the sugar item, and partly, probably, because of general business +conditions. + +§ 10. #The Dingley tariff, 1897-1909.# The campaign of 1896 was waged +almost solely on the issue of free silver. Undoubtedly great numbers +of voters supported William McKinley rather despite of, than because +of, his high protectionist beliefs. But his inauguration was promptly +followed by the passage of the Dingley act of July 24, 1897, which +embodied a marked increase of protective rates. A duty was again +levied on wool, and also on hides which had been untaxed since 1872. +High rates were made for woolens, linens, silks, chinaware, and the +rate on sugar was doubled. Provision was made for some reduction of +rates by reciprocity agreements, but the conditions were so complex +that the effect could not be great. This high protective tariff, thus +enacted without popular discussion, remained almost unchanged for +twelve years, the longest life, by one year, of any tariff act in our +history,[7] The rate under the first full fiscal year of the law's +operation, 1899, was the highest on dutiable in our history, 52 per +cent, and was nearly 30 per cent on free and dutiable. In practical +operation, however, the average rate steadily became more moderate +because of the rapid rise of the general price level that was in +progress throughout this period, amounting to 35 per cent from 1898 +to 1909.[8] The average rate of duties collected for the period of +12 years was 47 per cent on dutiable and 26 per cent on free and +dutiable. It was steadily falling and the last year, 1909, was 43 per +cent on dutiable and 23 per cent on free and dutiable. + +§ 11. #Sentiment favoring lower rates.# While the Dingley act was thus +in operation showing declining average rates, sentiment was developing +in every part of the country in favor of a further moderation of the +tariff. This was due partly to the discontent resulting from steadily +rising general prices, in which change the rise in the prices of food +and of many other necessities was not fully compensated by the rise +of the wages and incomes of the masses. Partly the growth of this +sentiment accompanied the agitation against trusts and the belief +that protective duties in some cases were an aid to the formation of +domestic monopolies. But more fundamentally, this changing sentiment +was the result of the changing industrial conditions in America. The +character of our foreign trade had altered greatly since the early +nineties. We were importing relatively less and less of manufactured +and finished products, and more of raw materials; and we were +exporting less and less of raw materials and more of finished +products. A growing number of manufacturers were feeling the need of +cheaper raw materials and were looking hopefully toward an enlargement +of their foreign trade. + +The Republican platform in 1908, in view of the changing public +sentiment, formulated a new rule for maintaining "the true principle +of protection," namely, that it "is best maintained by the imposition +of such duties as will equal the difference between the cost of +production at home and abroad, together with a reasonable profit to +American industries." This rule is very attractive in its suggestion +at the same time of the idea of a moderation of the tariff and of an +exact practical (not to say scientific) standard for the determination +of the proper rate in every case. + +The rule is, however, fallacious. "Costs of production" mean here +the monetary costs of the enterpriser. Now a first difficulty is that +costs are not uniform for all establishments in any one industry, and +a tariff high enough to protect some is entirely too low to protect +others. As long as a tariff rate is too low to exclude every unit of +the foreign product its importation is conclusive proof that for some +home producers the tariff rates fall short of the "true principle" +(better proof, indeed, than the most elaborate investigation by any +tariff board could be). The indubitable truth is that no trade ever +can take place (in a monetary régime) unless the monetary price is +lower in the exporting than it is in the importing country. This +virtually means that the product cannot be profitably exported unless +the monetary costs of production ("together with a fair profit") of +the article exported are for each party less than those of the other +party in the other country.[9] The so-called "true principle" would +lead thus to absolute prohibition of every article to which it was +applied. + +§ 12. #The Payne-Aldrich tariff, 1909-1913#. In the campaign of 1908 +the Republicans admitted that the protective tariff needed to be +revised, but they declared that it should be revised by its friends. +It was doubtless the general understanding that "revision" in this +promise meant revision downward, tho this was left somewhat unclear in +a campaign wherein the tariff played a somewhat minor part. The tariff +act of 1909 (the Payne-Aldrich act) was the attempt of the successful +party to redeem its promise in this regard. Many changes of rates were +made, both downwards and upwards. It was estimated that rates were +reduced in 584 instances, affecting 20 per cent of imports. These +changes included placing hides upon the free list (before taxed 15 per +cent), and cutting down the rate on leather, shoes, coal, lumber, +iron ore, pig iron, and steel-rails. But on the other hand rates +were increased in 300 instances (including many items in the cotton +schedule). The general belief that little reduction was effected, on +the whole, was confirmed by the experience under the act. As compared +with the last two years (1908-1909) of the Dingley tariff the first +two years of the Payne-Aldrich tariff showed a decline of 1.5 per +cent, and on free and dutiable a decline of less than 3 per cent. +These reductions in the statistical results are no greater than +occurred within like periods while the Dingley act continued in +operation without change.[10] + +No other tariff since "the act of abominations" in 1828 has called +forth such widespread criticism as this one, and the tariff became +a leading issue in the campaign of 1912. After 1910, the House being +Democratic, many bills to reduce duties were presented, and some were +passed by both houses, but all were vetoed by President Taft mainly +on the ground that it would be best to await the report of the tariff +board which had been authorized and appointed for the purpose of +ascertaining the cost of production referred to in the "true principle +of protection." + +§ 13. #The Underwood tariff, 1913#. After President Wilson was +inaugurated, March 4, 1913, the tariff was at once taken up by +Congress. The general features of the act that was passed were as +follows: + +(a) Considerable additions to the free list of raw materials. + +(b) Abolition of compensatory duties corresponding with the old rates +on raw materials. + +(c) Replacement of specific by _ad valorem_ rates in many cases. + +(d) Taxation of plain kinds of goods less than fancy kinds--luxuries +higher than necessities. + +(e) Reduction of rates generally (most of the few increases being to +correct some evident error in the old law). + +(f) Application of the so-called competitive principle to rates +intended to be protective, viz., to leave the rate just barely high +enough to keep out foreign products.[11] + +Articles placed on the free list were raw wool (which had borne a rate +equivalent to about 44 per cent), metals, agricultural implements, raw +sugar (the lower rate to go into effect gradually), coal, lumber, many +agricultural products including live cattle, meats, wheat, corn, +flax, tea, and hemp, and numerous manufactures including boots, shoes, +gunpowder, wood pulp, and print paper. + +Moderate reductions were made in the schedules for chemicals, earths, +cotton goods, and sundries, while rates on various luxuries were +either unchanged or raised. Left almost unchanged were the schedules +for tobacco, for spirits and wines, and for silks (already very high). + +This act was signed October 3, 1913, and had been in operation about +nine months when the great war broke out in August, 1914. What its +effects would have been under normal conditions we can judge little +from the actual experience. The first eight months that the act was in +operation, the _ad valorem_ rate on dutiable goods proved to be 36 per +cent (about 4 per cent less than in the preceding year) and the rate +on free and dutiable together about 14 per cent (over 3 per cent less +than the preceding year). The first complete fiscal year (that of +1915) under the act, the average rate on dutiable goods was 33.5 per +cent and that on all imports was 12.5 per cent. Evidently this is far +from a "free trade tariff." The reduction in the average _ad valorem_ +rate is less than was expected. Many of the reductions had little +effect, the former rate having been much higher than was needed to +exclude the goods. In other cases the old rates were but nominal +and inoperative because they were upon goods regularly exported, +not imported (e.g., farm products, cotton goods, and some other +manufactures). But some of the reductions doubtless will force the +less efficient plants in some industries touched to increase their +efficiency or go out of business. Time, in any normal period, is +needed for adjustment, but an adjustment of a most abnormal kind is +in progress during the war. Imports from Europe have fallen greatly, +while exports are enormously increased. Old industrial establishments +have been converted to different and temporary uses. The conclusion of +the war must bring a new readjustment that must cause a severe shock +to some enterprises--and this must have been so under any possible +variety of tariff.[12] + +§ 14. #Some lessons from our tariff history.# Can we draw from the +checkered course of tariff history in America clear lessons of wisdom +for the future? At least certain negative conclusions may be safely +drawn. It is a history of a vacillating public opinion toward the +policy of protective duties. Always the policy has kept some hold +on public sentiment, but it has varied in strength, now waxing, now +waning. The time of revisions has been determined nearly always by +varying needs of revenue. When more income has had to be raised, this +has nearly always been made the occasion and pretext for increasing +the degree of protection for many industries. This is not at all a +necessary connection, for it would be possible to couple internal +revenue taxes and customs duties in such a way that the rates would go +up and down together and give the varying amounts of revenue +required for the government without appreciably altering the relative +profitableness of various private enterprises. + +Our tariff history is too largely a record of special favors granted +to classes of citizens, to the citizens of certain localities, and to +particular enterprises. This is apparent even in a general survey, but +almost every more detailed examination of particular protective rates +reveals evidence of suspicious and sometimes scandalous personal +influences at work. The protective policy has always professedly +been advocated for the general welfare to raise wages or to make the +country prosperous, but the initiative has always been taken, and +the valiant work in contributing funds for campaign purposes and +in lobbying bills through Congress has been done, by the interested +manufacturers. Even if it were beyond question sound in principle to +exclude goods that can be bought more cheaply by trade, it is very +doubtful whether any net good could have resulted from this policy +as it has been in fact applied and followed. The frequent and +unpredictable changes have been a great evil, and have again and again +brought unmerited losses to the many in business and still greater +and unearned gains to a favored few. It is incredible that such a +hit-or-miss, in large part selfishly determined, policy could have +been an important cause of our national prosperity. The fundamental +causes of the general high wages and popular welfare that we have +enjoyed is to be found rather in our rich natural resources, +our capacity for self-government with free institutions, and the +industrial energies of our people.[13] + +The revision of the tariff of 1913, viewed with non-partizan eyes, +appears to have been carried out, to say the least, as consistently +with regard to its professed doctrine, and as little influenced by the +malevolent arts of the old-time Congressional lobby, as any debated +tariff act in our history. It still contains on the whole a large +measure of protection. Under various pretexts such as the danger of a +flood of cheap goods after the close of the great war, attempts will +be made to make it still more prohibitive. But one lesson of our +tariff history is that such an act should be given a period of fair +trial before extensive changes are made in it. Even further reductions +should be cautiously undertaken and put into effect gradually. If the +attempt is made through temporary rates to reduce the shock of the +trade adjustments, of the "dumping" after the war, then the devising +and administration of such measures should be delegated to an +expert, disinterested, permanent tariff board. The task is to prevent +temporary "unfair competition" and sudden changes, rather than to +raise permanent barriers to fair trade.[14] + + +[Footnote 1: It is evident that it is only through _ad valorem_ rates +that it is possible to compare the average rate of duty for one tariff +act, with that for another. As, however, every tariff act is made up +of both specific and _ad valorem_ duties, it is only at the end of the +year that an average _ad valorem_ rate can be estimated by comparing +the total of duties collected with the total estimated value of the +goods imported. Average _ad valorem_ rates are estimated in this way +both on the dutiable goods alone, and on all goods, free and dutiable +combined. There may be an element of error, even of misrepresentation, +in such estimates. They do not give the simple test of the relative +height of duties, or of the degree of "protection" that we might at +first suppose. Just to the extent that a new and higher rate really +operates to exclude imports (and thus is protective in its effect) the +goods subject to that rate cease to form part of the total imports. +For example, if the average rate of duty were 25 per cent, and a +50 per cent rate on an article were increased to 75 per cent, it is +possible that this rate would prove to be absolutely prohibitive. +This raise of rate, therefore, would tend to reduce the average rates +collected on all dutiable articles. Changes in general conditions +of industry from causes quite apart from the tariff may result in +shifting the proportions of imports that are dutiable so that the +average rates go either up or down while the tariff law has remained +unchanged on the statute book. A failure to consider these and related +facts leads to much confusion in popular and political discussion of +the tariff.] + +[Footnote 2: Usually given as 20 per cent. However a good many rates +under the full operation of the act worked out as 21-1/2 or 23 per +cent, and a few at 26 and at 29 per cent. Besides there were +numerous specific rates, the _ad valorem_ force of which cannot be +determined.] + +[Footnote 3: The political argument that the small tariff reduction of +1857 caused the crisis of 1857 will not bear serious examination. See +below, sec. 13.] + +[Footnote 4: See ch. 14, sec. 2.] + +[Footnote 5: See above, sec. 2, note 1.] + +[Footnote 6: Internal revenue receipts in 1866 had been $309,000,000; +in 1872 they had fallen to $131,000,000, yet the government's surplus +for the three years 1870-1872 was little less than $100,000,000 a +year. This was almost half of the total receipts from customs, which +were $216,000,000.] + +[Footnote 7: Other issues absorbed public attention in this +period--the Spanish war, colonial policy, "imperialism," railway rate +regulation, corporation control, etc.] + +[Footnote 8: See above, sec. 2.] + +[Footnote 9: Compare with ch. 13, sec. 5.] + +[Footnote 10: Probably resulting from the rising prices, as explained +above, sec. 2. For example, in one year, from 1899 to 1900, the +average _ad valorem_ rate collected on dutiable goods fell 3 per cent, +and that on all goods fell 2 per cent; in the two years from 1904 to +1906 the average rates on dutiable fell 4 per cent, and on all goods +fell 2 per cent.] + +[Footnote 11: This "competitive principle" is essentially the same as +the so-called "true principle" of equalizing the cost of production +(see above, sec. 11). It is essentially a prohibitive, not a free +trade, principle. Strictly applied it would cause complete exclusion +of imports. But as applied to selected articles which it is desired +to exclude in order to "protect" the domestic producer, this principle +would simply prevent the rate being placed appreciably higher than +was needed to exclude them. Anything beyond that point but offers +temptation and opportunity for the formation of a monopoly by domestic +producers. Then, too, the rate may intentionally be fixed so as to +make just possible the survival of the most favorably located or most +efficiently operated establishments, while compelling the abandonment +of other establishments. See ch. 14, sec. 3.] + +[Footnote 12: Such changes are logically related to the subject of +financial crises rather than to that of the tariff. See note at end of +the next section.] + +[Footnote 13: See Vol. I, e.g., pp. 228, 431, 445ff, 466, 490, 506ff.] + +[Footnote 14: #Tariff legislation and business depressions.# The +relation between new tariff legislation and the business conditions +following it has been the subject of much debate in political +campaigns. In the few cases where a relationship has been most often +asserted to exist, it is more probable that the tariff change was the +_result_ of business conditions preceding it, than that it was the +cause of the conditions following it. For usually a tariff has been +revised downward because a few years of prosperity with large imports +had so increased customs duties that the government has had surplus +revenues. Just when the tariff was reduced, the conditions were ripe +for a crisis. This happened in 1857 (already in 1856 there had been a +preliminary halt of business), again in 1872, and on a small scale in +1883. But the main reduction resulting from the compromise act of 1833 +did not occur until after the crisis of 1837-39; the Walker act of +1846 was passed just as business was starting upward on a long wave +of prosperity; and the act of 1894 was passed a full year after the +severe crisis of 1893, when business had already entered upon a period +of depression. In none of these cases does it seem reasonable to +attribute business depression to the reduction of the tariff, as +is commonly done in protectionist arguments even to the point of +attributing the panic of 1893 to the reduction of the tariff a year +later! + +At several times the tariff has been raised soon after a crisis when a +good occasion was presented by the need of larger revenues as in 1842, +1860, 1875, and 1897. Business at such times is just at the point +of the cycle when prosperity is due. The higher tariff of 1842 was +succeeded by the low tariff of 1846 without any check to business. The +war obscured the ordinary industrial effects of the tariff acts of the +sixties. The increase in the year 1875 was followed by four years +of hard times and slow recovery. The increase of the tariff in 1890 +occurred as business was nearing the top of the cycle and was followed +by two years of prosperity culminating in the very severe crisis of +1893. The authors of the tariff of 1897 were peculiarly fortunate in +the time of their action, for the country was just fairly recovering +from the very severe crisis of 1893 and prosperity was to continue +(with brief hesitation in 1900 and 1903) until the severe crisis and +panic of 1907. + +The advocates of higher rates are, of course, correct in declaring +that the great business prosperity of the years 1915 and 1916 resulted +from the unexpected demands in foreign trade growing out of the war, +and is not to be credited in large measure to the act of 1913. But +reason requires that the same restraint be exercised in crediting +to higher protective acts the prosperity which has in some--not +all--cases, followed their enactment; and requires further that the +present act be not held accountable for the next reaction in trade, +whenever it may occur, inasmuch as a reaction would be sure to occur +no matter what kind of tariff act we might chance to have at the +time.] + + + + +CHAPTER 16 + +OBJECTS AND PRINCIPLES OF TAXATION + + § 1. Public finance as a division of economics. § 2. The police function. + § 3. Social and industrial functions. § 4. The enlarging sphere + of the state. § 5. Industrial revenues of governments. § 6. Governmental + receipts from loans. § 7. Nonrevenue character of receipts from + loans. § 8. Revenues from taxation. § 9. Forms of taxation. §10. + Defective tax "systems." §11. Various standards of justice suggested. + § 12. Social welfare as the aim. § 13. Principles of administration. + § 14. Shifting and incidence. § 15. Taxes as costs. + + +§ 1. #Public finance as a division of economics.# Men live together +in politically organized societies which employ public officials as +agents to carry on the functions of government. Every governmental +unit, large or small, may be viewed not only as a political body, +but as an economic enterprise. Each has its economic aspects, such +as receipts and expenditures, employer and employee, borrowing and +lending, etc. Each political unit is in this sense "an economy." The +study of the public economy, of the economic aspects of government as +distinguished from its political aspects, constitutes the science of +public finance, an important division, tho not the whole, of political +economy. + +The primary fact determining the public finances is the extent of the +sphere of "the state," meaning by the state the totality of political +powers and functions in a community. There are two typical ideals of +a state, each with corresponding functions: the ideal of the police +state, and that of the social-industrial state. In fact every system +of government provides for the exercise of both functions in some +measure. The police function is primary. All governments alike +exercise it, but they differ most in respect to the degree in which +they exercise the social-industrial functions. + +§ 2. #The police function.# The police function is that of public +defense and the maintenance of domestic order. In family or +patriarchal communities all share a common income and combine in the +common defense, but self-preservation often has compelled such small +communities to form a larger, stronger state for the common defense. +Public defense requires sacrifice of some independence on the part of +the family and of the individual. Personal service in the field gives +place later in some measure to the payment of taxes, so that a regular +income may permit the government to attain a more regular, continuing, +and perfect organization of military forces. + +As political unity and power grow, the citizens need less often +protection against foreign foes, and they need more often, relatively, +defense against the aggressions of some of their own countrymen. The +preservation of domestic order requires police, courts of justice, and +other agencies. The ideal of the anarchist to do without government +is nowhere realized. Everywhere there must be government to preserve +peace and to protect property. Unfortunately, this need grows with the +growing density of population. Crime increases when men swarm in +great cities. The courts which settle disputes between men, and which +interpret their contracts, are agencies of peace, displacing physical +contests. To maintain and operate the various parts of the social +machinery requires ever increasing governmental revenues. From many +causes government has, in modern times, grown increasingly costly. + +§ 3. #Social and industrial functions.# The social and industrial +functions of government seem naturally to grow out of the primary +ones just mentioned. In a democratic society, popular education is +a necessity, as it appears that domestic order is not possible in a +democratic state without intelligent citizens. The system of public +education has, in many states, expanded to include a publicly +supported university as the dominant educational and scientific organ +of the community. Some industrial functions are performed by the +government in connection with the primary needs. Lighthouses are +necessary to guide the navy, but they also serve to guide the merchant +marine and to aid industry. The post was established as an agent +of political and military government to connect the ruler with the +outposts (a fact the name post indicates), but the postal service has +grown in every country to be a great industrial and social agency. +The consular service, originating in the political need of keeping +official representatives in foreign lands, has become a valuable +economic agency; consuls are commercial agents, advancing the business +interests of their countries in all quarters of the globe. + +§ 4. #The enlarging sphere of the state.# A mere police state would +leave to private initiative the provision of every kind of economic +agencies not needed for political government. The state might, for +example, even leave the provision of roads and bridges to private +individuals or to companies, permitting them to charge tolls to obtain +a return on their investment. Whenever a toll-road is made public and +a toll-bridge becomes free, and the state maintains the roads, it is +becoming less strictly a mere police state. Reacting from the ideal +of the police state which was most highly praised in the first half +of the nineteenth century, the functions of government have been +extending in many directions in the last half century. More and more +economic functions are performed through the agency of government. If +we think of an act as done by the government _for_ private citizens, +we call it paternalism; but if we think of an act as done _by_ +citizens collectively _for_ themselves as the best way to get these +things done, we may call it, in a broad sense, socialism.[1] + +Government is in one aspect a direct good to its citizens. In return +for its collective cost men collectively get the enjoyment of social +organization, markedly in contrast with the uncertain ties and hazards +of primitive communities. But government becomes also a mode of social +investment, an indirect agent, a productive enterprise. Wealth applied +through it secures in some cases a greater product than is possible by +individual action. + +But when the government undertakes these various tasks the expense +falls unequally on individuals and affects differently their incomes. +When free schools take the place of private schools, the law compels +every one to contribute to education. To many individuals it is a +matter of indifference whether they pay tuition or taxes, but the +wealthy bachelor sometimes grumbles when forced to help in educating +the day-laborer's family. The average result of a certain social +policy may be right, but individuals diverge from the average and +thus have constantly a motive to attempt to change the limits of +governmental action. Happily the subject is not always viewed with +selfish eyes. The ethical and patriotic thought is not, "How will this +affect my interests?" but. "How will it affect the general interests?" +But as the question of value is always involved men are usually found +favoring or opposing the industrial and social activity of the state +according as it affects their own incomes. Thus the determination of +the sphere of the state is in large part an economic question. + +§ 5. #Industrial revenues of governments#. The costs of government at +any stage are met in varying degrees in one of three ways: (1) from +industrial sources, (2) by borrowing and thus creating a public debt, +(3) from taxation. + +(1) Receipts from industrial sources in the broad sense include all +rents from wealth owned, interest on loans made, and proceeds of sales +from enterprises conducted, by the government. In feudal times, these +were mostly obtained in the form of rents from the private domains of +kings and nobles. In many early and medieval states these sources of +receipts were adequate to the need of government; then they decreased +in many countries, both relatively and absolutely, because of the +sale of publicly owned wealth (lands and mines) and with the recent +extension of the functions of government have again increased very +rapidly. Now industrial revenues come not only from the rents of +forests, mines, docks, lands, and buildings, but from profits in the +operation of industrial enterprises such as waterworks, railways, +mines, and factories, and from interest on funds deposited in banks +or otherwise invested. At present the industrial revenues of the +aggregate governments of the United States (national, state, and +municipal) amount to about a fifth of all revenue receipts. Since +the middle of the nineteenth century the number and variety of the +industrial enterprises undertaken by governments has been steadily +increasing, and this increase has been most marked in the cities. The +change in this respect in the United States, great as it has been, has +been proceeding more slowly than in the European countries. + +In 1913 the receipts of this nature (earnings of departments and of +public service enterprises) were nearly $500,000,000. The larger part +of this sum comes to the national government ($288,000,000), mostly +from the post-office department. Most of the remainder comes to the +minor divisions ($176,000,000), and but little to the states. The +total "earnings" (this means here receipts, not profits) of public +service enterprises in incorporated places were $120,000,000. + +§ 6. #Governmental receipts from loans.# The funds to invest in these +commercial undertakings are originally obtained in nearly all cases +from public loans. Almost every unit or division of government may +become a borrower to provide for its citizens at once certain needed +advantages and improvements when the funds are not at hand and +immediate taxation is deemed too heavy a burden.[2] + +The indebtedness (less funds available for payment of debt) of the +aggregate governments of the United States in 1913 was: + + Nation ................................. $1,028,000,000 + States ................................. 346,000,000 + Minor divisions ......................... 3,476,000,000 + ------------- + Total .................................. $4,850,000,000 + +The larger part of nearly every national debt has been incurred for +purposes of war and preparation for war, while nearly all public +debt other than national has been created for the purpose of peaceful +social and industrial development. The debts of the American states +have partly been made necessary to meet deficits in current expenses, +but largely of late to erect public buildings, purchase forest lands, +improve roads, and construct canals. The minor divisions are counties, +cities, villages, boroughs, towns, townships, school districts, +drainage, irrigation, and levee districts, fire districts, poor-relief +districts, road districts, and various other subdivisions of states +and of counties. Every one of them has more or less legal power to +incur debts and to levy taxes for the purpose of paying the interest +and of repaying the principal. The purposes for which the debts are +incurred by specially organized districts are sometimes indicated in +the names (e.g., drainage, irrigation), while the regular political +divisions of counties, cities, villages, towns, townships, incur debts +for a large variety of objects, such as streets, sewage disposal, +water supply, electric light or gas plants, school houses, libraries, +and other public buildings. Large expenditures for these purposes are +necessary because the local governments are undertaking new functions, +and either existing equipment (such as waterworks systems, and street +railways) must be bought from private companies or new ones must +be built. They are necessary further because the rapid growth of +population calls for an immediate "capital investment," the payment of +which may be, through borrowing, more easily spread over a series +of years (e.g., in the extension of streets and paving, and in the +provision of school houses for the children). + +§ 7. #Nonrevenue character of receipts from loans.# The proceeds +from loans (and certain other items of sales) are called nonrevenue +receipts, because they are but in anticipation of receipts from other +sources. The economic theory of such loans is essentially the same as +that of private loans, but it is the people of the political district +collectively that are the borrowers. To get the present uses of goods +they sell their promise to make future payments totaling a larger +amount. The loan is the present worth of those promises. In the case +of loans made for local purposes, provision is now usually made for +their complete repayment within a definite number of years, +usually 10, or 20, or 30. Meantime interest is payable annually or +semi-annually, and from some source an additional sum is collected +to repay a part of the loan, sometimes by redeeming a certain part +annually, sometimes by accumulating a sinking fund until that amounts +to the whole debt. + +The minor divisions in the United States are thus constantly creating +debts at the rate of about $2,000,000,000 each year and at the same +time paying former debts in instalments, in a total amount somewhat +less than this. In the case of some municipal investments which are +commercial enterprises (such as those supplying gas, electricity, and +water), these annual payments can be made out of the profits; in the +case of others, the payments come from special assessments upon +the owners; and in most other cases they are collected by the usual +methods of taxation. In America, a large part of these costs are, by +the law of special assessments, placed upon the owners of adjacent +lands, whose outlays are usually more than offset by the increased +value of their lands as a result of the improvements. In this case +also, the present investment is in anticipation of the future incomes +which the owners of the improved lands will get.[3] + +§ 8. #Revenues from taxation.# Much the largest part of the receipts +of most governments, apart from loans, and in many cases nearly all +such revenue receipts, come from taxation. Tax (as a verb) meant +originally to touch or handle, then to estimate or appraise, and then +to charge a burden upon some one, especially to impose a payment of +services, goods, or money upon persons or property for the support +of government.[4] _Taxation_ is the legal process of taking income, +services, or wealth from private persons for public uses. + +Taxes are of various kinds, but they always are incomes, or wealth +representing future incomes, transferred from private ownership of the +taxpayers to the government. In rare cases, more than the net current +income of a certain kind may be taken for public uses. As economic +income has many sources, it may be intercepted at many different +points, and taxation may take various forms. The differences are +so manifold that it is difficult to classify particular taxes +satisfactorily. + +§ 9. #Forms of taxation.# The following are the forms of taxation most +frequently referred to. + +(a) The simplest form of tax is a _poll tax_, a uniform amount payable +by every person of the taxable class. This form of tax is being +less and less used in America and now amounts to little more than +$17,000,000,[5] this being only .6 of 1 per cent of the aggregate +taxes in the United States. The national government gets about +one-fourth of this amount from a tax on immigrants and the rest is +collected by (some of) the states, counties, and minor divisions. +Usually, if not always, the poll tax is imposed only upon voters, as a +condition to the right to vote. + +(b) Taxes may be laid upon _incomes_, as they come into the possession +of the owner. Usually, only monetary incomes that arise in commercial +transactions are taxable, and no attempt is made to estimate the value +of psychic incomes. Commercial incomes are more easily measured, but +the omission of the other elements must cause many inequalities in the +burden of the tax as between two individuals controlling equal incomes +of real things. + +(c) Taxes may be on _property_, either general upon all property in +the taxing district, or special, upon certain forms of property. A +property tax may be specific or _ad valorem_, in proportion to value, +as to the method of its determination. Since the value of material +wealth is the capitalization of the rentals at the prevailing rate of +interest, a general, _ad valorem_, property tax, so far as it applies +to material wealth, and if it were accurately assessed, would take +an approximately equal proportion of wealth-incomes. It does not, of +course, touch directly incomes derived from wages and salaries, but it +reduces their purchasing power in many cases. It is in some respects +more searching than a tax on actual rents, for it reaches the +prospective, or speculative, rental. + +(d) Taxes may be on _expenditure_ (sometimes called taxes on +consumption). This is but another mode of attacking income, for in the +long run most income is spent, not always by the individual who earned +it, but by some one, and thus it is reached by a tax on expenditure. +Usually in the United States the tariff duties are accounted to be +taxes on expenditure, as also the internal revenues (also called +excises) of the national government. In time of war, internal revenues +are extended in the United States to a multitude of articles, but +usually they have been limited (with minor exceptions) to liquor and +tobacco. Most of these taxes are in fact levied not at the time of +purchase by the ultimate consumer, but upon the specific goods in +the hands of some merchant or business agency, and some of them are +essentially special property taxes and others are business taxes of +the kind next to be mentioned. + +(e) Taxes may be levied on selected agencies of industry or on the +process of _business_; such are business taxes, licenses, taxes on +investment in business, and corporation taxes. These burdens are +diffused and rest eventually on some income, rarely to be ascertained +exactly. + +§ 10. #Defective tax "systems."# The actual tax laws of each division +of government in a country combine the various forms in different +proportions. Most of the federal taxes are from tariff duties and from +internal revenues; the latter include a variety of special business +and property taxes and, since 1913, the federal income tax. The +largest receipts of states, of counties, and of minor divisions are +from property taxes, some special but most of them general in form. +Among the various states a wide diversity is found. Some use the +general property tax for all the divisions (state and local), while +others (several of the Northern states and California) have separated +the sources of state and local taxation, taxing corporations for state +purposes, and most other forms of wealth for local purposes. Some +states, particularly those of the South, make large use of licenses +and taxes on business both for state and local purposes. The tax +laws of many states have been much modified of late and are still in +process of change. It is only in a loose sense that one can speak of +the tax "system" of any state, made up as it is of so many diverse +elements, each used to tap in some independent way some source of +private income for public purposes. Every tax "system" has grown up +more or less accidentally, guided by no more of a general principle +than the advice of the cynical old statesman--so to pluck the +feathers of the goose that it will squawk as little as possible. Thus, +everywhere, the existing situation must be largely accounted for by +custom and ignorance, by the weakness of some classes and the undue +influence of other classes, rather than by clearly thought out +principles soundly administered. + +§ 11. #Various standards of justice suggested.# There have not been +lacking earnest attempts to arrive at some general principles. Many +standards have been suggested to measure the distribution of the +burden of taxation, such as benefit, equality, and ability. Each of +these terms is capable of various interpretations which have changed +from time to time. The benefit derived by any citizen from most of +the public services evidently cannot be measured with exactness. The +standard of equality cannot be applied in any literal sense to strong +and weak, to rich and poor. It is possible, however, to interpret +equality with reference not to objective goods, but to the psychic +sacrifice occasioned by taxation. Ability is of many kinds and may +be differently understood. Some think ability to bear taxation is +"in exact proportion to the money income"; others believe that it +increases at a greater rate than money income, and favor, therefore, +progressive taxation, that is, higher rates on the larger incomes. + +§ 12. #Social welfare as the aim.# The conflicting interests of +the various classes of taxpayers in each period are to some degree +softened by the prevailing public opinion, sometimes called the social +conscience, and taxes are adjusted according to a vaguely held +ideal of the social welfare. Social expediency, more or less broadly +interpreted, determines who shall be taxed and what social results are +to be sought. The exemptions from taxation in feudal times were great +and, viewed from our standpoint, were inequitable, for the upper +classes escaped while the peasants bore most of the burdens. The +landlords and nobility, who were assumed to be performing important +social functions, generally had outgrown their usefulness in the +period preceding the French Revolution, which swept away many of these +abuses. + +Exemptions from taxation are granted liberally in most states to-day +on some kinds of wealth and to some classes of citizens, because +of their supposed relations to the public interest. Real estate and +equipment devoted to educational, religious, and charitable purposes, +the homes of priests and ministers, homesteads purchased with pension +money, as well as all public lands, buildings, and equipment are +exempt. + +The social interest requires that taxes be both elastic and +productive, so that the needs of the government shall be amply +provided for. The harmonizing of these needs in the laws of taxation +requires a high degree of wisdom, of foresight, and of integrity +in the legislator and in the citizen. No hard-and-fast rule for the +apportioning of taxes can be laid down. The decision must be made in +each generation by the public opinion as to what is most expedient for +the general welfare. + +§ 13. #Principles of administration.# Whatever forms of taxes are +adopted, whether on property or income, whether at proportional or +at progressive rates, their justice and expediency depend largely +on their administration. Principle and practice in this, as in most +affairs, may go far apart. The administration of taxation should +be economical, certain, and uniform. Some laws are more easily and +economically executed than others. The time of collection should be as +convenient as possible for the citizen, and the mode of payment should +be the most simple. The utmost certainty is desirable as to the time, +method of payment, and amount. Taxation that, in its principle, is +variable, shifting, or dependent on personal whim and favoritism, +is despotism. But the greatest evils, in practice, result from the +failures in assessment. The assessment of taxes has to be intrusted +to men with fallible judgment, imperfect knowledge, and selfish +interests. The assessor is as near a despot as any agent of popular +government to-day. Not infrequently men of proved incapacity in every +private business they have attempted are, for partizan or corrupt +reasons, selected as assessors, and are given the power of passing +judgment on the value of millions of dollars' worth of property. Under +the circumstances, evils are to be expected, and they occur. The small +owner often is crushed under the unequal assessment while the large +owner comes lightly off. Political friends are favored, political foes +are made to suffer. Even the most honest and capable of assessors find +in the imperfections of the tax laws[6] an insuperable obstacle to +even-handed justice. + +§ 14. #Shifting and incidence.# The person paying a tax into the +public treasury is not always the one whose income is reduced in +the long run. This is most clearly seen in the case of taxes paid by +middlemen. In most cases the final and regular burden of the tax is +distributed over a number of incomes. The passing on of the burden is +called the _shifting_ of the tax; the final location of the burden is +called the _incidence_ of the tax. The lawmaker cannot tell exactly +where the weight will fall. The principles of value give some guidance +in the inquiry, but the workings of the principle are difficult to +follow. + +Consider a situation where certain taxes have been for some time +levied. They have become a part of the general adjustment of prices. +If paid by any one in business they may be looked upon as a deduction +from the gross proceeds or product of the business, prior to cost, or +as a part of cost.[7] In either case every one choosing that business +does so in the light of this fact. Unless the business promises to +yield as good incomes (wages, profits) as other lines, the number +engaging in it, and the output, must diminish and thus the price of +the product rise, or the cost of the factors fall, or both in some +proportion. The tax on any durative agent or on any established +business thus becomes incorporated after a time in its price and in +the prices of the products, and any purchaser pays a price based on +the net income remaining to the owner of the wealth after the tax is +paid. Viewed in this way, taxes are seen to be borne to some extent +by every one, by those who do not as well as by those who do actually +meet the tax-collector face to face. The citizen with no taxable +property is affected, far more than he realizes, by extravagance of +government and by inequities in taxation, for the effects of most +taxes are diffused so that every self-sustaining member of the +community has some share in them. + + +§ 15. #Taxes as costs.# Now if a new tax is levied, or an old tax +changed in amount or in its incidence, it becomes a new influence in +industry. Some occupations are made more attractive, others less so. +Some places are made more, others less, desirable to live in. +Property thus fluctuates in value, and investments become more or less +remunerative. If the new tax reduces the net income of any productive +agent, it reduces likewise its value, which is but the capitalization +of its net rental. If taxes are taken off of factories and put upon +farm rents, factories rise and farms fall in value in the hands of +their owners. The immediate change in value is much greater than the +annual tax, for if five dollars is to be taken permanently from the +annual rental of the farm, nearly one hundred dollars is taken at once +from its selling value when the prevailing yield on investment is +5 per cent. The rate of adjustment varies greatly under different +conditions, and the inflow and the outflow of labor and capital are +more or less rapid in the various industries. + +Taxes that enterprisers are unable to shift to others are reckoned by +them as a part of their costs of production whenever the conditions of +competition and of substitution make it possible to do so. Every new +tax that curtails the supply of any necessary agent must raise the +price of the products and cause more or less of the tax to fall upon +the consumers. In the Civil War an increase in the tax on whisky +increased its selling price, and distillers who owned stocks on which +a smaller tax had already been paid reaped profits of millions of +dollars. When the tax on tea was increased in England, all dealers +that had accumulated a stock before the law went into effect were +gainers. Every change in taxation inevitably affects, either favorably +or unfavorably, many interests. The chance to anticipate a change in +tax laws or to get, from those in power, information of a proposed +change, makes speculation possible and political corruption +profitable. + +The fact that a change in taxation is a disturbing element in price is +not to be deemed insignificant merely because "all comes out right +in the end." Every change in taxation is an element of uncertainty +in business and increases the fortunes of some men at the expense +of others. Hence no considerable change should be made without good +reasons in its favor. The older taxes have the virtue of stability, +but in many cases they have grown out of harmony with the industrial +conditions. While, therefore, from time to time there is a real need +of a reform in the tax system, it should not be undertaken without +recognizing the many and complex interests involved. + + +[Footnote 1: Meaning here not a certain political party, but a +principle of social action.] + +[Footnote 2: The total debts of the _national_ governments of the +world just before the outbreak of the great war in 1914 were estimated +at about $44,000,000,000. (These figures include the debts of the +separate states in the federal unions of Australia and the German +Empire, and the separate debts of European colonial governments, but +not those of the states of the United States, and in no case including +the debts of minor divisions, the total figures for which are not +to be had.) The new debts created by the war give already more than +double the foregoing total.] + +[Footnote 3: The special assessment is thus in its nature, in part a +private investment. The plan, of special assessments could easily be +applied in many more cases than is done at present.] + +[Footnote 4: There are border-line cases where it is difficult to +decide whether a particular payment to the government in the form of a +fee, price for service (as water rates, etc.), and special assessment +(as for street paving) is in the legal sense a tax or not. Some +courts have, for example, decided that for certain purposes a special +assessment is to be called a tax, and in certain other cases it is +not to be if this would defeat the evident and just intention of the +legislature.] + +[Footnote 5: The figures do not include returns from incorporated +places having a population of less than 2500 where the poll taxes may +be a considerable sum.] + +[Footnote 6: Particularly the difficulties noted in the next chapter, +sees. 2-5.] + +[Footnote 7: See Vol. I, p. 374.] + + +CHAPTER 17 + +PROPERTY AND CORPORATION TAXES + + § 1. Importance of taxation as a public question. § 2. The general + property tax; nature and difficulty. § 3. Ambiguity of the term + "property." § 4. Various temporizing policies. § 5. A consistent policy + of wealth-taxation. § 6. Needed reform of assessment. § 7. Separation of + state and local taxation. § 8. Federal taxation of merchandise in + commerce. § 9. The proposal of the single tax on land values. § 10. + Various reforms in land taxation. § 11. Difficulties in taxing + corporations. § 12. Special taxes on banks. § 13. Special taxes on + insurance. § 14. Special taxes on transportation. § 15. Alternative + policies of corporate taxation. § 16. General plan for corporate + taxation. + + +§ 1. #Importance of taxation as a public question.# The discussion of +taxation has accompanied the growth of free government in England and +America from the time of Magna Charta. The control of the public purse +has been found to give the key to political power, and therefore it +has frequently become the occasion of conflict between the monarch and +the people. But in our own national history since the adoption of the +Constitution, taxation has not had a leading place in politics except +in the one aspect of the tariff. The constitutional question of +states' rights long absorbed most of the interest of citizens and +of legislators. But with the quickened attention of the public to +economic questions, the problem of taxation became of increasing +importance. + +It has come to be recognized that taxation can be made to play, and +is bound to play, a leading part as an agency in the distribution of +wealth, and thus it is the center of much of the ardent controversy +regarding social reform. Ultimately, almost every proposal of social +change and betterment involves some cost. The question then must be +answered. Who is to receive the benefits and upon whom and how shall +new taxes be levied to pay the cost? Further, it is often urged that +this result of taxation in redistributing incomes is in itself (or can +be made) a virtue; and some even see in tax reform the answer to the +largest social questions of our time. We are now to take up a few of +the more important problems of taxation, to see the difficulties, and +to suggest the direction in which their solution is to be sought. The +tariff having been already separately considered, the chief kinds of +taxes we have here to treat are property taxes, general and special, +and inheritance and income taxes. + +§ 2. #The general property tax; nature and difficulty.# The rates both +of assessment and of levy of the general property tax are uniform and +equal in proportion to the value of all (or nearly all) property in +the taxing district.[1] There are always some exceptions of certain +kinds of property, or of the property of certain persons, or of +property and things put to certain uses--public, educational, +religious, and charitable in their nature. + +The federal government levies no general property tax, but the other +branches of government[2] receive about three-fifths of all their +revenues from it. + +At first view nothing would seem to be simpler and juster in principle +than such a plan of taxation, but those who have most carefully +studied its practical operation, almost with one accord, pronounce it +to be "a dismal failure." The chief reason assigned for this failure +has been that the assessment of the tax is imperfect and incomplete. +The usual thought is that if all property could be assessed the plan +would be excellent. Undoubtedly the difficulty of just assessment has +its part in the weakness of the tax, but back of, and more important +than this, is an inherent fallacy in the apparently simple principle +of the tax. + + +§ 3. #Ambiguity of the term "property."# Unfortunately, the word +property is applied, even by the most competent courts, both to the +intangible right of ownership (the fundamental meaning) and to +the concrete thing that is owned, the source of the income.[3] But +evidently the value of the right to the income yielded by a house, for +example, is merely the value of the house. The value of the _property +in the one sense_ (the abstract ownership, the intangible right) is +merely a reflection of the value of the _property in the other sense_ +(the concrete wealth). There are not here two independent bodies of +economic wealth. Whatever value belongs to the one is subtracted from +the other. Nor is it rational to take the paper document called a deed +(which is but the evidence of ownership) and call it tangible property +having a value in addition to the house itself. Yet, in fact, all +these confusions are constantly made in taxation. The term "intangible +personal property" is applied to such things as mercantile credits, +promissory notes, bonds--in general to the right to collect sums +from another person, whether these rights arise out of sales or of +loans--and all are treated as parts of taxable property. Sometimes +the evidences of indebtedness, the promissory notes or the mortgage +papers, are even called tangible property, the same term that +is applied to land, houses, and machinery. By universal practice +supported by a long line of court decisions, these rights (whether +evidenced by paper or not) are made subject to taxation, except as +by piecemeal legislation certain grudging exceptions have been made. +These views and this practice are supported by the popular desire to +tax money-lenders. The result is "double taxation" of many sources of +income. This involves a burden that is ruinous in some cases, both to +borrowers and to lenders, and that tempts in all cases to the evasion +of the tax. + +Take, for example, a house assessed at $10,000 which is owned free of +debt and which has a rental value of $600. At the rate of 1.5 per cent +the tax paid would be $150. Now if the owner borrows $8000 he is still +taxable $150 on the full value of the house, and the lender nearly +everywhere is taxable $120 on the amount of his mortgage. The total +tax payable out of the one source of income, the house, is then $270. +The same analysis will show that any credit is but a contractual +claim upon some other source of income which is, or should have been, +already taxed. + +If one person owns all the capital-value invested in a specific piece +of wealth, no attempt is made to tax both the capital and the wealth; +but if it happens that two or more persons share the capital-value +invested in the same wealth, the attempt is made to tax as a unit the +full value of the wealth and, in addition, some part of the capital +also. It is, however, easy in most cases to conceal this "intangible +property" from the assessor's eyes, and a comparatively small amount +of it is ever taxed. This means inequality and hardship in the +operation of the tax and, as a result, unceasing temptation to perjury +by the taxpayer and to favoritism and graft by public officials. + +§ 4. #Various temporizing policies.# The general property tax in +practice is unjust and demoralizing. What, then, shall be done about +it? Various policies have been followed. One has been to declare that +the law would be good if it could be enforced, but that as in practice +it cannot be, the best thing is to go on as before, catching a few +"tax dodgers," and letting the rest go. Another policy is to hire +"tax ferrets," paying them large commissions to discover cases +where intangible property of this sort has been concealed from the +assessors. This method, no matter how stringently applied, has never +reached more than a small proportion of the cases, and becomes a +potent agency of political favoritism and corruption. + +Another policy is to maintain the general principle, but to make +exceptions here and there. Usually the exceptions are made just at +those points where the law would with earnest effort be most easily +enforceable, and therefore where it has become most inconvenient. As +a result of these changes the state laws display a bewildering and +illogical variety. By constitutional interpretation, United States +notes and federal bonds are exempt from state and local taxation; +generally, by state law, building and loan association and +savings-bank loans are exempt as, in a majority of states, are state +and municipal bonds if held within the state. In at least eight +states, bonds of the state are exempt, but those of the municipalities +are taxable, while in a few states the reverse is the case. In several +states both kinds of bonds when issued after specified dates, are +exempt, but in Ohio state bonds are exempt only if issued prior to +1913. All but seven of the forty-eight states, however, attempt to tax +the resident holders of state and municipal bonds of other states; +but the exceptional states are those in which most of the investors +in this class of securities reside. In many cases private debts +receivable are allowed to be offset against debts payable. In some +states mortgages on real estate are exempted or (in Massachusetts) +treated as an interest in the real estate. Rarely mortgages are +exempted up to a certain amount (in Indiana, to $700, the purpose +being to tempt the borrower to reveal the name of the lender). +Sometimes a special mortgage registration tax, payable but once (in +New York 1/2 of 1 per cent) is levied, and otherwise mortgages +are free from taxation. Small as this rate is, the fiscal yield of +mortgage taxation under this plan exceeds that under the general +property tax. + +By the overlapping of these laws, so contradictory in principle, it +may happen that securities held by taxpayers residing in other states +than those of the issue are taxable two or three or more times; but +few if any loans of this kind are made except by those evading all +taxation. + +§ 5. #A consistent policy of wealth taxation.# These exceptions +still leave the law in its general principles as to the taxation of +intangible property illogical and unjust. A solution can be found only +by abandoning the ambiguous legal concept of property, and making use +of economic concepts. A consistent tax law might take either wealth +or capital as the basis of assessment, but not sometimes the one and +sometimes the other. Wealth is an impersonal basis of taxation; +each piece of wealth might be taxed once as a unit no matter how the +ownership were divided. Or the other alternative might be chosen. +Capital would be a personal basis of taxation; each person's capital +might be taxed no matter from what sources the incomes were derived +(the concrete wealth, of course, then being left untaxed). + +The wealth basis is much nearer to the present general property tax as +actually administered. The assessment of general tangible wealth +would undoubtedly be more easily done than would that of individual +capitals, and likewise be both easier and juster than the present +inconsistent policy. Tangible things are comparatively easy to find, +measure, and evaluate where they are, and if they are all taxed it is +evidently the same as if all the capital values based upon them were +taxed in the owners' hands. The various equitable claims of different +owners in one source of income could be left to adjust themselves +through shifting, mainly in the choice of investments, once the plan +had become generally applied. + +§ 6. #Needed reform of assessment.# The assessment of the present +general property tax is notoriously inefficient and unjust. The root +of most of the present evils (other than those above discussed) is the +method of local election of assessors, which usually is by townships, +but in some cases by counties. The local assessor's estimate of value +is used as a basis for taxation not only for his district but for the +larger units (county and state). Thus every local assessor is tempted +by the conflict of interests not only among the taxpayers in the +district which elects him, but by the conflict of interests between +his district as a whole and other districts. The lower the ratio of +assessment to true valuation in any township compared with that of the +other tax districts, the smaller the proportion of county and state +taxes that the people of the district have to pay. Willingness to +under-assess property often becomes thus the chief virtue of an +assessor in the eyes of his political constituents. This has led in +many cases to absurd underassessment, which boards of equalization +have proved powerless to remedy in any great measure. A sounder plan +would be general state assessment, with a permanent expert board of +commissioners employing a corps of state assessors under the merit +system of appointment. This plan has as yet been applied only to +assessment of railroads and some other public-service corporations. + +§ 7. #Separation of state and local taxation.# For the reason just +indicated the failure of the general property tax has been most +conspicuous where it is used as a basis for state taxation. This has +led some financial students to advocate the plan of separation of +state and local taxation. This means the assignment of certain sources +of revenue (such as corporations and the liquor business) primarily +or exclusively to the state, leaving all real estate and the general +property of non-corporate persons to be taxed by the counties and +minor divisions under the general property tax. The plan has been +increasingly applied in New York, until, in 1906, it became almost +complete. In 1910 the plan was adopted in California; and it is +largely used in New Jersey, Connecticut, Delaware, and Pennsylvania, +and to a small extent in some other states. An efficient state +assessment of general wealth would accomplish most of the advantages +claimed for this plan, while avoiding some of its dangers. + +§ 8. #Federal taxation of merchandise and acts in commerce.# Tariff +and internal revenue duties constitute the two chief revenues of the +federal government. Both of these are mainly taxes on wealth. Unlike +the general property taxes they are not levied upon the main body +of wealth held in possession, but almost entirely upon articles of +merchandise and upon acts in course of trade. Stamps on receipts, +checks, deeds, bills of sale, and licenses on the sale of liquor +and tobacco are taxes on business acts which are necessary to the +acquisition, use, or expenditure of wealth. Goods imported are taxed +at the time of entering the country; domestic products such as cigars, +spirituous or malt liquors, playing cards, and (at times) matches, pig +iron, and other products, are taxed usually at the time of exit from +the factory. It has already been shown that when the tariff duty +prevents the importation of foreign goods and by raising the price +encourages domestic manufacture of the article, there is virtually +taxation of the consumer to subsidize the private manufacturer. A +system of properly adjusted compensatory duties (tariffs and internal +duties combined) which would prevent tariff duties from having any +prohibitive effect whatever could, in a great country like ours, be +made to produce any revenues desired. Such a system, combined with the +federal income tax, seems destined to be the chief dependence for the +national government. + +§ 9. #Proposal of the single tax on land values.# Besides the general +property tax there are found in the country as a whole a large number +of special property taxes. Some of these have been introduced as +substitutes for the general property tax; such is the special taxation +(above referred to) of mortgages, and bonds. Other special property +taxes have been introduced because they were believed to be good in +themselves; such are special franchise taxes on corporations and some +kinds of taxes on land. + +The special taxation of land, or of land values, has been strongly +urged by Henry George and his followers since the publication of the +remarkable book "Progress and Poverty" in 1879. The doctrine there set +forth is that the state should "appropriate land rent by taxation," +should "tax land values, irrespective of improvements." It is +maintained that "a single tax" of this kind would be quite sufficient +for all the purposes of government. The main arguments adduced +for this plan may be reduced to three propositions: first, private +property in land is essentially unjust, because land is made by +nature, not by men; second, the plan would make assessment simple and +certain by limiting it to the unimproved land, and making unnecessary +the more difficult assessment both of tangible improvements and of +intangible personal property; and third, it would work a marvelous +reform in social conditions, abolishing poverty and greatly increasing +production. + +It is impossible within our limits of space to discuss this proposal +further than to indicate that: (1) It assumes an untenable theory of +property.[4] (2) It overlooks the difficulty of distinguishing the +value of the land "irrespective of improvements," from that of the +land as it actually is, a difficulty especially great in the case of +agricultural land.[5] The difficulty is present even in the case of +urban land when the improvements of filling, draining, and leveling +have become incorporated with the site.[6] (3) The plan ignores the +stimulus (motivating force) which private ownership has given and +still gives to the maintenance and fuller productive use of land. +Nowhere has production thriven where the state was the universal +landlord. + +§ 10. #Various reforms in land taxation.# While the single tax plan +is defective in principle, its wide discussion has served to direct +attention toward the need of reform in the taxation of land. Some +proposals looking toward this end are widely favored by opponents as +well as by advocates of the single tax. Such are the following: + +(a) The abandonment of the taxation of mortgages.[7] + +(b) A more correct assessment, in accordance with the present laws, +of lots and lands held for speculative purposes, which in practice are +now greatly under-assessed. + +(c) More adequate special franchise taxation upon corporations for +special privileges in the public highways. + +(d) Exemption, in value equal to the costs, of improvements on land, +such as buildings, drains, fences, and fertilizers, for a limited time +after they are made, perhaps five years. + +(e) The separate assessment of urban lands used as mere building sites +and of the buildings on them. + +(f) Taxation of the increase ("increment") of urban land values, +periodically or on the occasion of transfer of ownership. + +§ 11. #Difficulties in taxing corporations.#[8] Until near the second +quarter of the nineteenth century, business corporations (of which +there were few) were taxed just as was the general property of +individuals. This still continues to be the case in the main in most +of the states. The methods and machinery of assessment were (and still +are) essentially local and simple, and have proved to be inadequate +to reach or justly assess the larger and more complex corporate +enterprises when their equipment and business extend beyond town, then +county and, finally, state lines. Moreover, the corporate forms +of organization presented in complex and puzzling forms the dual +conception of property.[9] Here was the tangible wealth of the +corporation and there were the diffused rights of ownership, the +capital of individual stockholders and bondholders. Confused by this +ambiguity, the men of that time believed (as many still believe) that +there were here two separate and justly taxable funds of value. The +popular will declared (and still declares) that "all kinds of property +ought to bear their fair share of the burdens of taxation." Yet to +apply this principle would obviously be double taxation and result +in confiscation in many cases. Between this doubt and the practical +difficulty of assessment, it turned out that corporate wealth, far +from being doubly taxed, was largely escaping even its due single +burden. + +§ 12. #Special taxes on banks.# Attempts to deal with the difficulty +without clear perception of its cause took the form of legislative +tinkering and patching. Taxes were gathered from corporations by any +device that seemed workable. The banks, being the earlier important +corporations, were first experimented upon. Taxes on capital stock and +on circulation were tried first (in 1805, by Georgia), then a tax on +dividends (in 1814, in Pennsylvania, and in 1815 in Ohio), examples +which were followed or modified by a number of states. After the +national banking system was started in 1864, attempts to tax both the +capital of the banks and the stock in the hands of individuals led to +federal court decisions and then to state legislation by which now in +many of the states the banks are separately taxed on their real estate +and the shares are assessed to the individual holders (by various +rules), but the taxes deducted from dividends and paid by the bank. +There are, besides, special franchise taxes and fees paid by banks in +various states. + +§ 13. #Special taxes on insurance companies#. Insurance companies +present in a striking manner the complexities of the ambiguous +property concept. The assets of the insurance companies (we refer here +particularly to the reserve companies), which belong in equity to the +policy holders (less the claim of the stockholders in the case of +the stock companies), are nearly all invested in stocks and bonds of +corporations and in mortgages on real estate. Now under the general +property tax, strictly interpreted, the policies are assessable +at their surrender or reserve valuation in the hands of the policy +holders; secondly, the securities and credits which compose the assets +are assessable to the company; and, thirdly, the railroads, factories, +and houses, built with the outstanding loans made by the insurance +companies, are assessable as tangible wealth, to the owners. If such +an interpretation were practically enforced it would result in triple +taxation to be drawn from the same economic source, and would be +utterly prohibitive of the insurance business. The enforcement +has, however, been impossible in practice. Insurance companies +have comparatively little tangible wealth excepting real estate +for offices. This is taxed locally. Several methods have been tried +(beginning as early as 1824) to make insurance companies pay taxes +(usually for state purposes) on something besides tangible wealth. A +tax on receipts from premiums proved most workable, first as applied +to "foreign corporations" (that is, to those of other states) and +later, generally, to domestic companies also. Now, amid bewildering +variety and interstate rivalries in tax laws, the most usual rate is +two per cent on gross (in a few cases on net) premiums collected. The +taxes on premiums, with various licenses and fees, now amount to 2.15 +per cent of the total receipts from life insurance premiums in the +United States. This is taxation not on an existing body of accumulated +wealth, but upon the process of accumulation, a tax directly on the +act of saving. A consistent policy of wealth taxation combined with +income taxation would require the abandonment of the present forms of +special insurance taxes. + +§ 14. #Special taxes on transportation.# Another great group of +businesses whose taxation has been especially complex, because they +are distributed throughout different taxing districts, are agencies of +transportation and communication, especially railroad, sleeping car, +express, telegraph, and telephone companies. A state tax on railroad +tonnage (Pennsylvania, 1860) was declared unconstitutional by the +United States Supreme Court. But many other plans have been tried +to compel the railroads to contribute, the chief being by taxes on +dividends, gross earnings, equipment, and valuation of capital stock, +taxed either to the company or to the stock-holders, (Connecticut +since 1849). About a third of the states no longer make the physical +plant the basis of taxation, except that in most of them some part or +kinds of real estate are taxed locally.[10] + +Telegraph companies are still locally assessed in most states, but in +over a third of the states are taxed either on gross receipts, or +on mileage of wire. Telephone companies are similarly taxed, but +sometimes on the number of transmitters, or of subscribers, or on each +plant, or otherwise. In a similar manner, express and sleeping car +companies are taxed, in the same group of states, on mileage, or on +capital stock proportional to mileage, or by license and privilege +taxes. + +In the case of these corporations, and also of various other +miscellaneous kinds of companies, no clear-cut principles serve to +guide. The result is "a chaos in practice--a complete absence of +principle."[11] + +§ 15. #Alternative policies as to corporate taxation.# If the taxation +of corporations is not to continue to be treated in a mere hit-or-miss +manner, with every possible kind of inconsistency among the various +states, some general principles must be recognized and some clear +policy be formulated. But there is no general agreement to-day among +jurists and economists upon a definite and consistent plan in this +matter. + +Two alternative policies appear. The first is to make the scheme for +taxing corporations quite different in principle and plan from +that for taxing natural persons. The assumption in this is that the +"general property tax" is an irremediable failure, and is particularly +inapplicable to corporations. This plan goes along with the separation +of state and local taxation.[12] An unfortunate result of this is to +relieve the great mass of taxpayers of the state from, any apparent +and measurable part of the tax burden for state purposes and thus to +separate responsibility and power in state government. This policy +nevertheless is favored by some of the leading authorities on finance. + +The other policy is to tax the wealth and business of corporations +(excepting those enjoying special privileges) in essentially the +same way as other wealth and business. The improvement of corporate +taxation would thus be but a part of the transformation of the +"general property tax" into a general tax on tangible wealth.[13] +If first there is recognized the error of assessing the equitable +ownership interests in addition to the body of wealth, and secondly +there is created an efficient agency of assessment, the taxation of +corporations can be logically and easily brought into accord with a +harmonious system of state and local taxation.[14] + +§ 16. #General plan for corporate taxation.# The main features in such +a plan of reform would be as follows: + +(a) Assessment of all wealth by a state agency, with expert nonlocal +assessors, appointed and serving only under the merit system. + +(b) The assessment of the value of each enterprise and body of wealth +as a unit for the whole state, and apportioned to the minor divisions +as the basis for levying local taxes. + +(c) Apportionment of the total value in the state among the localities +by general rule, in the case of transportation and transmission +companies, by mileage with due regard to the presence of local real +estate and of special industrial equipment such as repair shops and +power plants. + +(d) Taxation of interstate enterprises only in due proportion to the +whole business, by mileage or other rules; inter-state comity to be +further developed in this matter. + +(e) Account to be taken, in assessment, of various factors determining +the earning power, such as good will, patents, and other monopolistic +elements, pertaining to and helping to determine the value of the +tangible plant of the enterprise. + +(f) Account to be taken of the market value of securities and notes +owned by a corporation, in determining the taxable value of the whole +business, but these not to be treated as a separately assessable +"property" (in addition to the tangible plant). + +(g) Exemption of the holders of securities and evidences of +indebtedness of corporations.{15} + +(h) Treatment of special privileges granted to public-service +corporations for the use of streets and public highways on the +principle of rent-payment to the community rather than by levying a +percentage on an assessment. + + +[Footnote 1: For example, the constitution of Alabama declares: "All +taxes levied on property in this state shall be assessed in exact +proportion to the value of such property," etc. And the constitution +of Indiana declares: "The general assembly shall provide, by law, for +a uniform and equal rate of assessment and taxation of all property, +both real and personal, excepting," etc. Similar statements occur in +most state constitutions.] + +[Footnote 2: The general property tax in the United States +constitutes: + + Of the revenue receipts of the states 38 per cent. + Of the revenue receipts of the counties 76 per cent. + Of the revenue receipts of the incorporated places. 60 per cent. + +The total amount collected in this way in 1913 was over +$1,083,000,000.] + +[Footnote 3: See above, ch. 2, secs. 2, 3, and reference there to Vol. +I.] + +[Footnote 4: See above, ch. 2.] + +[Footnote 5: See Vol. I, pp. 116, 117, 145, 445-455.] + +[Footnote 6: See Vol. I, pp. 117, 146, 453.] + +[Footnote 7: See above, sec. 4.] + +[Footnote 8: No reference is made in what follows to fees payable but +once for the incorporation of new companies or at times of increasing +the capital stock of an old one, variously called taxes on corporate +charters, license taxes, incorporation fees, organization fees, and +charter fees.] + +[Footnote 9: See above, sec. 3.] + +[Footnote 10: E.R.A. Seligman, "Essays on Taxation" (1895), p. 156.] + +[Footnote 11: Seligman, op. cit. p. 136.] + +[Footnote 12: See above, sec. 7.] + +[Footnote 13: See above, sec. 5.] + +[Footnote 14: The assessment feature of this proposal is exemplified +more nearly than anywhere else, tho still imperfectly, in the "Indiana +plan," in which, however, the true concept of property is recognized +only in so far as the shares of corporations of which all the wealth +is taxed are not assessed to the shareholders.] + +[Footnote 15. This need not prevent a supplementary system of +graduated taxation on incomes. See below, ch. 18, sec. 10.] + + + + +CHAPTER 18 + +PERSONAL TAXES + + § 1. Inheritance tax laws. § 2. Fiscal importance of inheritance taxes. + § 3. Income taxes; general nature. §4. Income taxation by the states. + § 5. History of federal income taxation. § 6. Events leading up to the + law of 1913. § 7. Main features of the law. § 8. Exemptions and + stoppage at source. § 9. The graduation principle. § 10. A system of + taxation. + + +§ 1. #Inheritance tax laws.# There remain to be considered at least +two important forms of taxation that are essentially _personal_ in +their unit of assessment, in contrast with the foregoing which are (or +should be, if consistent) essentially _impersonal_[1] These are the +inheritance and the income taxes. + +Until 1916 little use had been made of inheritance taxation for +federal purposes. In that year, however. Congress passed a law which +was expected to obtain about $20,000,000 a year from inheritances. + +Forty-one states in America have inheritance tax laws (in 1915) +which apply generally to property passing either by will or under the +intestate laws of the state. The tax is for state purposes. These laws +differ in many ways, but are nearly all alike in certain respects: + +(1) In applying to the separate legacies rather than to the estate as +a whole.[2] + +(2) In taxing legacies to relatives in the direct line at a lower +rate (or even exempting them entirely) than those to collateral +relatives.[3] + +(3) In exempting legacies below a certain amount.[4] + +(4) In having rates progressing with the size of the legacy; (this +feature is less general, but is prominent in most of the later laws). + +§ 2. #Fiscal importance of inheritance taxes.# The fiscal importance +of inheritance taxes has been comparatively not very great (except in +New York State), but it has rapidly grown. In 1903 the receipts from +this source (in 27 states) were over $7,000,000; in 1913 they were (in +35 states) $26,000,000. The spread of inheritance taxes and the higher +and progressive rates applied are an expression in part of the need +of additional revenues and in part of the growing popular concern +regarding the concentration of wealth. Yet the actual legislation is +something of a compromise between fiscal policy (to get revenues) and +social policy (to reduce or to distribute the larger fortunes).[5] In +New York legacies of over $1,000,000 are now taxable at 4 per cent +to relatives in the direct line and to all others at 8 per cent. In +Washington the tax to relatives in the direct line is but 1 per +cent, but to others it may go as high as 12 per cent on legacies over +$100,000. In Wisconsin, somewhat similarly, the tax may rise to 15 per +cent on the excess above $500,000. + +§ 3. #Income taxes; general nature.# All taxes, whether assessed upon +the capital value of goods or not, come out of (reduce) the incomes +now or later available for individuals. But there are various ways +of attacking incomes, i.e., of apportioning the tax burden. Income +taxation is that form in which the basis of the assessment and levy +is the income of the taxpayer as it arises (not accumulated wealth, +or capital, or business processes, or expenditures). Of the various +conceptions of income[6] the one mainly employed in income taxation +is monetary income arising in the course of business, supplemented +occasionally (but not consistently) by some items of material income +that are expected to come to the person. There is not in the long run +such a contrast between wealth taxation and income taxation in their +ultimate burden and effect as is usually supposed. + +Indeed wealth (or capital) taxation as applied to accumulated wealth +is more far-reaching than income taxation, for it falls upon the +present worth alike of monetary and of psychic incomes (e.g., the +value of a house whether it is let to a tenant or occupied by the +owner). But, on the other hand, income taxation attacks directly the +monetary incomes from labor, coming as wages, salaries, fees, and +profits in business. This feature goes naturally with the fact that +the income tax is essentially a personal tax, grouping the items of +assessment about a person, whereas the "property" taxes are mainly +(tho not consistently) impersonal, making the piece of wealth the +primary object of assessment. This summation of each person's income +makes income taxation peculiarly suitable for progressive taxation +with the social-welfare motive of equalizing the distribution of +wealth. It is doubtless this technical assessment feature, rather than +any essential advantage as a mode of taxation, that has led to its +recent growth in popular favor. + +§ 4. #Income taxation by the states#. Income taxes have been used +widely in European countries, but not so much in the United States. +Numerous attempts have been made by the states to tax incomes, but +with small results. Personal incomes, when sought by local assessors, +proved to be most elusive. There are (in 1913) but seven states with +anything resembling a personal income tax.[7] These are Virginia, +North Carolina, South Carolina, Mississippi, Oklahoma, Massachusetts, +and Wisconsin. Of these states Wisconsin has the most recent law, and +one the widest in its application and the most important fiscally. The +law applies a progressive rate to all incomes (with exemption of +$700 from wages and salaries) and contains elaborate provisions for +corporate taxation. The proceeds are distributed 10 per cent to the +state, 20 per cent to the county, and 70 per cent to the municipality +in which the tax is collected. In the six other states the tax is on +incomes only exceeding a certain amount (North Carolina, $1000, the +other states from $2000 to $3500 exemption); some apply to incomes +from any source but others do not apply to incomes from property +otherwise taxed. The total receipts from these state income taxes in +1913 were but $314,000. + +§ 5. #History of federal income taxation.# The income tax seems +destined to play a more important part in the fiscal system of the +federal government. Until 1913, however, its part had been small. It +began to be used under the law of 1867 (when the law passed in 1861 +was replaced before it went into effect). This was repeatedly amended +and finally repealed in 1870, to continue in force until the year +1872. The rate was 3 per cent on the excess of incomes over $600, and +5 per cent on the excess over $10,000. This law was repeatedly +upheld by the United States Supreme Court as not in conflict with +the Constitution. Its fiscal results were not large, as it was never +effectively administered. + +The next income tax law was that of 1894, enacted in connection with +the tariff revision of that year. It was declared unconstitutional +before it had gone into effect. The main ground for the decision was +that a tax on incomes from rent of land as well as on incomes from +personal property is direct, and must therefore be apportioned among +the states according to population. + +In the active discussion of social legislation in the years following +this decision public sentiment developed favoring a renewed attempt to +get such legislation by amending the Constitution. This was shown by +the remarkable fact that a bill for the sixteenth amendment to +the Constitution was passed unanimously by the Senate, and almost +unanimously by the House. It was ratified by three-fourths of the +states and became a law in 1913.[8] + +§ 6. #Events leading up to the law of 1913.# Meantime, in 1909 and +excise tax law had been passed, applying to corporations in a manner +not open to the objections found by the Supreme Court to the law of +1894. The Democratic party, which had passed the law of 1894, was +pledged to the passage of an income tax law when it came into power +again in 1913. The reduction of the tariff, as well as growing +expenditures, moreover, made necessary the development of new sources +of revenue for the national government. In other countries the income +tax had been found to be a part of a system of taxation especially +valuable as "a balance wheel" to equalize the revenues and +expenditures. It was deemed by some to be an additional advantage of +an income tax that it would make the richer citizens better realize +the nature and burden of public expenditure. Most other federal +revenues, being derived from the tariff and from taxes on merchandise, +are borne mainly by the purchasers and consumers. + +An income tax was opposed as sectional taxation by many in the Eastern +states where the owners of most of the larger fortunes reside. But to +this Senator Elihu Root replied that the states where there was +the greatest ownership of wealth pay the largest taxation under any +scheme, and ought to. + +§ 7. #Main features of the law.# The law as enacted[9] imposes (a) +a "normal" tax of 1 per cent on the entire net income of every +corporation (engaged in business for profit); + +(b) a "normal" tax of 1 per cent on the excess above $3000 of every +unmarried individual's income (or $4000 for husband and wife, as +indicated in the next section); (c) an "additional tax" (often called +a super-tax) ranging from 1 to 6 per cent on individual incomes of +larger amounts than $20,000. There are thus eight classes of persons, +those entirely exempt, those paying only at the normal tax rate, and +six different classes paying a super-tax.[10] + +A person with an income of $1,000,000 thus pays $60,020, this being +the amount indicated, $25,020 for the first half million plus 7 per +cent on the second half million. + +§ 8. #Exemptions and stoppage at source#. There are various +exemptions, the first being that of $3000 on every individual income +and of $4000 on the aggregate income of husband and wife living +together.[11] Among other exceptions are sums paid for taxes (except +assessments for local benefits), necessary business expenses, losses +sustained, and (for the normal tax only) those parts of individual +incomes derived from corporations which have paid the tax on them. + +The difficulty of getting an honest and complete assessment of incomes +is great. All taxation is deemed by the taxpayer to be "inquisitorial" +in some degree, and this is particularly true of an income tax. In +England had been developed the plan called "stoppage at source." In +our law the taxation of corporations at the rate of the normal tax, +while requiring them to report the names of those receiving dividends +and interest payments, affords an ingenious way of checking up the +returns of individuals in respect to a class of investments which is +steadily increasing in importance. + +§ 9. #The graduation principle#. The most disputed feature of the +income tax is the principle of graduation, or of progression. It is +upheld in part because in this case it but offsets _regression_, that +is relatively heavier taxation on the smaller incomes, in the case of +the other kinds of taxes (tariff, property taxes, etc.). It is urged +further that those of larger incomes, especially the largest, have +marked advantages over others in making investments. Further it is +urged that the higher the income the less does a certain rate cut into +"the amount necessary for good living" (as was said in Congressional +debate). This is in accord with the psychological principles of +choice, of value, and of diminishing gratification. Finally, there is +a widespread approval of the progressive rate just because it in so +far acts as a leveling influence upon fortunes. The "additional" tax +is already important fiscally, yielding over one-half of the total +paid by individuals and one-fourth of the total from corporations and +individuals. + +The income tax returns for the first ten months of the law (March to +December, 1913) showed 356,598 taxable individual incomes, equal to +about 1 per cent of the taxable population (considering minors to be +usually not taxable). Even this proportion, small as it is, is much +larger than that of the European countries having a general income +tax. + +The first ten months' yield (March 1, 1913, to December 31, 1913) was +over $60,000,000. A remarkable fact is that 21 per cent of all taxable +incomes (not persons) were in the single Borough of Manhattan (the +main part of New York City). The receipts from the income tax in +1913 were nearly 10 per cent of the ordinary receipts of the federal +government, and about 2 per cent of total revenue receipts of all +branches of government, the income taxes paid by individuals being +about 1 per cent of the same total, and the super-tax about 1/2 per +cent of the same. + +The receipts from the income tax during the fiscal year ending +June 30, 1915, were $80,000,000, of which $39,000,000 was paid by +corporations and $41,000,000 by individuals. Of the latter sum, over +$24,000,000 was from the super-tax. + +§ 10. #A system of taxation.# The task of reforming and developing the +various kinds of taxes and of uniting them into a just and consistent +plan for each of the divisions of government in the United States is +a vast and difficult one. There are many conflicting interests among +states, between states and nation, among the various minor political +divisions, and among individuals and classes. There are also +conflicting opinions regarding many features of the possible practical +plans. Because of these it is safe to predict that progress will not +be made quickly, steadily, nor always directed toward a clear ideal. +If progress is to be rapid, the public must, however, have consistent +principles by which its steps may be guided. In the foregoing kinds of +taxation are the various elements which may be united into a system of +taxation. It is useful to consider how this might be done. + +At the basis of the whole tax structure is taxation, by value, of +concrete wealth at the place where it is situated (_in situ_). This +should be regardless of the distribution of ownership or of the +residence of the owner. The present misnamed "general property tax" +already presents the main outlines of this form of taxation and the +general changes necessary in law and method of assessment have been +indicated above.[12] Corporation taxation may be adjusted to this +either by separate treatment and assignment to state purposes only, +or more simply for most states, by assimilating it with the general +taxation of wealth and allotting due shares of the proceeds to the +various taxing divisions.[13] The national government can, because of +its exclusive power of levying tariff duties and also because of +its exclusive control over interstate commerce, reach the tax-paying +ability of the nation effectively by a combination of tariff and +internal revenue taxes. These become a part of business costs, and are +diffused over the whole population in general prices.[14] + +This system of impersonal wealth taxation may then be supplemented by +personal taxation, applied through inheritance and income taxes. These +forms of taxation extend over and reach many of the same persons and +incomes as do ultimately the impersonal taxes. But the summation +of personal incomes gives the necessary condition for applying the +principle of progression so far as this is, by public opinion, deemed +desirable either for fiscal or for social reasons. + + +[Footnote 1: See above, ch.17, sec. 3, note, and sec. 5, on this +distinction. The poll tax also is personal: see ch. 16, sec. 9.] + +[Footnote 2: In Utah the tax is 5 per cent on all estates over +$10,000.] + +[Footnote 3. Exception, Utah.] + +[Footnote 4: Exceptions are Missouri, New Hampshire, Vermont, +Virginia.] + +[Footnote 5: It would be more consistent with the purpose of +equalizing fortunes to vary the rate not according to the size of the +legacy but according to the size of the fortune which the legatee has, +or would have, after receiving the legacy.] + +[Footnote 6: See Vol. I, p. 26.] + +[Footnote 7: In addition, certain items of receipts of companies +or incomes of individuals are arbitrarily defined as property for +purposes of taxation in a few cases in about fifteen other states. See +Wealth, Debt, and Taxation, Report of the Bureau of the Census, 1907, +p. 622.] + +[Footnote 8: Article XVI. The Congress shall have power to lay and +collect taxes on incomes, from whatever source derived, without +apportionment among the several states, and without regard to any +census enumeration.] + +[Footnote 9: It constitutes sec. 2 of the tariff act of 1913 entitled +"An act to reduce tariff duties and to provide revenue for the +government and for other purposes."] + +[Footnote 10: This may be seen in the following table: + Normal Rate on excess Total + tax on in next class tax on + lower Nor- Addi- upper Total rate + limit mal tional limit per cent + Under $3,000 0 0 0 0 0.00 to 0.00 + $3,000-$20,000 0 1 0 170 0.00 to 0.85 + $20,000-$50,000 170 1 1 770 0.85 to 1.54 + $50,000-$75,000 770 1 2 1,520 1.54 to 2.02 + $75,000-$100,000 1,520 1 3 2,520 2.02 to 2.52 + $100,000-$250,000 2,520 1 4 10,020 2.52 to 4.00 + $250,000-$500,000 10,020 1 5 25,020 4.00 to 5.00 + In excess of $500,00 25,020 1 6 upwards 5.00 to 7.00 + +By legislation in the summer of 1916, after the foregoing was in type, +the "normal" rate was doubled and the additional rates were raised.] + +[Footnote 11: The exemption is $3000 for each if they are not living +together. Thus the law offers a reward of $20 to make marriage a +failure.] + +[Footnote 12: See above, ch. 17, sec. 5.] + +[Footnote 13: See above, ch. 17, secs. 15, 16.] + +[Footnote 14: See above, ch. 15, sec. 14, first paragraph.] + + + + +PART V + + +PROBLEMS OF THE WAGE SYSTEM + + + + +CHAPTER 19 + +METHODS OF INDUSTRIAL REMUNERATION + + § 1. Workers subordinate in early societies. § 2. Workers in the Middle + Ages. § 3. Growth of the wage system. § 4. Practicability of the + wage system. § 5. Time work. § 6. Task work. § 7. Piece work. + § 8. Premium plans. § 9. Aim of profit-sharing. § 10. Examples of + profit-sharing. § 11. Difficulties in profit-sharing. § 12. Defective + theory of profit-sharing. § 13. Purpose of producers' coöperation. + § 14. Limited success of the plan. § 15. Its main difficulty. + + +§ 1. #Workers subordinate in early societies#. As far back as the +history of settled and populous communities can be traced, the masses +of workers have been subordinate. Civilization began with direction, +with obedience to superiors on the part of the mass of men. Even in +the rudest tribes, the women and children were subject to the will of +the stronger, the head of the family. Among the Aryan races the family +system was widened, and the patriarch of the tribe secured personal +obedience and economic services from all members of the community. +Chattel slavery, the typical form of industrial organization in early +tropical civilization, seems to have been one of the necessary steps +to progress from rude conditions; students to-day incline to view it +as an essential stage in the history of the race. But as conditions +changed with industrial development, chattel slavery became an +inefficient form of industrial organization and a hindrance to +progress. + +§ 2. #Workers in the Middle Ages#. Serfdom for rural labor and many +limitations on the workman's freedom in the towns were the prevailing +conditions in medieval Europe. Serfdom was both a political and an +economic relation. The self was bound to the soil; the lord could +command and control him; but the serf's obligations were pretty +well defined. He had to give services, but in return for them he got +something definite in the form of protection and the use of land. +Between the lord and the serf there continued an implied contract, +which passed by inheritance from father to son, in the case both of +the master and of the serf. In the towns conditions were better for +the free master class of the artisans who owned their tools and often +a little shop where they both made and sold their products. But the +mass of the workers, shut out from special privileges, bore a heavy +burden. There were strict rules of apprenticeship; gild regulations +forbidding the free choice of a trade or a residence; laws against +migration into the town; settlement laws making it impossible for +poor men to remove from one place to another; arbitrary regulation of +wages, either by the gilds in the towns or by national councils and +parliaments, forbidding the workmen to take the competitive wages +that economic conditions would have forced the employers to pay; +combination laws forbidding laborers to combine in their own interest. +These conditions prevailed even in the periods and in the countries +often referred to as particularly favorable for the working classes +(such as England in the fifteenth century). + +§ 3. #Growth of the wage system#. Throughout the Middle Ages these +conditions were gradually changing, and the changes were hastened +by the discovery of America, by the social unrest accompanying the +Reformation, and by other forces. Servile dues in the rural districts +were, by the sixteenth century, commuted for cash payments in England +and had begun to disappear in the other Western countries of Europe. +The agricultural work was done partly by the peasant landowners, +partly by yeomen farmers on their own land, and partly by laborers +hired by landowners or by tenant farmers (enterprisers with some +capital for equipment). The growth of commerce and of the mechanical +trades in the towns required larger ships, factories, and shops, +and increasing investments. This required in the towns an increasing +proportion of hired laborers having little or no capital invested +in industry, and living on wages. This change went on more and more +rapidly with the introduction of machinery in the eighteenth and +nineteenth centuries, and "the wage system" grew steadily to be a more +and more important part of the whole economic structure.[1] + +§ 4. #Practicability of the wage system#. This change has brought with +it grave problems of social organization and social welfare, which it +is not the place here to discuss. But whatever be the difficulties of +the wage system it has certain practical merits of workableness which +account for its progress and dominance.[2] The larger the market and +the longer the waiting period in industry, the greater the element of +uncertainty and financial risk. Under the wage contract the employer, +as the one best prepared to do it, takes the risk as to the future +selling price of the product; the worker gets in a definite sum at +once the market value of his services. Wage payment, therefore, is +a form of insurance to the workingman; he gets something definite +instead of taking chances he is ill prepared to take. Wage payment is +a form of credit to the laborer whose labor is applied to producing +the goods for customers distant in time and in place. The employer +advances to the workman the present value of the future sale, +discounting it at the prevailing rate of interest. + +Wage payment implies a contract by which the employee on his part +agrees to render service and the employer on his part agrees to pay +for it. The methods of determining and measuring the amount of service +of the employee are called "methods of industrial remuneration." The +many varieties may be grouped in two classes: time payment and piece +payment, corresponding with the two modes of measuring labor, time +work and piece work. + +§ 5. #Time work.# Time work came first and was long almost the only +method. In time work the employee is paid by the hour, day, week, +month, or year, as the case may be. This is very satisfactory for +small enterprises, where the master works with his own hands alongside +of the employee, overseeing him, teaching him, and stimulating him by +his own presence and example of industry. This method prevails still +in nearly all farming work, in many kinds of manufacturing, in most +transportation, in clerical positions in trade, and in general where +the employee must perform a variety of tasks. + +Considering a brief period, it might seem that in time work the worker +is paid by time regardless of his effort or performance. However, +in every industry there is a recognized, fairly definite standard of +accomplishment for those getting the regular market rates of wages, +so that the time-standard implies some performance- or piece-standard +also. But this is judged by the employer only in a general way, and +very commonly men of different degrees of efficiency continue for +some time to receive the same money wage. Still, where any differences +become noticeable to the employer in quantity of work, quality of +work, or personal qualities of honesty, reliability, and good temper, +the better workman is likely to obtain a better position, higher pay, +more regular employment, or some other form of reward. The employer is +more likely at the end of any period of employment, to discharge the +man who falls short either in quantity or quality of work, and to +retain and advance the better worker. The method of time-payment does +not directly tempt the workman to slight the quality of his work by +haste. It does not keep constantly before the worker the thought of +his own interest in rapid work, often with an accompanying nervous and +mental strain. In most occupations, therefore, the workers prefer time +work. It does not take exclusive account of the quantity of material +product, but leaves place for estimating various personal qualities of +the employee which are of value in a business. + +§ 6. #Task work#. There are thus both advantages and disadvantages +in time work, and their relative importance varies in different +industries and industrial conditions. Especially is the difficulty +of supervising workers and of ensuring the performance of a certain +standard, or minimum, amount and quality of work great in larger +enterprises. Various methods of measuring the performance of the +worker directly by some other than the time-standards have been +developed. All of these, in a general way, involve the piece work +principle. + +Task work is nominally time work, with a penalty if a certain amount +of product is not turned out within a given period. The agreement may +be that if the specified task is not done within the regular time, +it must be completed in overtime without additional pay. This is also +called "doing a stint." This method has been extensively used in +the ready-made clothing business in America, and is to some extent +involved in many cases of wage payment in manufacturing. + +§ 7. #Piece work.# Piece work of the simpler, or ordinary kind, is +that where the payment varies just according to the amount of the +product, by some physical measurement, as yards of cloth woven, number +of pieces turned on a lathe, or amount of type set by a printer. +Usually careful inspection by some agent of the employer serves to +keep the quality up to a certain standard. The rejected pieces are not +paid for, and sometimes also the workmen are required to pay for the +materials wasted by their poor work. Piece payment is convenient for +home work, such as that of rural peasants weaving cloth for commission +merchants or as that of tenement workers in cities. It is also +employed very widely in the larger factories in textile and mechanical +industries. Selling on commission is a form of piece work. + +In piece work the motive to activity is ever present to the worker, +and almost always the worker turns out a larger product when paid by +the piece than when paid by time. The employer benefits by the more +efficient use of his machinery and equipment even when the price per +piece is not reduced with the larger output per worker. The worker's +earnings may increase rapidly under this plan, but as the manual +dexterity acquired is usually of a very special kind which can be used +only on one particular machine, the worker has little opportunity to +resist a cut in his wages. For this reason and because of the undue +strain upon the worker that often occurs, piece work is in many trades +not favored by the workers.[3] + +§ 8. #Premium plans.# Various modifications of piece work have been +developed of late, all involving the features of a minimum task and +of a premium for performance beyond that point. These plans are called +"premium plans," "progressive wage systems," and "gain sharing." One +of the first of these, Halsey's premium plan, fixes a standard time +for a job and if the worker falls short of, or merely attains to, +that standard he gets the regular pay; but if he takes less than the +standard time he receives a fixed premium per hour for the time saved. +For example, if the standard time is 10 hours for a $3.00 job and the +premium for speed is ten cents per hour, the worker would receive 20 +cents premium if he did the work in 8 hours ($2.40 +.20, total $2.60), +and 50 cents premium if he did it in 5 hours ($1.50 + 50, total +$2.00). His average wage per hour thus rises as his speed increases; +it becomes 32.5 cents per hour when the job is done in 8 hours, and 40 +cents per hour when the job is done in 5 hours. The reduction of cost +per job to the employer evidently would be 40 cents in the first case, +and $1.00 in the second. This is Halsey's plan, by which the worker +gets one-third and the employer two-thirds of the time saved. + +The same plan has been applied (Weir's method) with a premium that +equally divides between the workman and the employer the time saved. +By Rowan's method the premium is not a fixed sum but a percentage of +the standard rate per hour equal to the percentage of reduction in +time consumed. For example, if in the foregoing example the time were +reduced 20 per cent (to 8 hours) the premium would be 20 per cent of +30 cents, and the workman would receive 36 cents per hour. By this +plan the premium becomes less for the later reductions than in either +of the other plans. The utmost possible wages would be double the +standard rate. + +A number of other variations have been worked out by the promoters of +recent scientific management, and are known as Taylor's, Gantt's, +and Emerson's plans. The authors of all these plans agree as to +the importance of fixing the standard rate so that it will leave a +possibility of considerable improvement with unusual effort, and of +leaving the standard rate and premium unchanged as long as no new +process or new machinery is introduced into the business. If this is +not done the employees lose faith in the plan and refuse to make the +necessary effort to earn the premium. Most of these plans of +payment recently have been connected with experiments and studies in +scientific management to reduce the time and increase the ease of the +operations. + +In a variety of ways a bonus or a premium may be paid for quality, or +for economy in the use of materials (as to a fireman for using less +coal), or for various other results. Every business has its peculiar +conditions, which make certain results especially desirable, and +certain methods of reward practicable. In some industries, for +example, the various plans of piece work and of premium payment are +applied to groups of workers (as in collective piece work), the total +payment being then divided among the members of the group in some +agreed proportion. + +§ 9. #Aim of profit-sharing.# Profit-sharing is rewarding the laborer +with a share of the profits in addition to his usual contract wages. +Payments by the piece and premiums for output are solely dependent on +the efforts of the particular workman (or collective group), but +in the plan of profit-sharing a premium is given in addition to the +regular wage if, at the end of the year, the business as a whole has +yielded a profit above a certain amount. Profit-sharing is not merely +a gift; it is done usually in accordance with a definite promise in +advance. The employer adopting the plan does not intend to lose by it. +His purpose is to stimulate the industry of the workers, thus reducing +waste and cost of labor and supervision, and thereby increasing +profits. He offers to divide with the workman the additional profits +which are expected to result from their efforts. There is, in every +factory, greater or less waste of materials, destruction of tools, and +loss of time, that no rules or penalties can prevent. If the worker +can be made to take a strong enough personal interest he will use care +when the eye of the foreman is not upon him. The product also can +be slightly increased in many ways by the workman's exertions or +suggestions. In some cases the quality of the work cannot be insured +by the closest inspection as well as it can be by a small degree +of personal interest. Either responsibility for the fault cannot +be fixed, or the defect is one not measurable by any easily applied +standard. Strikes may be averted, good feeling promoted, and +contentment furthered if the interest of the worker can be made to +approach, and in large measure to become in harmony with, that of the +employer. The economic result of the plan, if it can be made to work, +should be to reduce the costs of these establishments below what +they are. The crucial question is whether profit-sharing alone in any +particular case will insure that the costs will be less than those of +competitors, thus giving a source out of which an increased amount, +really a wage, can be paid to the laborer. For the amount of profits +is affected not only by the amount of output, but also by a number of +other things that are quite outside the control of the workmen. + +§ 10. #Examples of profit-sharing.# The profit-sharing plan seems +first to have been successfully tried in Paris, in 1842, by Leclaire, +a house-painter. In house-painting there is often a great waste +of materials and time by men working singly or in small groups in +different parts of the city. By this new method Leclaire enlisted the +aid of the workmen, reduced the costs, and increased the profits. It +is a remarkable fact that the plan has been continued successfully by +the same firm to the present time. It has been tried in many hundreds, +possibly thousands, of cases, and is operating in some form or another +in more than a hundred firms in Europe and America. The most notable +examples of profit-sharing in the United States are the Pillsbury +Mills in Minneapolis, Procter and Gamble's soap-factories, in +Ivorydale, Ohio, the Nelson Mfg. Co., in Leclaire, Ill., and the Ford +Automobile Works, in Detroit. In some cases both manufacturer and +workmen value the system highly. It probably has its greatest success +when applied in prosperous establishments where profits are regular +and large, and where a steady working force is especially desired. +The proportion of business done in this way is not large. One hundred +firms is a very small fraction of 1 per cent of the total number of +firms in Germany, France, England, and America. A still more important +fact is that true profit-sharing has spread little since 1890, tho +various practices have developed under that name. The most noteworthy +of these is the selling of stock, usually at a somewhat lower price, +to the employees of a corporation so that, as stockholders, they may +have a motive to work for the success of the company (e.g., the United +States Steel Corporation). This method as applied to a select few +of the employees, who are advanced to official positions in a +corporation, is very widely adopted. + +§ 11. #Difficulties in profit-sharing.# It seems at first difficult to +explain this comparative failure of a plan that looks so attractive +in spirit and of which so much was hoped. Yet objections come from +the side both of the workman and of the employer. The workman lacks +knowledge of the business and is suspicious of the bookkeeping. If +at the end of the year the books show no profits, the workman loses +confidence, considers the plan to be mere deception, and rejects +it. The working of the plan remains in the employer's hands, and the +workman really is not a partner in the business. Moreover, the plan +puts a limitation upon the workman's freedom to compete for better +wages by changing his place of work. It is indispensable to make +length of service in some degree a condition to the sharing of +profits. Workmen, coming and going, cannot be allowed to share; the +percentage given to the others increases with length of employment. +Whenever men are thus practically subject to a fine (equal to the +amount of shared profits) if they accept a better position, there is +danger of a covert lowering of wages. The plan tends to break up the +trade-unions, which is one of the reasons that the employers like it, +and is the main reason that organized labor opposes it. + +The employer on his part objects to the interference with his +management, the troublesome inspection of the books, and the constant +complaints of the workmen. He dislikes to have the profits known; if +they are large, the advertisement of success invites competition; if +they are small, publicity may injure credit and depress the value of +the enterprise. In view of all these difficulties it is not surprising +that while the plan often starts promisingly, it usually fails after a +short trial. Business methods are severely subject to the principle of +the survival of the fittest. Through competition and the survival +of the firms that adopt improvements, better methods must eventually +supplant poorer ones. If a method fails to spread when it has been +tried for seventy-five years and all are free to adopt it, the strong +probability is that it has serious defects inherent in it. + +§ 12. #Defective theory of profit-sharing.# It is usually better +to make wages depend on the worker's efficiency rather than on the +profits of the whole business. The strongest motive to efficiency is +present when reward is connected immediately and directly with effort, +not with some result only slightly under the worker's control. Any +change in the amount of profits is only partially and indirectly +related to increased effort of the worker. The "profits" may be +nothing, tho all the manual workers may be exerting themselves to the +utmost. The wage bill is but one of the groups of costs. Profits are +the net result of many influences. Chief among these is the skill in +planning and conducting the business. This function of management is +either performed by the same person that is carrying the financial +risk, or by some salaried employee selected by him. It is this +management function the reward of which should, in theory, be made +to vary with the amount of profits; and in fact such an arrangement +(managerial profit-sharing, so to speak) is undoubtedly in operation +in thousands of cases, but is not included in the usual conception of +profit-sharing. Many salaried managers are in receipt of a share of +profits and are gradually acquiring an interest in partnerships or a +larger share of ownership in the enterprise for which they work. But +ordinary profit-sharing is not in accord with the general trend +toward the centralization of responsibility in the hands of competent +managers, ensuring to the worker a definite amount in advance, as +high as conditions make possible. The system of premiums, or bonus +payments, for output, where it can be safeguarded against abuses, +gives in most cases better results and is rapidly spreading. It is +sounder in conception and works better in practice as a method of +remuneration for most of the workers. + +§ 13. #Purpose of producers' coöperation.# Since the early part of the +nineteenth century many well-wishers of humanity have cherished high +hopes that the whole wage system might gradually be replaced by +the plan of producers' coöperation among workingmen. Producers' +coöperation is the union of workers in a self-employing group, +performing for themselves the enterpriser's function. The workers hope +to get what seems to them to be a needless drain of profits into the +pockets of the employer and unnecessarily high salaries to managers. +To do this they must perform the enterpriser's function as to +investment and risk. Collectively or through their representatives +they must undertake to furnish capital and management as well +as hand-work. The capital may be supplied either by the members, +individually or collectively, or may be borrowed from outsiders, +who are thus merely passive investors. Usually the return to capital +invested by members is limited to 5 or 6 per cent, so that this part +of the capital likewise is treated as a passive investment, and all +the real variable profits are distributed to the members as wages. The +hope has been as in profit-sharing to increase the amount of profits +through the stimulus the plan might give to the workers and by saving +in friction, disputes, and strikes. + +§ 14. #Limited success of the plan.# Practically the plan has been +made to work in a comparatively few simple industries. The most +notable example of successful coöperation in America was in the +cooper-shops in Minneapolis. There were few and uniform materials, +patterns, and qualities of product, few machines and much hand-labor, +simple well-known processes, a simple problem of costs, a sure local +market. After more than thirty years the main shop was still in +operation, but with a membership of the older men and with no growth, +A number of the less skilled workers receive ordinary wages. In +America a few of the productive coöperative companies are found +operating small factories. In England, there have been numerous +successful societies, but all in small enterprises, mostly connected +with agriculture. Within the whole field of industry, this method +of organization makes little if any progress. Most experiments have +failed and the successful ones have become or are tending to become +ordinary stock companies with most of the stock in the hands of a few +men. Therefore, whether losing or making money, they nearly all cease +to exist as coöperative enterprises. This result has disappointed the +hopes and prophecies of many well-wishers of the working classes. + +§ 15. #Its main difficulty.# The main difficulty in producers' +coöperation is to get and retain managerial ability of a high order. +Failure to do this results in inability to maintain and keep in +repair the equipment and to pay the ordinary returns to the passive +investment, and financial failure follows. There is no touchstone for +business talent, no way of selecting it with any certainty in +advance of trial. This selection is made hard in coöperative shops +by jealousies and rivalries, and by politics among the workmen. A man +selected by his fellows finds it difficult to enforce discipline. In +coöperation there is occasionally developed good business ability +that might have remained dormant under the wage system; some +work-men showing unusual capacity cease to be handicraftsmen. But the +unwillingness on the part of the workers to pay high salaries results +in the loss of able managers. Having demonstrated their ability, the +leaders go to competing establishments where their function is not in +such bad repute, and where they are given higher salaries, or they +go into business independently, being able easily to get the needed +backing from passive capitalists. + +Coöperative schemes thus suffer from the workers' inability to +appreciate the functions of enterprise and management. Most men make +a very imperfect analysis of the productive process. They see that +a large part of the product does not go to the workmen; they see the +gross amount going to the enterpriser, and they ignore the fact +that this contains the cost of materials, interest on capital, and +incidental expenses. Further, they fail to see that the investment +function is an essential one. The theory of exploitation, as +explaining profits, is very commonly held in a more or less vague +way by work-men. With a body of intelligent and thoroughly honest +work-men, keenly alive to the truth, the dangers, and the risks of the +enterprise, coöperation would be possible in many industries where +now it is not. Producers' coöperative schemes usually stumble into +unsuspected pitfalls. When a heedless and over-confident army ventures +into an enemy's country without a knowledge of its geography, without +a map, and without leaders that have been tested on the field of +battle, the result can easily be foreseen. + +The coöperative principle has been embodied much more successfully +and on a larger scale in America in the form of producers' selling +organizations or of consumers' coöperative stores. As, however, both +of these forms of organization have been developed in America more +largely by farmers than by wageworkers, the discussion of them may +better be undertaken in connection with problems of rural organization +rather than with those of labor. + + +[Footnote 1: See Vol. 1, pp. 227, 318, 322; also above, ch. 2, sec. +14.] + +[Footnote 2: See e.g., Vol. 1, p. 329, on selection of managed and of +managers.] + +[Footnote 3: See below, ch. 20, sec. 6.] + + + + +CHAPTER 20 + +ORGANIZED LABOR + + § 1. Changing relations between employers and wage-workers. § 2. + Need of common action among wage-workers. § 3. Functions of labor + organizations. § 4. Types of labor organizations. § 5. Statistics of + labor organizations. § 6. Collective bargaining. § 7. Limitation of + competition among workers. § 8. Strikes in labor disputes. § 9. Frequency + and causes of strikes. § 10. Picketing and the boycott. § 11. Effects + of organization upon general wages. § 12. Competitive aspect of + organization and particular wages. § 13. Monopolistic aspect of + organization and particular wages. § 14. Open vs. closed shop. §15. + Political and economic considerations. §16. The public's view of unions. + § 17. Future role of organization. + + +§ 1. #Changing relations between employers and wage-workers.# The +"organization of labor," or the "labor movement," so striking a +feature of the world to-day, is of comparatively recent origin. It did +not begin and advance _pari passu_ with the beginning and early growth +of the wage-system as above briefly described.[1] In anything like +its modern form the labor movement dates from the early years of the +eighteenth century. Much of the largest part of its history in all +countries, excepting England, is after 1860. Why was organization +among the workers so long delayed after wage-payment became common, +and why when it once appeared did it spread so rapidly in some +directions, and why is it still limited in the main to certain fields +of industry? These three questions are but one question in three forms +and to answer one fully would be to answer all. + +The modern trade union appeared in England shortly before the +industrial revolution,[2] and has extended as fast and as far as +the same stage of industrial development has been attained in other +countries. The effort of wage workers to organize themselves appears +everywhere to result from the separation of the economic and personal +interests of employers and workmen. As the control of industry became +more concentrated in larger units with the advent of power machinery, +the feeling of economic unity among the different ranks of industry +was further weakened. The average workman had less opportunity of +becoming a master, an employer. In the days of the old hand industry, +master, journeyman, and apprentice worked side by side at the same +bench. Almost every apprentice might hope to become some time a +master, and many a one did so. To-day most wage-workers in large +establishments have no hope of rising out of their positions. The mere +largeness of an establishment forbids also the personal acquaintance +of employer and workman. As a result of these changes, the workmen +become more "class-conscious" of their position as wage-workers and +the employers in many establishments take the attitude of buyers of +labor as a mere ware. When the employer then feels the pressure +of competition he is more likely to force the lowest wage that is +possible and to compel the workers to accept less favorable conditions +than if he were in more personal relations with them. Where the +immediate direction of an establishment is intrusted to paid managers +who are responsible to stockholders, the managers' success is judged +almost exclusively by the dividends they succeed in earning. Hence +they are under stronger and more persistent temptation than are active +owners to drive hard bargains with their employees. Many examples +might be found where managers and resident directors have wished to +pursue a more liberal policy than absentee shareholders would permit. + +§ 2. #Need of common action among wage-workers.# These same industrial +changes caused employers, even earlier than it did employees, to have +something of a "class-conscious" feeling, which tempered the spirit +of their mutual competition, especially in bidding for the services +of workers. The smaller the number of employers the easier it is by an +understanding to suppress competition on their side. If there is only +one factory of a kind in a town the employer is able at times to drive +a harder bargain with his employees. Especially in times of industrial +depression is a change of employment difficult for the laborer, +involving for him much trouble and loss of time and money in moving. +But it is possible to exaggerate the degree to which competition among +employers of labor is weakened to-day. In the long run and at many +points competition must be felt in all such cases. The notoriously +unfair employer will find his workmen drifting away, his working-force +reduced in number and quality at times of greatest need, and his evil +reputation going abroad among workmen. A better realization of this +fact has led many employers to pursue a farther-sighted policy that +fosters a better understanding and a kindlier feeling on both sides of +the labor-contract. + +Another effect of the growing size of business units is to give the +workers less personal acquaintance with each other. When they are +unorganized they have less unity, common opinion, and power than the +workers in the old-fashioned shop with its close personal acquaintance +and ready interchange of views. In the wilderness of a great modern +factory a worker may be unknown in name and interests to the man +touching elbows with him. Moreover, in America, differences in +nationality and in speech among immigrant workers often effectively +prevent a common feeling of their interests and assertion of them. +There is an analogy between these conditions and the political +conditions that early led simple democracies to give way to +representative governments. So long as a community is small and men +know each other personally, popular government may exist without +complex machinery, but when numbers become larger, public opinion can +be concentrated and made effective only by delegating the functions to +elected representatives. + +§ 3. #Functions of labor organizations.# Out of these conditions have +grown the various kinds of labor organizations. Their first object +is to maintain and increase wages. Closely connected with this is +the remedying of various abuses in respect to methods of payment, +measurement of the output, and conditions of work. Almost coördinate +with the aim of higher wages of recent years has been that of the +shorter work day. Labor leaders have frequently asserted when the two +demands have been made together, that a reduction of hours is the more +desirable. Better conditions of safety and sanitation in their work +were not the first thought of laborers when they organized. As a +result of habit and ignorance (widely prevalent at that time) they +were remarkably unconcerned about this matter. Reforms in this +direction at the outset had to come largely from sympathetic +observers, the "philanthropists," often described as sentimentalists. +But the modern, more enlightened, labor movement has better ideals +and policies in respect to the safety, sanitation, and decency of the +working places. + +Labor organizations have also secondary objects of very great +importance. They are nearly always in some measure mutual-benefit +associations, and provide in varying degrees insurance against +accident, sickness, death, or lack of employment. All unions in a +measure serve their members as employment bureaus, and some make this +am important feature. Through trade-papers, correspondence, traveling +members, and in meetings, information is exchanged regarding +conditions of employment in various parts of the country. Labor +organizations by means of their discussions and through their special +periodicals are a strong educational force in matters political and +economic. The local labor organizations often come to be the center of +the social activities and interests of many of their members, and even +of all the members of their families. The organizations thus serve the +functions of social clubs, of literary societies, and of civic centers +for their members. + +§ 4. #Types of labor organizations.# Among the many organizations of +wage-earners three main types may be distinguished: the labor union, +the trade union, and the industrial union, tho often they are all +spoken of as trade unions without distinction. A labor union admits +all classes of wage-earners and even business and professional men +into the same local chapter. The "Knights of Labor" is the most +notable example that America has seen of this type. The national +organization was composed of local chapters, to membership in which +every one was eligible excepting bankers, lawyers, gamblers, and +saloon keepers. Organized as a single local chapter in 1869 it grew +very rapidly until it attained its maximum membership of 600,000 in +1886. From this point it rapidly declined in membership, and since +1900, altho its organization is still maintained, has been of very +little influence. + +A trade union is an organization of wage-earners in the same +handicraft or occupation. Unions exist among workers in all the old +distinctive handicrafts, such as the printers, stone cutters, cigar +makers, carpenters and in many other groups such as musicians and +retail clerks. The local chapters in many cases have been long united +in national unions (often international, including the United States +and Canada). + +An industrial union is one that seeks to unite all workers employed in +the same class of establishments regardless of their craft or the +kind of work they do. The most notable examples are the United Mine +Workers, the Brewery Workers, and the Industrial Workers of the World. + +In 1881 a number of national trade unions united for certain purposes, +to form the American Federation of Labor with a membership of about a +quarter million workers, which has steadily increased since that date. +The American Federation of Labor now includes also some important +unions of the industrial type. Several strong national trade unions +(the most important being the brotherhoods of railroad employees) are +not affiliated with the American Federation of Labor. + +§ 5. #Statistics of labor organization.# The ratio of organized +workers to the population is estimated (figures for 1910) to be +highest in the United Kingdom, being nearly 7 per cent; it is next +highest in the German Empire, being nearly 6 per cent; whereas, in the +United States, it is but 2.3 per cent. This difference is largely due +to the much greater relative importance of agriculture in the United +States. + +The total membership of trade unions in the United States and Canada +is estimated to have been in 1910 about 2,200,000, of which only +about 100,000 were in Canada. This was 5.5 per cent of all persons +(38,130,000) gainfully employed, or 6.8 per cent of male employees, +and 9 per cent of female employees. Organization was very weak (less +than 1 per cent) among the workers in a group of industries occupying +nearly one-half of all workers, including agriculture, the hand +trades, oil and natural gas, salt, and rubber factories. Organization +was not of large extent (1 to 10 per cent) in other groups of +industries occupying more than one fourth of all workers, including +those engaged in producing quarried stone, food stuffs, iron and +steel, metal, paper and pulp, stationary engineers, in public, +professional, and domestic service, and in clerical work. Organization +was of much greater strength, including 10 per cent or more of the +workers, in the remaining industries and occupations. + +If deduction be made of the employing and salaried classes, about +7.7 per cent of all persons occupied were organized. If, further, +deduction be made of agricultural, clerical, publicly employed, +commercial and domestic workers, about 16 per cent of the remaining +13,760,000 persons are organized (of women 3.7 per cent). Among the +occupations most highly organized are those of railway conductors (87 +per cent) and engineers (74 per cent). In the building trades about 16 +per cent are organized, of granite cutters 69 per cent, masons 39 per +cent, plasterers 32 per cent, carpenters 21 per cent, and painters 17 +per cent. Similar striking differences appear among the occupations in +the printing industry; of stereotypers 90 per cent are organized +and of compositors only 35 per cent. These figures point to inherent +differences in the conditions favoring organization. Even in the same +craft a high degree of organization may be found in the cities and +little or none in the smaller towns (e.g., in the case of the printing +and building trades in general).[3] + +§ 6. #Collective bargaining.# The fundamental policy of trade unions +is the substitution, for the individual wage bargain, of collective +bargaining between the delegated representatives of the working men +and the employer, or group of employers, or their representatives. +The wage-earners bargaining collectively may be those of a single +establishment, or of a group of establishments in the same locality, +or of a wider territory even national in extent. Accordingly, they are +represented in the negotiations by trade-union officials with +narrower or wider jurisdiction. Employers in some cases had tacit +understandings with each other before laborers were organized. But in +many cases the individual employer was at a marked disadvantage after +the organization of his employees. The result has been the rapid +spread of employers' organizations, so that in industries where +laborers are highly organized, two-sided collective bargaining has +become more and more usual. + +A large part of the effort of trade unions is directed toward ensuring +the use of collective bargaining. This is the purpose of many of +their demands, even of some that hardly appear to have any such +consideration. Collective bargaining practically necessitates the use +of "the standard rate," since only with reference to some standard +rate, a market price for labor, is it possible for a wage contract to +be made by labor officials for a group of men. The standard rate may +be a piece price or a time price, and in many cases the unions strive +to secure the latter as more convenient for their purposes. The +standard time rate usually is but a minimum and many of the more +skilful workers receive wages above the minimum. But the standard +minimum tends to become also the maximum in many cases, the more so +when the union has succeeded in enforcing a pretty high standard rate. + +§ 7. #Limitation of competition among workers#. In order that +the representatives of organized laborers may act effectively in +collective bargaining the first condition necessary is that a +large proportion, if not all, of the workers of the trade in the +establishments concerned shall be organized. A common sense of wrong +is one of the strongest motives to bring workers together, and +has prompted the origin of many a local chapter. Then constant and +strenuous efforts are made to bring workers into the organized ranks. +Experienced organizers knowing all the arts of persuasion devote their +whole time to this task, being paid regular salaries. When friendly +argument fails, threats may be used and sometimes personal violence. +The public opinion and class feeling fostered among members of an +organization in times of difficulties are analogous to the sense of +patriotism in the nation at large and at times may displace it in the +hearts of organized laborers as is seen in opposition to the militia +and to the maintenance of order in times of strikes. The most +effective of all peaceful methods if petty persecution rising at times +to social ostracism. The individual who declines to enter the union is +denounced as a traitor to his fellow workers and is made to feel their +scorn. The use of the union card to be carried by every member to show +whether he is in good standing is an effective way of enforcing these +measures. Finally, where all these measures fail, pressure may be +brought upon the employer to get him to force unwilling workers into +the union.[4] + +Further to give control over those working in a trade and to +reduce competition among workers, unions often limit the number of +apprentices and determine who shall have the privilege of learning the +trade. By a variety of regulations they limit the output and in many +cases (tho less frequently now) have opposed the use of labor-saving +machinery. Further to enforce these policies they seek to have each +special kind of work controlled by a special union. This gives rise +to disputes between rival unions and causes annoyance and loss to the +workers themselves, to the employers, and to the general public. + +§ 8. #Strikes in labor disputes.# A strike is a concerted stopping of +work by a group of employees to enforce a demand upon the employer. A +lockout is an employer's closing of his shop because of a disagreement +with his employees. The strike is, in its direct and indirect, +immediate and ultimate, effects the most important weapon of the +organized wage-earners in their relations with their employers. To +newly organized laborers the union appeals mainly as an instrument for +striking, for threatening the employer, or for making him suffer to +compel him to accede to their demands. The effectiveness of a +strike lies in the loss it threatens or occasions in the stopping of +machinery, the ruin of materials, the loss of custom, and the failure +to complete contracts that have been undertaken. + +The employers will often, to break a strike, pay to others for a time +more than the current rate of wages. The success of the strikers being +dependent on their ability to keep the employer from filling their +places, their energies are bent upon that end. The losses that strikes +cause to workers in stoppage of wages, to employers and investors in +destruction of plant and in suspension of profits, and to the public +in the interruption of business, aggregate an enormous sum. The direct +losses to employers and strikers in the 20 years between 1881 and 1900 +have been estimated to have been nearly $500,000,000, a large sum, but +amounting to less than 1 per cent of the wage-earners' incomes. It +is, however, impossible to estimate at all exactly losses that in many +cases are indirect and intangible. The strikers are concerned in each +case not with the balance of total losses and total gains to society +as a whole, but with the net gain that they expect to accrue in the +long run to themselves. Viewed in this way it is true that there are +various indirect benefits in strikes that are not easily calculable, +particularly the advances of wages made by employers to avoid strikes +which they know will otherwise occur. In regard to the wisdom of any +contemplated strike, opinion is always somewhat divided, as it is in +regard to the value of strikes in general. + +§ 9. #Frequency and causes of strikes#. Strikes were relatively +decreasing in number from 1880 to 1900, but from 1901 to 1905 the +annual average was more than twice as large as in the preceding +decade. On the whole, strikes have been more numerous in periods of +business prosperity when there was a better chance to get concessions +from the employers. But they occur also in the periods following +crises, when the workers seek to minimize cuts in wages and to prevent +the depression of working conditions. More broadly viewed, strikes +appear to accompany readjustments to dynamic conditions. As wages as +a rule rise more slowly than general prices,[5] it was to be expected +that the period since 1900, in which the general price level was +rising at the rate of about 3 per cent a year, should have been marked +by increasing resort to strikes. + +The immediate causes of strikes have been changing in relative +importance. In 1881, at the time of the very rapid organization of +unions, over 71 per cent of all strikes were directly connected +with wage demands (61 per cent for increase and 10 per cent against +reduction). But in 1905 the total for these causes was only 37 per +cent, whereas the proportion of strikes for reduction of hours nearly +doubled (from 3 to 5 per cent) and the proportion of those concerning +recognition of unions and union rules increased fivefold (from 6 to 31 +per cent). Ultimately nearly every demand of the laborers is +related to the question of wages; but these figures show that when +organization is new this relationship is more immediate, whereas +later more effort is directed toward securing the stronger strategic +position that comes with recognition of the union. + +§ 10. #Picketing and the boycott#. Picketing by strikers or their +friends is intercepting and accosting all persons approaching or +leaving the place of work, to inform them of conditions and to +dissuade them from working there. When peaceable means fail, often +there is recourse to violence both against the employer and his +property and against nonstriking workers. Indeed, many persons declare +that peaceable picketing is impossible, and it surely is difficult +to attain in view of the temptations of human nature under the +circumstances. + +Almost always connected with a strike is the practice of the boycott, +which is a combination of wage-earners to cut off an employer (or +group of employers) from business dealings. The boycott is found +in varying forms and degrees, broadly distinguished as simple and +compound-boycott. In simple boycott only persons directly interested +in the trade dispute refuse to deal with the boycotted person. The +question arises as to who are to be deemed directly interested, +whether it includes only the actual strikers in a particular +establishment, or whether it includes organized workers in sympathy +with them. The latter case is presented when an "unfair" list is +published in labor journals. It seems that only the former case is a +really simple boycott. The use of the simple boycott, the refusal of +a person, or even of a conspiring group of persons, to deal with a +person with whom they have an industrial dispute, appears to be a part +of the elementary rights of personal liberty. Beyond that point the +boycott is compound in varying degrees.[6] It is the compound form +which is usually referred to in discussion and in court decisions on +the subject. It is the compound boycott that has been described as "a +combination to harm one person by coercing others to harm him." The +compound boycott, as experience shows, has moral limits as well as +legal limits. It is doubtful whether the boycott can be extended at +all beyond the first degree of personal relations without becoming +antisocial, whether it is the weapon of organized workers or +of organized wealth. The endless-chain boycott, a measure of +excommunication without limit, pronounced against an offending +employer, non-union workers, and every one in any way befriending +them, is an effort to drag every one else into a dispute that is +primarily a private matter. + +§ 11. #Effects of organization upon general wages.# The crucial +economic problem in connection with trade unions is not as to their +methods (that being rather a political problem) but as to their effect +upon wages. There must be distinguished two questions: first, as to +their effect upon the general level of wages; and next, as to their +effect in raising the wages of the organized laborers alone. As to the +first, the thought has sometimes been expressed by sympathetic social +students outside of trade-union circles that but for the organization +of labor wages in America would be no higher than they were in 1850. +This seems to be assumed in much of the argument of labor leaders, +for they speak as if all wages, but for trade unions, would be at the +starvation level; and they credit everything above that level to the +work of the union.[7] This claim is peculiarly effective in America, +where wages are and always have been relatively high. But proof of the +claim is lacking. As we have seen, even now fewer than 1 in 16 of +all gainfully employed, and fewer than 1 in 12 of those working for +contractual wages are organized. On no principle of value could +the mere organization of one-twelfth of the wage-earners, without +permanently withdrawing them from the labor market, explain the +relatively high wages of the other eleven-twelfths. In many lines +where labor is not organized, as in teaching, clerical, professional, +domestic, and agricultural services, wages have risen as much or even +more than in most of the organized trades. The underlying economic +forces determining the general level of labor-incomes in a country +are much more fundamental in nature than labor unions or protective +tariffs.[8] The trade-union authority already cited seems in another +passage to admit a view not essentially unlike that just expressed +when he says: "Capital is increasing faster than population.... It +seems therefore merely in obedience to natural laws that wages should +rise." + +The only reasons ever suggested for thinking that the organization of +one-twelfth (or any larger proportion of the wage-earners) could in +any general way raise the labor-incomes of those remaining unorganized +are: first, that organized labor sometimes leads the way in securing +favorable legislation; and, secondly, that if organized workers +get higher wages this sets a standard which it is easier for the +unorganized then to attain. Both of these suggestions may have +some little validity in special cases, affecting slightly a small +proportion of the unorganized workers, but neither touches fundamental +causes of general high wages. Whereas, it is clear that when the +unorganized laborers constitute the main body of consumers for the +products of organized labor (and this unquestionably is in large +measure the case) any increase in wages that can be secured through +organization by a portion of the workers must, in part, be subtracted +from the "real" incomes of the unorganized workers. The employer is +middleman, not to a great degree the ultimate consumer of labor.[9] +Some part, it is true, of the higher wage might be taken from profits +or from wealth-incomes, but this would still leave the unorganized +workers the losers. + +§ 12. #Competitive aspect of organization and particular wages.# +A different question is presented as regards the influence of +organization upon particular wages, and primarily upon the wages of +organized labor. The trade-union authority before cited says, "Where +there are no unions wages should be lower. This is exactly the case." +And he quotes: "Wherever we find union principles ignored, a low rate +of wages prevails and the reverse where organization is perfect." But +he later explains in part this difference: "The union men are the best +workmen and often employers pay a man more than union wages. This is +not surprising as no man can be a union carpenter unless he be in good +health, have worked a certain number of years at his trade, be a good +workman, of steady habits and good moral character." If this be true, +as doubtless it is to some degree in many trades and places, it is +in accordance with competitive principles that, as the elite of the +trade, the organized laborers should get higher wages than those +outside the unions. Moreover, the unions exist mainly in the more +populous places where costs of living as well as wages range higher +than in the small towns and in the rural districts. A comparison +merely of wages in money in such cases is misleading as to the +conditions of real income. Further, a higher standard of output +prevails in the cities where organization is greatest, and older men +and the less efficient that are unable to "keep up the pace" drift +away into unorganized shops or to villages where no standard union +rate is in force. So far as unions help to develop the intelligence +and promote the sobriety and efficiency of their members, they are +a positive economic force making for higher wages. The book before +quoted expresses, somewhat vaguely, an opinion in accord with these +facts when it says: "It is an error to think that the trade union +seeks to determine the rate of wages. It cannot do that. It can do no +more than affect them." And so, with organization as well as without, +the wages of individuals and of classes of laborers are determined by +the general principles of price as applied to their services. Where +neither the employer has a monopoly in his business nor the organized +laborers have a monopoly of the labor supply, there is two-sided +competition in the labor bargain, and organization may help to raise +particular wages inasmuch as it acts in the competitive ways above +mentioned and as it helps to restore to the laborers a truer equality +of competition. + +§ 13. #Monopolistic aspect of organization and particular wages.# The +action of organized labor is not, however, limited to the competitive +field, above discussed. Wages in particular industries may, by +the action of trade unions be raised and maintained above a true +competitive rate. This of course can be done only in accordance +with the principles of the service-value to the consumer and of +service-price in the employment-market. The supply of labor is in a +variety of ways artificially limited by the efforts of the unions. It +may be done temporarily by striking when a failure to fill orders will +cause the employer exceptional loss. Violence in strikes and boycotts +is often the desperate attempt to create and assert a measure of +monopoly power where of itself it does not exist, i.e., where other +workers stand ready to take the jobs at the prevailing rates of wages. +Monopoly is created if apprentices are limited to fewer than in the +long run would be attracted into the trade by the prevailing wages. +It is created if the unions artificially limit output to less than +is consistent with the health of the worker. Monopoly is created if +unions strong enough to keep "scabs" from getting work, fix their dues +high or put other obstacles in the way of increasing the membership. +Probably the most striking cases of high wages for organized labor are +of this kind. The element of labor-monopoly evidently is mingled in +all degrees from the slightest to a very great amount, in particular +economic situations. + +§ 14. #Open vs. closed shop.# The question of labor monopoly is +involved in the very crucial question of the closed vs. the open shop. +A closed shop (or union shop) is a shop in which no non-union men may +be employed, even at union wages. Its existence is evidence that the +union is strong enough to compel the employer to act on this principle +and thus virtually to force all his employees into the union. The +refusal of a demand for the closed shop is often the ground for a +strike. Where this is so unions usually assert that the closed shop +is essential to the existence of the union. If union and non-union men +work side by side there are many ways in which the employer is able +to discriminate so as gradually to break down the union. If business +slackens, the union man may be the first to be discharged; if any +preference is given it is to the non-union man. While this may be +true, it would seem, on the other hand, that an unmodified closed +shop, with the conditions of membership in the control of the union, +creates a distinct monopoly of labor leaving the employer helpless in +any wage dispute and enabling the union to enforce its every demand +regardless of the competitive conditions of the labor-market for that +class of services. + +§ 15. #Political and economic considerations.# The question here takes +on a broad aspect, Is the closed shop, and are the other policies of +trade unions, morally right; and ought they to be legally sanctioned? +The answer to such questions is not for the economist alone to give. +The questions involve other than economic considerations. They involve +moral and political considerations--not merely existing formal law, +but the fundamental issue of personal liberty and of interference with +the liberty of some citizens by another group acting without political +authority. For example, if a workman is unable to earn the standard +rate[10] and is not permitted to take less, he is forced to move to a +place where there is no union, or is forced out of the trade entirely. +In the latter case he probably is compelled to take a lower wage +than he could get in his regular occupation. Likewise, this change +artificially increases the pressure of competition and reduces the +wages of others in the occupation to which he turns. So in the case of +persons prevented from becoming apprentices in a trade, or kept from +taking work by threats, or by the dread of boycott, or by the fear of +violence, in any degree however slight, there is present an element of +personal coercion by the organized laborers. This is the price others +are made to pay for a favorable effect on the wages of the organized +laborers. Now the strictly economic question concerns merely the part +as to the effects upon wages, and the economist (as such) is going +outside of his special field when he pronounces on the moral rectitude +(and the desirability in law) of such acts and policies. One who fully +shares the feelings of the organized workers will believe that the +winning of a strike or the general improvement of the strikers' +condition is so important that it outweighs the evils to other +individuals and to society as a whole. Indeed, to one in that state +of mind the evils appear very small or nonexistent. The economist can +only issue the warning that the commonest illusion he encounters +is the belief of each class--commercial, banking, manufacturing, +wage-earning--that what is for its particular interest is, in a +peculiar manner, for the general interest, so much as to justify +favoring legislation or special exemption from the general law, or +even sheer lawlessness. + +§ 16. #The public's view of unions.# We may, however, observe the view +of the onlooker striving to be impartial. The attitude of the public +in labor disputes, and particularly in regard to the closed shop, is a +vacillating one. The general public sympathizes in large measure with +the unions in their efforts up to a more or less uncertain point; +but the public does not like to see organized labor with the power to +dictate terms absolutely to the employers any more than it likes to +see employers crush the union. The unions are effective in varying +degrees in strengthening the bargaining power of the workers, and +accordingly the results vary not merely in degree but in kind. The +public wishes to see "fair play," and up to a certain point the +union is a device to get fair play. In truth, what is in the public's +thought, somewhat vaguely, is approval of unions so far as they go +to establish a real equality in competitive bargaining with the +employers, but disapproval where the power of the union gets greater +and becomes monopolistic. It is at this point that organized labor +loses the sympathy of most of "the general public" outside of unions. +When the union tries to force a higher wage than the market will +warrant, when it strives not to establish but to defeat competition, +the public condemns. It sees, tho not quite clearly, that such action +makes an unstable equilibrium of wages which tempts to constant +friction and discord with employers and with unorganized laborers. It +sees also that if the unions force a wage higher than a fair and open +market affords, this is rarely done at the expense of the employer; +that in the long run it is at the expense of the purchasing public +itself, including the unprivileged workmen.[11] + +In accordance with these facts and opinions there has developed, at +least in one respect, a pretty definite conviction on the part of the +public regarding the closed shop, namely: the closed shop should go +only with the open union. A union under the closed shop policy is +exercising a quasi-public function, that of controlling the industrial +action of private citizens against their will. The union therefore, in +this view, must cease to be a purely private, voluntary organization, +and become in some respects subject to public regulations as to +its internal rules and administration. This view, however, is very +unacceptable to the leaders of organized labor in America, and there +the question now stands. + +§ 17. #Future role of organization#. In the light of the principles of +wages it appears that organization most easily gains results, and +the most stable results, when wages are below or near the competitive +rate. An earnest effort on the part of the workers is necessary for +them to get the share that true competition would accord them, but +the attempt to force wages beyond that point must be the occasion +of increasing friction. With so modest an ideal however, as the true +competitive wage, organized laborers and their leaders cannot be +expected always to be content. + +Aside from its effects upon the wage-bargain, unionism finds +its greatest justification is in its unspectacular fraternal, +mutual-benefit, and educational functions. The chief forces favorable +in the long run to wages that can be affected by organization are +domestic peace, order, and security to wealth; honesty and good faith +between man and master, in law-maker and in judge; efficiency and +intelligence of the workers; and far-sighted social legislation. Some +of these contribute to greater productiveness, others to a fairer +distribution. In all these ways organized laborers have made valuable +contributions, unfortunately neutralized in many cases by a narrow +class outlook. Organized labor is here to stay for a long time to +come, and as the elite of the wage-earning class it should, and +probably will, be an increasing force for political betterment and for +social welfare in the republic. + + +[Footnote 1: See ch. 19, secs. 1-3.] + +[Footnote 2: See Vol. I, p. 459.] + +[Footnote 3: See _Quarterly Journal of Economics_, May, 1916, article +by L. Wolman.] + +[Footnote 4: See below, sec. 14, on the closed shop.] + +[Footnote 5: See Vol I, pp. 223-224, and above, ch. 6, sec. 12 and ch. +10, sec. 7.] + +[Footnote 6: The "unfair list" is usually given as a form distinct +from either the simple or compound forms. The "fair list" published +either by labor journals or by a consumer's league is not declared to +be a boycott.] + +[Footnote 7: In a book by an English trade-unionist, Trant, reprinted +and circulated by the American Federation of Labor as representing its +theory and claims, all the advances that have been made in wages are +said to be due to the trade-unions.] + +[Footnote 8: See Vol. I, pp. 227, 439, 466, 467, 504-507; and above, +ch. 14, sec. 8.] + +[Footnote 9: See Vol. I, pp. 217, 222-223, 352, 356.] + +[Footnote 10: See above, sec 12.] + +[Footnote 11: We are expressing here the general opinion, not +pronouncing a final justification of competition as a rule of conduct. +On this something will be said later, in ch. 31.] + + + + +CHAPTER 21 + +PUBLIC REGULATION OF HOURS AND WAGES + + § 1. Spread of the shorter working day. § 2. The shorter day and + the lump of labor notion. § 3. Fewer hours and greater efficiency. § 4. + Child-labor. § 5. Child-labor legislation. § 6. Limitation of the working + day for women. § 7. Limitation of the working day for men. § 8. + Broader aspects of tins legislation. § 9. Plan of the minimum wage. + § 10. Some problems of the minimum wage. § 11. Mediation and voluntary + arbitration. § 12. Compulsory arbitration. § 13. Organized labor's + attitude, toward labor legislation. § 14. Organized labor's opposition to + compulsory arbitration. § 15. The public and labor legislation. §16. + The public and compulsory arbitration. + + +§ 1. #Spread of the shorter working day.# Since about 1880 a shorter +working day has been one of the prime objects of organized labor in +America. Notable progress was early made in some trades, reducing +hours from 11 to 10, or from 10 to 9, and in a few cases from 9 to 8. +In the building trades in the cities, especially, the eight-hour day +has come to be well nigh the rule. In 1912 it was estimated[1] that +1,847,000 wage earners were working in the United States on the +eight-hour basis; of these 475,000 were public employees. A large +proportion of the remainder were women and children whose hours were +limited by law, or were men working in the same establishments with +them. Since that date the eight-hour day has been more widely adopted +both through private action in many establishments and by legislation. +The year 1915 witnessed an especially rapid spread of the eight-hour +day. + +§ 2. #The shorter day and the lump of labor notion.# The shorter +working day is advocated by most workers in the belief that it will +result not in less pay per day, but in even greater pay than the +longer day, even if the output should be decreased. This view is +connected with the lump of labor notion.[2] It assumes that men will +work no faster in a shorter day, and that there is so much work to be +done regardless of the rate of wages; and concludes that the shorter +day will reduce the amount of labor for sale and cause wages to rise. +To the extent, however, that laborers, as consumers, mutually buy each +other's labor, evidently this loss due to curtailing production must +fall upon the laborers as a class. The workers nearly always call for +the same daily pay for a shorter day, which means a higher wage per +hour. If wages per hour increase less than enough to make up for the +fewer hours,[3] the purchasing power of the workers must be reduced. +If the output per hour is increased proportionally to the pay per +hour, the existing wages equilibrium would not be disturbed. But if +the output increases not at all or in less than the proportion of +the increase in pay, there is an inevitable disturbance of the wage +equilibrium. In a competitive industry this would compel a speedy +readjustment of wages downward. If a certain group, or large number, +of workers were to begin turning out only 80 per cent as large a +product as they did before while getting the same money wage, the +costs per unit would be thereby increased. Prices must rise or many of +the establishments must close, and then prices would rise as a result. +This must throw some of the workmen out of employment and create a +new bargaining situation for wages. If the general eight-hour day were +applied to every industry and to all wage workers at once, then +all workers and all employers in the industry would be in a like +situation. But at once there must occur changes of consumers' +choices in a great number of ways. If there are one fifth fewer goods +evidently at least one fifth of the consumers must go without. This +would largely be the wage workers. The things of which wage labor +makes up a large part of the costs will rise in price relative to +the things of which self-employed labor and of which materials +and machinery make up a relatively larger part. This must compel a +reduction of the demand for the products of wage labor relative +to other things, and be reflected to labor in a lower wage. This +reduction would not necessarily be just in proportion to the reduced +output (that is, say, 20 per cent if from 10 to 8 hours, or 11 per +cent, if from 9 to 8 hours). It might even be more, but probably would +be somewhat less. In any case, both the money wages and the real wages +of laborers, either in the particular trade or generally, must be +reduced by a general reduction of hours that results in a decreased +output. In such cases, even when the workmen by a strike or general +movement secured the same wage scale for a day of fewer hours (a +higher wage per hour), they would be unable to hold it excepting where +they had monopolistic control of the trade. + +In a period of rising prices due to an increasing supply of gold, the +readjustment of wages (per hour) away from an artificially high level +down to a competitive rate goes steadily on. Even when money wages +remain the same their purchasing power declines at such times, and +this serves soon to bring the high money wages into accord with the +lower value of the services.[4] + +§ 3. #Fewer hours and greater efficiency.# Quite contrary to the +foregoing view is the claim that in the shorter day the rate of work +is so increased that the output is at least as large as in the longer +day, or even larger. A faster working pace is possible with a shorter +day, particularly in those operations calling for physical or mental +dexterity. This view is less attractive to the workers than the +preceding one, but is more acceptable to the employers and to the +public. The change undoubtedly has resulted in many cases in the +manner indicated, and could be made to result so in many other cases +by applying the methods of scientific management. But it is a change +which cannot be repeated indefinitely and under all conditions with +like favorable results. Whether in any particular case it can be, +depends in part on the length of the working day at the start. Such an +increase in output might occur in a change from exhausting hours, as +from 12 to 10, and again from 10 to 9, and yet not be possible in a +change from 9 to 8. Moreover, the speeding up of the workers beyond +a certain point may have had physiological effects outweighing the +benefit from shorter hours. It is now said that with the increase of +automatic machinery there are more and more workmen who much of the +time have merely to watch the machine-tool run, and occasionally +adjust the material. There has, however, been collected a notable +body of evidence to show that, in many industries and in different +establishments using much machinery, a reduction of hours to a number +as few as eight has been followed by the increase of the output per +worker, or by improvement in the quality of work, or by improvement +in the management, resulting in a reduction of the cost of production. +This is often sufficient, or more than sufficient, to compensate for +the shorter time. Wages have remained as high as, or higher than, +before, and employment has been more regular. So far as this result +is due to the individual worker, it is explained by the same evidence +referred to below[5] as bearing upon the health of the worker. +This evidence tends to prove that with longer periods of rest and +recreation the worker lives in a physical and mental condition fitting +him far better for his work, and for continuing his working life. + +§ 5. #Child-labor.# All the foregoing arguments are weighed in terms +of private incomes and of the value of the products, whereas the main +considerations that have of late been influencing legislation and +judicial decision in favor of shorter hours have been those of public +welfare. The legal limitation of working hours is being treated +primarily as a health measure, into the judgment of which is more and +more entering a broader conception of the happiness, morality, and +opportunities for good citizenship for the worker and his family. + +In agricultural conditions, such as have prevailed generally in +America, there is little need of limiting the hours of work and the +age at which children may begin to work. The barefoot boy trudging +over clover fields to carry water to the harvesters may be the +happier, healthier, and better for his work. Child-labor in +agriculture has never become a social "problem" so long as the +children work with their own parents at their own homes; but the labor +of children for wages, especially in gangs on large farms (as in +beet cultivation and cranberry picking) or in canning factories, +has exhibited evils as pronounced as any in urban manufacturing +conditions. + +The evil of forcing children into factories was early recognized. +The most obvious evils of child-labor are neglect of the child's +schooling; destruction of home life; overwork, overstrain, and loss of +sleep, with resulting injury to health; unusual danger of industrial +accidents; and exposure to demoralizing conditions. The usual +assumption that the worker is able to contract regarding the +conditions of labor on terms of equality with the employer is most +palpably false in the case of children. The child, subject to the +commands of his parents and guardians, is not a free agent. Lazy +fathers are tempted to support themselves in idleness on the wages +of their young children. Often poverty leads the parents to rob their +children of health, of schooling, and of the joys of childhood. The +competition of child-labor also depresses the wages of adults, and +thus the evil grows. + + +§ 5. #Child-labor legislation.# The limitation of hours was first +applied to children working in English factories early in the +nineteenth century and thence has extended throughout the world, +tardily following the spread of the factory system. The first American +law of the kind was in Massachusetts, in 1842, limiting to 10 hours +the labor of children under twelve years of age in manufacturing +establishments. All the earlier state laws established low minimums of +age and high maximums of hours, and were poorly enforced for lack of +adequate administrative machinery, this in turn being the result of +lack of active public interest. In all these respects many states +gradually improved their child-labor laws in the latter part of +the last century, and much more rapidly since 1903. Now the maximum +working day for children in about one half of the states is 8 hours, +in one quarter is 9 hours, and in one quarter is 10 hours (and in +a few southern states, 11 hours). Night work by children is very +generally forbidden (in about forty states). During the same time the +minimum age has been pretty generally raised to fourteen years for +factory work, with higher ages (sixteen, eighteen, or even twenty-one) +in some states for certain occupations dangerous to health or morals. +In addition to these general limitations, special provision is made +for individual examinations to determine whether the child is mentally +and physically fit to work and has met the requirements of the +compulsory education laws of the state. + +The most important child-labor legislation in recent years was the +enactment of the long debated national child-labor law (passed +in August, 1916). This prohibits the interstate shipment of goods +produced in factories wherein any child has, within thirty days, been +employed under unfavorable conditions as to hours and time of work as +specified in the act. The passage of this act was the culmination of +years of efforts in and out of Congress. + +Child-labor legislation viewed as a merely negative policy is not of +great moment. Its real significance is to be judged only in connection +with the broader social policy of protecting and developing all of +the children of the nation to be healthy, intelligent, moral, and +efficient citizens. Children growing into blighted and ignorant +manhood and womanhood are threats to society. + +§ 6. #Limitations of the working day for women#. But little later than +the limitation of child-labor usually comes some legislation to limit +the hours and conditions of employment of women. The grounds of this +policy are that women likewise are less able than men to protect +themselves in the labor contract, that they are physically weak and +are peculiarly exposed to certain dangers to health, that as future +mothers they need protection for their own and the public welfare, and +that in the period of maternity the dangers are especially great. The +work of women in factories operates in some ways to depress the wages +of men, and it is harmful in its effects upon the home and family +life. At present five states limit the hours of women to 8 a day, +twelve to 9 a day, fifteen to 19 a day, four to 11 or less a day. A +number of states forbid the work of women in designated places of work +such as saloons, mines, or where constant standing is required. Only +as late as 1911, in America, has legislation, now in four states, +given maternity protection, as is now more fully provided in European +countries in connection with systems of health insurance. + +In all of the great industrial countries of Europe night work by +women is restricted (prohibited between 10 P.M. and 5 A.M. or yet more +narrowly limited); but legislation along this line is found in only +eight American states. + +§ 7. #Limitations of the working day for men#. The general assumption +made in law has been that the adult male worker is competent to judge +of the working conditions, hours of labor, and wages, and is capable +of protecting his own interests sufficiently by his power of refusal +to accept employment. The legislatures have, much more tardily than in +their legislation for children and for women, acted contrary to this +assumption, but, when this has been done, the courts in America +have vigorously asserted the general doctrine and denied the +constitutionality of the laws. However, some exceptions were made in +legislation, and, after much apparent hesitation and vacillation, were +allowed by, the courts to stand, and these have now grown in number +until they form an impressive total. + +These exceptions have come in various ways. There is first, the +eight-hour limitation in public employment, required in federal +employment in 1868, really effective since 1892, and now in force +likewise in about two thirds of the states. In almost the same +jurisdictions--national, state and municipal--eight hours is the legal +day on work done in private business for the governments. Work on +railroads and street railways, particularly in the direct operation of +trains, such as the work of dispatchers, signal men, and trainmen, +is subjected to a large variety of regulative measures, hours being +limited in some cases to 8, in others to 9, 10, 12, or 16, and in +a number of cases a specified minimum number of hours of rest is +required after the maximum hours of labor. These laws are primarily +for the protection of the public, but they afford a protection to the +employee much needed, as many well-authenticated cases of excessive +and exhausting hours demonstrate. + +The limitation of hours has very recently been extended to many +private businesses in which exceptional conditions exist affecting the +health of the workers or the safety of the public. This development +has occurred almost entirely since the United States Supreme Court in +1898 (Holden vs. Hardy) sustained a Utah statute limiting to eight +the hours of labor in underground mines. Now 8 hour laws in certain +specified cases are found applying to mines, smelters, tunnels, and a +variety of other kinds of work, and in a few cases the limit is 9, 10, +or 11 hours. + +§ 8. #Broader aspects of this legislation#. The subject took on a new +aspect when the legislature of Oregon, in 1913, declared broadly that +"no person shall be hired, nor permitted to work for wages, under +any conditions or terms, for longer hours or days of service than +is consistent with his health and physical well-being and ability to +promote the general welfare by his increasing usefulness as a healthy +and intelligent citizen," and fixed ten hours as the limit of work +consistent with such a measure of health and welfare, in work in any +mill, factory, or manufacturing establishment. This law was sustained +by the Supreme Court of that state and was carried on appeal to +the United States Supreme Court.[6] In support of the law there was +presented a voluminous brief giving a most impressive body of evidence +from scientific and from practical business sources, to show the many +evils, popularly unsuspected or underestimated, that result from long +hours even in industries of no exceptional hazards.[7] Physiological +and psychological tests demonstrate that the fatigue following more +than a moderate working period not only reduces immediate efficiency, +but so poisons the system that greater liability to accident, disease, +intemperance, immorality, and premature decay, results. + +Two main purposes appear somewhat intermingled in this legislation +in limitation of hours. The first purpose is to protect the public +directly where the safety of others is dependent on the health and +efficiency of the worker. The second purpose is to protect directly +the worker's health and welfare, that policy being recognized to be +in the long run the best likewise for the public welfare. In legal +reasoning it is being recognized that the individual wage-worker, even +the adult male, is not in a position to judge the number of hours he +ought, for his own good, to work, and is unable to fix the length of +his own working day. As a matter of economic theory, the usance of a +child, a woman, or a man, is merely that kind and amount of +service that can be given out by each without repressing the normal +possibilities of growth, reducing the normal health and vigor, or +shortening the normal period of healthy productive human existence.[8] +It is becoming a general social policy to prevent the abnormal strains +of industry that cause the unnatural deterioration of the human factor +in industry. A wage-worker may be permitted to sell his daily _net_ +fund of working power--his usance--but not his life. + +§ 9. #Plan of the minimum wage.# Even more recent than the legislative +regulation of hours downward is the attempt to regulate wages upward +in the case of certain low-paid wage-workers. The modern[9] movement +for the minimum wage began in Victoria in 1896, and it soon extended +to nearly all the other Australasian states. Great Britain applied the +plan in 1910 to industries in which wages were exceptionally low. The +plan was first adopted in the United States by Massachusetts in the +year 1912, tho in an emasculated form, and spread so rapidly that at +the end of 1915 it was found in at least 11 states. Minimum wage +laws usually lay down "a living wage" as the standard to be used, +and either prescribe a flat rate of wages, or, more often, leave the +decision in each case to the wage commission established to administer +the law. + +Generous sympathies have guided this movement of which much has +been hoped and which, on the other hand, has always had its adverse +critics. The most that can be claimed for it by its friends after more +than twenty years of experience, is that the "dire predictions" have +not been verified. In truth it would seem that the plan as yet has not +been tried on a scale that could yield very large fruits either +for good or for evil. The persons whom it is sought to aid are only +selected groups of the lowest paid workers, generally limited to +minors and young women, who in many cases are those of immigrant +families in urban districts. A large volume of discussion on this +subject has developed, mostly of an _a priori_ nature, of which we may +here touch only a few of the salient points. + +At first glance the principles involved in the legislation limiting +hours and those in minimum wage legislation may seem to be the same. +But an important difference soon appears. In the former case the evil +is that of a too long working period, injurious to health, and this +can be reached directly and stopped by an efficiently administered +law. But in the latter case the real evil is industrial weakness and +incapacity such that the workers are unable to command "a living wage" +in a competitive market. A minimum wage law, by itself, neither cures +the industrial incapacity nor ensures employment to the industrially +weak at any wage. The law does not attempt to compel employers to +employ at the legal minimum wage every one who wishes to work; it +merely declares that the employer shall _not_ employ any one whom, in +his employ, he finds to be not worth that high a wage. + +§ 10. #Some problems of the minimum wage#. Unless the demand for a +particular kind of service is absolutely inelastic (a rare if not +impossible situation in a large market), there must be fewer jobs +for the less capable workers at high than at low wages, other prices +remaining the same. Further, some of the less capable workers must be +crowded out of such jobs as remain; for an artificially higher wage +attracts into an occupation some from other occupations before paid +more highly. It seems to be admitted by the friends of minimum wage +legislation that this result is logically to be expected and that to +some degree it appears. Of course it is never possible to tell to just +what extent workers have been and are being excluded in this way from +any particular establishment or occupation. Forbidden to earn what +they can, the poorer workers must become dependent on charity. It +may be said, and perhaps truly: better this than underpaid labor +destructive to the health of the workers and evil in its competitive +effects upon other wage workers. + +In most discussions of the wages of women there is a ready confusion +of sympathetic ideals of what one would like to see with the cold +facts as they are. Women's services (especially those of young women) +have increasingly of late been coming upon the labor market in such +a way as to cause abnormal congestion in a few occupations. Employers +have not caused low wages in these cases. Partly these occupations +are the clean, light, and agreeable ones, partly they have a relative +social glamour, largely they can be followed for a few years near the +home of the worker, nearly always they may be undertaken with brief +training and little skill. Investigation has shown that at least +eighty per cent of this group of girl workers live at home. A wage +that is amply a "living wage" when used as a pro-rata contribution +to an American family income is frequently insufficient for the girl +living "independently." Such a girl is, under the conditions, unable +to earn a living in her chosen occupation, and it may be better to +recognize that fact and to deal with such individual cases as appear +among the one fifth of all girls employed. + +The one unquestioned service of the minimum wage law is that of +diagnosing the evil of low wages rather than in remedying it. +The minimum wage law brings to light the industrial incapacity of +particular individuals to earn a living wage. The direct remedy is to +abolish the incapable workers or their incapacity by such methods +as regulating foreign or cityward immigration, custodial care of the +physically, mentally, and morally weak, vocational guidance, and +more effective measures of industrial education. Alongside of the +abnormally low paid occupations or elsewhere in the industrial +organization are other occupations in which with, or often +even without, special training, the sweated workers could get, +competitively, more than the minimum wage, if they could, or would, +qualify for the work. + +§ 11. #Mediation and voluntary arbitration#. The labor controversies +in which the public has the largest interest as a third party[10] +are those which result or may result in strikes. The public interest +becomes acute when a strike results in interference with the +individual freedom of other workers and of nonparticipants, when it +causes a blocking of the highways and disturbance of the peace, and +when it prevents the regular production and transportation of the +commodities which the public consumes. The public, therefore, has +steadily become more interested in all methods and agencies designed +to conserve better relations between employers and wageworkers, and to +diminish or, if possible, to do away with strikes when individual and +collective bargaining between the two parties fail. + +_Mediation_, or conciliation, is the effort of a third party to get +the two parties to a trade dispute to come together to agree peaceably +upon a settlement. Mediation may be voluntarily undertaken in a +particular case by any citizen or by a public official, usually the +executive (mayor, governor, or President); or it may be by a regular +public state or national commission charged with this duty (as in some +17 states). + +_Arbitration_ is the decision, by a disinterested person (or +commission) to whom it is submitted, of the exact terms, after a +provisional settlement of a dispute. It is voluntary when the parties +agree in advance to accept the verdict, and compulsory when they are +compelled by law to submit to arbitration and abide by the verdict. + +Some provision either of voluntary private or of public agencies +to mediate between the parties in labor disputes and to facilitate +voluntary arbitration has been made of late in most communities of the +civilized world, including 32 of our states, and the nation as a +whole particularly in respect to disputes between railroads and train +operatives engaged in interstate commerce.[11] No one objects to +them, and they accomplish much good, but fail oftenest in the greater +emergencies because of the unwillingness of one or the other party +to submit the case, or because of lack of any power to enforce the +decisions. + +§ 12. #Compulsory arbitration#. The serious question in the subject of +arbitration concerns the introduction of the principle of coercion by +government, in compulsory arbitration. This, in principle, is pretty +radically different from voluntary arbitration, for as it denies to +the parties the right to settle their dispute by private agreement, +it becomes in effect the legal regulation of rates of wages and +conditions of work. In principle this was involved in the legal +regulation of wages in England from the fourteenth to the nineteenth +centuries. The plan is closely approached in the industrial courts +that are now provided in a number of European countries for a cheap +and expeditious settlement of small disputes regarding trade matters, +arising in the relations between employer and employees. The new +modern development began when New Zealand passed a compulsory +arbitration act in 1894, followed to some extent since by all the +other Australian states, largely through the action of the Labor +party. Through the operation of its act New Zealand came to be called +the "land without strikes," tho the description was inaccurate, +especially after 1907. The Canadian Industrial Disputes Act of 1907 is +an example that has had influence upon public opinion everywhere, and +has been followed to some extent in recent legislation in New Zealand, +America, and elsewhere. It involves the compulsory principle in a +limited degree, making it unlawful in public utilities and mines to +change the terms of employment without thirty days' notice, or to +strike or lock-out until after investigation and hearing before a +board to be nominated for the purpose. The Colorado Act of 1915 goes +even beyond the Canadian act in its scope. The plan seems destined to +have wider applications and a larger development in the not distant +future. Let us note the general attitude of the various interests +concerned. + +§ 13. #Organized labor's attitude toward labor legislation#. Labor +organizations hitherto have been in their legal nature almost entirely +private and voluntary. They are seldom incorporated and are rarely +even recognized in any way by legislatures and by courts, which deal +merely with the members as individuals.[12] Their private character, +combined with their limited membership as compared with the total +population, leaves them without the power to accomplish legally by +themselves the results which they desire in their own interest. Hence +they are tempted at times to usurp public authority over the field of +private rights in industry.[13] In other cases, when they have come +to the end of their unaided powers, they invoke the aid of the law to +accomplish their objects. But the appeal of organized labor to the law +is special and qualified, being confined to cases where the actions +of others are controlled to the advantage of the union, such as +regulating the work of women and children, controlling the acts of +employers in respect to construction of factories, and limiting the +length of trains. This does not imply a peculiarly selfish attitude +on the part of organized labor. Action together in any social group +always develops in men their loyalty and spirit of coöperation without +always making them more considerate to those outside of their group. +Indeed, often men acting through their chosen officials, private or +public, are more selfish collectively than they are individually. +The leaders of any group of men, whether of wage workers, merchants, +manufacturers, or political constituents, find it necessary to +show that the interest of their supporters rather than a broader +"sentimentality" is uppermost in their thought. And further, the +jealousy of any limitation of their power is as powerful a motive in +one group of men as in another. All are made of the same human clay. +But the stronger and more successful a labor organization is, the +more vigorously do its leaders resist any legislation that limits the +functions and field of action of the labor leaders, or that settles +labor troubles in a way that makes the voluntary labor organization +less necessary to the individual worker. Of course self-help, as a +spirit and as a policy, is a virtue, if it does not sacrifice the +rights of others. But if the facts above suggested are borne in mind +they will help to explain the otherwise often puzzling attitudes of +organized labor toward different measures of social legislation. + +§ 14. #Organized labor's opposition to compulsory arbitration.# +Organized labor in America has attained to a highly influential +position. On the whole it constitutes an "aristocracy of labor," +consisting largely of skilled workers that obtain a wage exceeding +that of unskilled workers to a degree not seen anywhere else in the +world. In this they have been favored by a combination of conditions +which it is not possible to describe briefly; suffice it here to say +that organization is itself not the whole explanation, but only +a small part of it. That organized labor, officially, is strongly +opposed to compulsory arbitration in America, is thus perhaps +sufficiently to be understood on the principle of "Let well enough +alone." When in August, 1916, a strike on the entire railroad system +was threatened by the four railroad brotherhoods, and some action was +proposed in the form of the Canadian act, the trade-union officials +issued a statement containing these words: "Since the abolition of +slavery no more effectual means has been devised for insuring the +bondage of the workingman than the passage of compulsory investigation +acts of the character of the Canadian Industrial Disputes Act." Within +less than a week the brotherhoods called off the strike after Congress +had passed an act giving the men immediately the eight-hour +day--a substantial part of what they had asked--and providing for +investigation, by a commission, of the effects of the rule. This is +compulsory upon the railroads but it is not compulsory upon the men to +accept these terms. + +§ 15. #The public and labor legislation.# It has come to be recognized +that in every serious labor dispute, especially in such as develop +into strikes, those concerned are not merely the two parties, +employers and employees, but a third party, the public, consisting of +every one else whose interests are not directly or indirectly bound up +with one of the other two parties. The line of demarcation is not easy +to draw exactly. An individual may be divided in sympathy, inclining +to the one party perhaps because of some personal friendships or class +loyalty or to the other party because of material investments, while +in the main having interests distinct from either. But wherever +the public is drawn in as a party, it includes far more persons +and embraces far larger interests than does either of the other two +parties or than do both of them together. The public becomes a party +primarily because it consists of the purchasers and consumers of the +products, who are deprived of the usual supply of goods, more or +less essential to their welfare or even to their existence. With the +increasing division of labor and complexity of industrial organization +more and more kinds of business have, in a greater and greater degree, +become "affected with a public interest." The public becomes an +unwilling party, therefore, in every serious labor controversy. + +In order that any kind of labor legislation shall be enacted, it is +necessary (so far as we have a government by public opinion) for a +majority of the public to be convinced that the conditions are such +as call for governmental interference. It becomes so convinced in +two broadly distinguishable classes of cases: one, when the masses of +unorganized workers are too weak to secure for themselves conditions +of work and wages consistent with health and morality; and the other, +when strong bodies of organized workers, in their attempts to win +their ends in an industrial dispute, exceed their private rights and +invade the public welfare. + +§ 16. #The public and compulsory arbitration#. Where the railways are +owned and operated by the state (as is now the case pretty generally +except in America and Great Britain) the question of the "right to +strike" arises from time to time, in critical forms. The logic of the +situation compels even those officials that are of the labor party or +are most favorable to labor, to maintain an uninterrupted service on +the public railways. The experiences of that nature in France and in +Australasia have been notable. Nowhere in the United States has the +principle of compulsory arbitration been adopted, but at the time of +the great anthracite strike, in 1902, public sentiment grew strong in +favor of it. As a result of the intolerable conditions in the mines of +Colorado was passed the compulsory investigation act of 1915 in that +state. In 1916 the threat of a general railroad strike brought from +many quarters strong expressions of condemnation in principle, of the +strike as a method of settlement of wage disputes on the railroads. +And in the end the organized laborers themselves accepted, apparently +with much satisfaction, a law involving the legal fixation of wages +and the principle of compulsion as applied to the employers. + + +[Footnote 1: By the Secretary of the American Federation of Labor.] + +[Footnote 2: See Vol. I, pp. 458-467.] + +[Footnote 3: For example, increase less than 25 per cent per hour in +changing from a 10 hour to an 8 hour day.] + +[Footnote 4: See above, ch. 6, sec. 12.] + +[Footnote 5: See especially, sec. 8.] + +[Footnote 6: At this writing the case, Bunting vs. the State of +Oregon, is still undecided.] + +[Footnote 7: Published as "The case for the shorter working day," by +the National Consumers' League, see especially pp. 621-892.] + +[Footnote 8: See Vol. I, pp. 135 and 197.] + +[Footnote 9: Much public regulation of wages occurred in Europe until +near the end of the eighteenth century. In England this was done +mainly by the justices of the peace and, in the main was directed +toward limiting the demands of the wage-workers.] + +[Footnote 10: See below, sec. 15.] + +[Footnote 11: By the act of 1888, the Erdman act of 1898, superseded +by the Newlands act of 1913, and supplemented by measures for +mediation by the Department of Labor.] + +[Footnote 12: The few exceptions to this statement are mostly recent; +such as the recognition of the unions in New Zealand in 1894 as +parties in the plan of compulsory arbitration, and in Great Britain +in 1909 as agencies through which unemployment insurance may be +administered.] + +[Footnote 13: As appeared in ch. 20.] + + + + +CHAPTER 22 + +OTHER PROTECTIVE LABOR AND SOCIAL LEGISLATION + + § 1. Evils of early factory conditions. § 2. Improvement of factory + conditions. § 3. Limitation of the wage contract. § 4. Usury laws. § 5. + Public inspection of standards and of foods. § 6. Charity, and control of + vice. § 7. City growth and the housing problem. § 8. Good housing + legislation. § 9. General grounds of this social legislation. § 10. + Training in the trades. § 11. Prevalence of unemployment. § 12. Evils of + unemployment. § 13. Definition of unemployment. § 14. Individual + maladjustments causing unemployment. § 15. Maladjustment of wages + causing unemployment. § 16. Individual maladjustment in finding jobs, + § 17. Public employment offices. § 18. Fluctuations of industry causing + unemployment. § 19. Remedies for seasonal fluctuations. § 20. Reducing + cyclical unemployment and its effects. + + +§ 1. #Evils of early factory conditions#. The time is but brief in +the life of nations since the main manufacturing processes, now mostly +conducted in great factories, were carried on in or near the homes +of the workers. This change has been reflected in the meaning of +"manufactures," which first meant literally goods made by hand but now +conveys the thought of goods made by machinery. The craftsmen worked +alone in their own homes or with the help of their wives and children. +If the master craftsmen had other helpers these were usually lodged +and fed in the homes, and were taught by the side of the masters' own +families. The old English law of master and servant was the labor law +of that time as, to some extent, it still is to-day in Great Britain +and America. The living and working conditions of the wage-workers +were in general the same as those of the master himself and of his own +family; and this was the best possible guarantee that the conditions +would be kept up to the best standards of that time. The same change +in industrial relations that led to the rise of the organized labor +movement[1] revealed new and often horrible neglect and evil in +and about the factories. They had been erected with no thought of +sanitation, safety, and decency for the workers. + +§ 2. #Improvement of factory conditions#. Legislation to remedy these +evils began in England a century ago, and the English code of factory +laws, regulating the construction and operation of factories and +providing for their inspection, has become voluminous. It has been +copied, and in some respects improved, by all of the great industrial +nations. This is true in America of the manufacturing states, tho the +agricultural states have still very few such regulations. As a result +of these measures, accompanying and stimulating an enlightenment +of the employers' self-interest, there has been a very remarkable +improvement in such matters in recent years. In many American +factories erected in the last quarter-century the conditions as to +lighting, heating, ventilation, stairways, fire-escapes, protection of +the workers against accidents, and lavatory and sanitary arrangements, +are better than the best conditions ever existing in domestic +manufactures. A somewhat corresponding improvement has taken place on +railroads, in mercantile establishments and, perhaps less, in mining. + +Factory legislation often has been opposed by employers because of the +expense it causes; but if the regulations apply to all factories, the +expense becomes a part of the cost of production and is shifted, like +the other expenses of production, to the general body of consumers, +of which the employers form only a small part. Much of the recent +progress in some establishments has, however, gone much beyond the +requirements of any existing laws. Many employers recognize that it is +costly and unprofitable to themselves to allow their workmen to be in +surroundings that reduce their vitality and efficiency, such as do the +conditions mentioned at the close of the preceding section. + +§ 3. #Limitation of the wage contract#. In general the law does +not attempt to interfere with the making, by individuals, of such +contracts as they choose to make. Its main function is to interpret +and enforce the contracts that are made. But there has been an +increasing group of exceptions to this general statement. It was +forbidden even by the English common law for wage-workers under +some conditions to sign away their right to claim damages in case +of accident, and many recent statutes have added more specific +limitations in this respect.[2] Legislatures and courts have been +particularly watchful of the interests of children, who are usually +deemed incapable of entering into contracts binding them to their +injury. Sailors, likewise, have been somewhat exceptionally treated, +because, journeying far from home, they are under the often despotic +control of their employers. The English courts may even change the +contract if the sailors have been coerced by their masters. + +Laws regulate the form, time, and methods of payment in manufactures +and mining. Companies sometimes keep stores and pay the workers in +mines and factories in goods instead of money. Such a store in the +hands of a philanthropic employer might easily be made, without +expense to himself, a great boon to his workmen, giving them the +benefits of consumers' coöperation. But the usual result is told +by the fact that such stores are often known as "truck stores" and +"pluck-me stores," and heartily disliked by the wage-workers. They +are most often found where some one large corporation dominates in +the community, as in a mining district, and the workers are in a very +dependent condition. If the higher prices demanded practically lower +real wages, it would seem that the worker had an immediate remedy in +his power to demand higher money-wages. Recognizing that this is for +the most part an illusion--for it is just in such places that the +conditions for free competition are least present--the law in many +states prohibits these stores. It regulates also the measuring of +work, fixing the size of screens and of cars used in coal-mining. +The law is especially favorable to the hand-laborer in regard to the +collection of his wages, requiring monthly or fortnightly or sometimes +weekly payments. Mechanics' liens give to workmen in the building +trades the first claim upon the products of their labor. + +§ 4. #Usury laws#. The limitation by law of the rate of interest that +may be charged affects many persons outside the ranks of wage-workers. +Usury laws are found almost universally in civilized lands. By usury +was formerly meant any payment for the loan of goods or money; now it +means only excessive payments. In former times moralists and lawmakers +were opposed to all usury or interest. The reason for this attitude +is not hard to find.[3] Most loans were made in times of distress. The +sources of loanable capital and the chances of profitable investment +were few. But for the last four centuries there has been on the +question of usury a gradual change of opinion, beginning in the +commercial centers and progressing most rapidly in the countries +with the most developed industry. A moderate rate of interest is now +everywhere permitted; but in all but a few communities the rate that +can be collected is limited by law, and penalties more or less severe +are imposed upon the usurious lender. + +Usury laws are practically evaded in a number of ways within the +letter of the law.[4] Many persons maintain that they do more harm +than good even to the borrower, whom they are designed to protect. In +a developed credit economy, where a regular money-market exists, they +are superfluous, to say the least, as most loans are made below the +legal rate. Such laws, however, have a partial justification. In a +small loan market they to some extent protect the weak borrower at the +moment of distress from the rapacity of the would-be usurer. There +has been great need to check the rapacity of the "loan-shark" in the +cities. Usury laws are fruits of the social conscience, a recognition +of the duty to protect the weaker citizen in the period of his +direst need. Their utility is diminishing; and at best they are only +negative in their action, preventing the needy borrower from borrowing +when his need is acute. In many European countries a more positive +remedy has been found in the provision of public pawn-shops. In +America a very little has yet been done in this way, and that mostly +by private philanthropy.[5] + +§ 5. #Public inspection of standards and of foods#. The determination +and testing of standards of weights and measures has long been a +function of government. English laws of the Middle Ages forbade +false measures and the sale of defective goods, and provided for the +inspection of markets in the cities. Usually, the self-interest of +the purchaser is the best means of ensuring the quality of goods; +but personal inspection by each buyer frequently is difficult and +time-consuming, requiring special and unusual knowledge of the +products and special costly testing apparatus. The states and the +nation undertake, in some cases, therefore, to set minimum standards +of quality, and to enforce them by governmental inspection. Government +coinage had its origin in this need. + +This policy is applied, however, mainly to commodities affecting +health; its application to art products, except to protect the +morality of the community, would be difficult or unwise. Recent +legislation in many lands and in all of the American states has +developed greatly the policy of insuring the purity or the safety of +many articles consumed in the home; notable is the Federal Pure Food +and Drug Act of 1906. The federal law levying a tax on oleomargarine, +however, was designed as protective legislation in the interest of the +farmer. Public regulation and inspection sometimes raises the price, +but the cost is small compared with the convenience and the benefits +resulting to the citizen. + +§ 6. #Charity, and control of vice#. The public relief of the +defective classes, insane, feeble-minded, and paupers, is a part +of the social protective policy. The public interest undoubtedly is +served by having these suffering classes systematically relieved, but +the extent and nature of the provision are questions ever in debate. +Still more debated is temperance legislation, both as to licensing and +as to prohibiting the liquor traffic. Nowhere is the manufacture and +sale of intoxicating liquor treated quite like the traffic in most +other goods, because it is recognized that the public interest is +affected in a different way. While it is beyond question that society +should protect itself and its innocent members against the drunkard, +it is more doubtful whether it owes to the man, for his sake, +protection against his own blunders. Not even the gods can save the +stupid. Temperance legislation is strongest in its social aspect. The +opponent of it usually champions the individualist view; its partizans +uphold, in varying degrees, the social view. + +Similar questions arise regarding lotteries, gambling, betting, and +horse-racing. When a man backs a worthless horse against the field, +money probably is transferred from the stupider to the shrewder party. +The philosopher may say that the sooner a prodigal and his money +are parted the better; but the broken gambler remains a burden and a +threat to honest society. Gambling, lotteries, and speculation cause +embezzlement, crime, unhappy homes, and wrecked lives.[6] Here are +to be found with difficulty the true boundaries between ethics and +expediency. A busybody despotism may protect the fool, but it thereby +helps to perpetuate and multiply his folly; yet if the fool is left +alone, he too often is a plague to the wise and the virtuous. + +§ 7. #City growth and the housing problem#. In 1790, of our population +only 3 per cent lived in cities of over eight thousand inhabitants; +in 1900 the percentage was 33. Then the largest city (Philadelphia) +numbered 50,000; in 1910 the largest city (New York) numbered +5,500,000; that is, 110 times as large 120 years later. The total +number of persons living in cities of 8000 had increased in more than +double that ratio. The rapid growth of cities brought with it many +evils. Considered in their more material aspects, nearly all of these +are summed up in the expression "the housing problem." + +As population grows denser in cities, land rises in value, yards and +gardens narrow and then disappear, light, sun, and air are shut out, +and cleanliness, decency, and home life become more difficult and, +for many, impossible. The residents gradually group themselves in +districts corresponding to their economic incomes, and the poorer +parts of the population become tenement dwellers in the neighborhood +of factories or become segregated in "slum" districts of unsanitary +and dilapidated houses. + +§ 8. #Good housing legislation.# Two policies are open under +these conditions. The one, always followed for a time, is to leave +individual self-interest unguided to solve the problem. If the tenant +agrees to rent a disease-breeding house, he is the first to suffer. +The interests of investors, it is said, will supply as good a house +as each tenant can pay for. The other policy now adopted is to set +a minimum standard of sanitation and comfort, in respect to plans, +lighting, materials, and proportion of lots to be covered, to which +standard all builders and owners must attain. Complying with the legal +requirements, they are left free to collect whatever rent they can +get. As one bad building may bring down the rent of all on the street, +such legislation may sometimes be in the interest of the body of +landowners as against the selfish desires of some individuals. Mainly, +however, the regulation is in the interest of the tenants and of +society as a whole, and against that of the landlords. The rents +from slum property are threatened, hence the strong opposition always +manifested against tenement-house legislation by some landlords, +architects, and contractors, who fight it as an interference with +their interests and as a confiscation of their property. It is not +unlikely that this policy has the effect of making rents too high for +some poorer tenants and driving them into the country. But this result +is not so undesirable. Moreover, the control and inspection of housing +conditions has in a few states been made statewide to reach even "the +country slums" which lately have been recognized to exist. Enlightened +sentiment to-day favors efforts to destroy the breeding-places of +disease, misery, and crime, no matter where they may be. + +Property owners are in many communities no longer left free to +determine height of buildings, appearance, or even the uses for which +houses may be erected in any district. American cities have still much +to learn in this regard from the example of many European cities which +have developed the art of city planning with wonderful results in +beauty of landscape and of architecture, in practical economy for +business, and in the health and welfare of the mass of the people. + +§ 9. #General grounds of this social legislation#. Why are not such +matters as we have been discussing safely left to individuals? It is +for the interest of every one that his back yard should not be a +place of noisome smells and disagreeable sights. But men are at times +strangely obstinate, selfish, and neglectful, and through one man's +fault a whole community may suffer. The refusal of one man to put +a sewer in front of his house may block the improvement of a whole +street. The heedlessness of one family may bring an epidemic upon an +entire city. There must be a plan, and by law the will of the majority +must be imposed upon the unsocial few. Where voluntary coöperation +fails, compulsory coöperation often is necessary. Thus health laws, +tax laws, and improvement laws regulate many of the acts of citizens, +limit the use of property, and compel men to better social courses +against their own wishes and judgments. + +All such laws as these are protective legislation, in that they depart +from the rule of free trade taken in its broadest sense. It does +not follow, however, that all these laws stand or fall together. The +justification of such measures is limited and relative, and therefore +of varying strength. All protective measures are alike in that +the free choice of one citizen is forbidden by law in the supposed +interest of some other citizen who is to be "protected." While the +purpose of the tariff is economic and political, in a large majority +of social laws the moral purpose is fundamental. It is the demand of +humanity that competition be placed upon a higher plane. Most social +legislation is to protect the weak from being forced into contracts, +or from living in conditions injurious to their welfare and happiness. +The justification for these limitations upon the right of private +property, upon the free choice of the individual, upon "free +competition," must be found in the social result secured. The best +test of social protective laws is their contribution to a higher +independence and to a freer competition on a higher, more worthy, and +more humane plane. + +§ 10. #Training in the trades#. Free elementary and secondary +education has become the all but unquestioned public policy in the +American commonwealths. The main motive for it has been the belief +that education in books is a necessity for good citizenship in a +republic. At the same time it has been thought that the training of +the school would help the child to earn a living. This appears to have +been true so long and so far as it was combined with, or supplemented +by, industrial training on the farm, in the home, and through +apprenticeship in the manual trades, as once was so prevalent. But +industrial conditions have changed. Most of the old-time education +of the schools has now little relation to the industrial life of the +great majority of the children, for few enter clerical or professional +callings. Germany was the first nation to recognize the new +educational need (in fact, never as urgent there as here) and to +provide for systematic and efficient training in all the industrial +arts. Since the beginning of the century the American public has been +awaking to the needs of the situation. We appear to be on the eve of +a great development in industrial training that will equip youth for +more efficient life in business and in the home, either in rural or in +urban conditions. + +§ 11. #Prevalence of unemployment.# Many other forms of social +legislation on behalf of the common man might well deserve, did +time and space permit, a larger measure of the economic student's +attention. However, excepting the subjects treated in the next two +chapters, the one remaining that is most important at this time is the +problem of unemployment. + +In every country and at all times where the wage system prevails, some +wage-workers, now more and now less, are "out of work" and unable to +get it. The proportion that they constitute of all workers cannot, +with the aid of any existing statistics, be exactly told, nor +can exact comparisons be made between different countries. Of +the magnitude, importance, and difficulty of this "problem of the +unemployed" there is, however, no question. It is greatest, speaking +generally, in manufacturing industries, tho, among the various kinds, +great differences in this respect appear. In 1900 the United States +census reported that of all persons in gainful occupations 2.5 per +cent had been unemployed more than half the year, 8.8 per cent from +three to six months, and 11 per cent one to three months, a total of +22.3 per cent more than one month.[7] In 1911 in a large group +(nearly all) of the manufacturing industries, the minimum number of +wage-earners employed (in January) was 13 per cent below the maximum +(in November). In some the difference was much greater (e.g., 24 +per cent in the iron industry, 63 per cent in the brick and tile +industry). Statistics of unemployment among trade-unions in New York +and Massachusetts indicate that the annual average of unemployment is +between 12 and 15 per cent. In some years upwards of 10 per cent +of all the working time of the wage-earning population is lost by +unemployment. + +§ 12. #Evils of unemployment.# A considerable part of the total in +an ordinary year may be set aside as "normal" in the sense that it is +allowed for in the wage-workers' plans;[8] and a part of it may even +be desirable. Yet there remains an inconceivable sum of suffering in +the lives of the workers, and an enormous economic waste of +productive energy not only for them but for the whole community. +The irregularity, and occasionally the excessive duration, of these +periods of unemployment too often makes unemployment not a beneficent +vacation (comparable to shorter hours), but a period of tragic +anxiety, demoralizing and unfitting for return to work. Irregular work +is generally recognized to be a greater cause of poverty and of actual +pauperism than is a low wage regularly received. + +§ 13. #Definition of unemployment.# Unemployment is the state of a +wage-worker for the time out of a job. But this definition needs to be +further explained and limited if it is to be useful in the discussion +of unemployment as an evil calling for social remedy. There must be +set aside the cases where the lack of a job is due to one rest day +in seven and to legal holidays, a total of nearly 65 days in most +American states; to the worker's being on strike; to temporary +sickness; finally, and more difficult to distinguish, that due to +continued disability, physical, mental, or moral, to do the work up to +an acceptable standard and to retain a job in the occupation chosen +by the applicant. The first cannot be called a problem, and the others +constitute the problems of strikes, of industrial sickness, and of the +unemployables, respectively. + +There still remain some unanswered questions such, for example, as: +whether in seasonal trades (e.g., teaching, or the building trades) +allowance should be made for normal vacations and for slack times, +not to be counted as unemployment; and whether lack of work at one's +principal occupation is ever or always unemployment when the person is +actually employed or can get work at some lower paid employment. The +more frequent answer to these questions is in the negative but this +in some cases is almost palpably absurd. Further study is necessary to +work out a generally acceptable concept of unemployment. + +§ 14. #Individual maladjustments causing unemployment.# The cause +or causes of the evil must be ascertained before a remedy can be +intelligently applied. It is pretty generally agreed that unemployment +is essentially a problem of maladjustment of the labor supply, and not +that of an absolutely and permanently redundant supply. That is, there +is, under static conditions, work for all to do at various rates of +wages that would bring about a value equilibrium of services.[9] The +maladjustments are either of an individual or of a general character. +Individual maladjustment may be due to a mistake in choosing an +occupation (e.g., through the vain ambition of one unfitted to be +an artist, actor, lawyer, or teacher); or to failure to acquire by +adequate training the necessary skill; or to loss of capacity by +accident, old age, or failure of mental or moral powers; in all +of which cases the problem verges upon or becomes that of the +unemployable. The "can't-works" and the "won't-works" must be divided +from the "want-works." If there is any remedy in such cases it must be +through re-education, personal reform, or change of occupation. + +Many persons look upon this type of cases as almost wholly accounting +for the problem of the unemployed. They are confirmed in this opinion +by the fact that the out-of-work group in any trade at any time is, on +the average, the least efficient group of workers in the trade. This +results from selection by the employers. This selection is due to +the _relative_ not to the _absolute_ efficiency or inefficiency of +workers, and must result whenever there are any discoverable economic +differences in the workers (all things considered) that are employed +at the same wage. This would continue even tho the poorest workers +were to raise their efficiency above that of the best men now +retained. "Personal inefficiency" may explain a chronic low wage or +absolute unemployability in a particular case, but it does not +explain intermittent lack of work for those willing and able to work. +Unemployment is a social problem and not merely an individual problem. + +§ 15. #Maladjustment of wages causing unemployment.# It seems +highly probable that the artificial maintenance of a wage above the +competitive, or value-equilibrium, rate of the individual, whether +this be done by sympathy, by custom, or by the action of trade unions, +must cause some maladjustment of workers in relation to available jobs +and thus increase unemployment. To doubt this is again to maintain +the absolute inelasticity of the demand for labor with changes in its +price.[10] If the true equilibrium wage in a certain industry were +$3.00 a day, then a wage of $4.00 a day would attract to the trade +more than enough workers to meet the demand for labor in normal +periods (unless entry to the trade is controlled by monopoly power), +and at length the losses from unemployment would balance the day-wages +received in excess of the rate obtaining elsewhere for that quality +of labor. Any artificial obstacles to change of occupation or to +concessions in the kind of work done and in the rate of wages must +operate to increase the maladjustment. So far as this maladjustment +occurs, it may cause unemployment neutralizing the apparent gain +of higher day-wages obtained by monopoly power. The very inertia of +wages, however, in new price situations[11] makes the wage-workers +resist more vigorously such a policy of wage concessions. Moreover, +the difficulty here indicated is more particularly one occurring +in static conditions and is to be distinguished from the dynamic +maladjustments next to be considered. + +§ 16. #Individual maladjustment in finding jobs.# Another kind of +individual maladjustment is the failure of the jobless man to connect +with the manless job. A certain amount of this maladjustment must +exist in the most stable industries and in the most settled industrial +conditions. Fluctuations occur in the market demand for the products +of various establishments, requiring the taking on or laying off of +some men. Fluctuations occur in the plans both of employers and of +wage-workers as a result of age, of removal, for reasons more or +less non-economic, of desire to change occupations, of variations in +health, and of countless other causes. The needs of the employer for +a worker, and of the worker for a job, are mutual. To a large degree +these various fluctuations are mutually compensatory, workers going +and coming, orders increasing here and decreasing there. Total jobs +and total workers capable of filling the jobs, are at any moment in +normal times equal quantities, if they can be brought together. But +almost everywhere is lacking a real labor-market. The substitutes +for it are largely ineffective: trade-union action, employers' +associations, "want ads," cards in shop windows, weary walks from door +to door, lines of waiting men outside of factories, private employment +agencies. At their best the private employment agencies perform +valuable services within limited fields, but they are uncoordinated, +and utterly inadequate to meet the chief need, and at their worst they +are the instruments of great abuses against the unemployed. + +§ 17. #Public employment offices.# Vigorous efforts to create local +"free employment offices," or "labor exchanges," began in a number +of countries about 1895. The movement gained headway in the next ten +years and has since steadily grown. In Germany the chief exchanges +have been founded and conducted by the municipalities (while others +are controlled by the unions and by groups of employers) and have +remained largely decentralized, tho coöperating to some extent through +voluntary state conferences of officials of the exchanges, and since +1915 required to report to the imperial statistical office. The total +number of exchanges in Germany (in 1915) was nearly 3000. The general +results have been remarkably good, altho not completely satisfactory. + +Every industrial country of Europe has done something of this kind. +Great Britain, however, after some experiments with a similar +local system, established in 1909 the first national system of +"labor-exchanges." In America the movement is developing in three +directions, through municipal, state, and federal offices. These are +united (since 1913) in an "American Association of Public Employment +Offices." In 1915 there were known to be 99 state and city employment +offices distributed through 30 states, besides federal offices +operated in 18 cities in connection with the Bureau of Immigration. +The clearly recognized task is now to coördinate these various +agencies into an efficient national system, eliminating partizan +politics and elevating the management of all branches to the plane +of professional service. Through these agencies can be operated an +industrial service, analogous in function to the weather bureau, and +reporting from day to day the pressure of demand and the prospects for +labor in the various parts of the country. The economic results of +a complete, exclusive, and efficient service of this kind would far +exceed its legitimate cost to the community. + +§ 18. #Fluctuations of industry causing unemployment.# Any one of the +maladjustments in employment thus far considered may occur at a +given moment, in static conditions of industry. But there are +also maladjustments resulting from more general industrial changes +throughout a period of time. The two main types of these are seasonal +and cyclical changes, the one occurring within a year, and the other +occurring within the longer period of the business cycle. At the +downward swing of these seasonal and cyclical changes the number of +would-be workers exceeds the number of jobs [12] and the resulting +unemployment is greatest when the minor and the major swings are both +downward, about midwinter in a period of industrial depression. Thus +in 1893-94, and to a lessening degree in 1894-95, 1895-96; in 1907-08, +and 1914-15. Of course employment offices alone are no remedy for the +exceptional difficulties of such times, and the individual, whether he +be an unfortunate "out-of-work" or a more fortunate well-wisher, feels +helpless in the face of the overwhelming burden of distress. Such +a situation is declared by the radical communists to spell the +bankruptcy of the wage-system; while the most conservative students +of the subject confess that this periodic chaos in the labor market is +the strongest indictment of, and involves the gravest dangers to, the +existing economic and social order. + +§ 19. #Remedies for seasonal fluctuations.# But of late there has been +a growing hope that an answer may be found to this economic riddle of +the Sphinx. A number of different measures are being experimentally +tested and applied. Many years of effort will be required for the +perfecting of these plans separately and collectively. Some of these +plans may be here indicated, however briefly. To remedy seasonal +fluctuations within the establishments output may be regularized by +taking orders in advance; by producing various products successively +in the same factory; by overcoming weather conditions as has been done +successfully in brick and tile making, ditch digging, and building +operations; by transferring workers from one department of an +establishment to another; by improving the employment departments so +as to build up a more stable force, thus reducing the great expense +of "hiring and firing" and the loss through training "green hands"; by +varying the length of the working day while keeping the same working +force throughout the year; by coöperating with other industries +to build up a regular working force and transferring it from one +establishment to another with seasonal changes. + +Of great aid in a number of these measures is a broader industrial +training for the workers, making them more able to change from one +occupation to another. For this purpose every period of unemployment +and of temporary shortening of the working day ought to be used as +a time for trade education, by the recently devised and successfully +applied "short-unit courses for wage-earners."[13] + +§ 20. #Reducing cyclical unemployment and its effects.# The +maladjustments due to the movement of the business cycle are even more +difficult to remedy completely, but are diminished by every measure +that helps to reduce the great financial fluctuations.[14] Further, +many communities have already begun to plan large public works more +systematically so that they may be carried on mainly when private +business is more slack. A comparatively small amount of such work +would serve as a gyroscope to preserve the balance of employment for +a large part of the less skilled workers. It has been estimated by +Bowley, an English statistician, that in the United Kingdom, it would +be necessary to set aside only 3 per cent of the annual expenditure +for public works to be used additionally in years of industrial +depression, in order to balance the wage loss at such times. This is a +well-nigh incredibly small proportion, hardly as great as that of the +weight of the gyroscope compared with the car or ship to which it is +applied. It is hardly to be doubted that hitherto, in America, public +undertakings have been executed much more largely in periods of +business prosperity, and have been diminished during "hard times," +thus greatly accentuating the harmful swing of the labor-demand. +Finally, unemployment insurance, which has already been applied +by parliamentary legislation in Great Britain to a group of nearly +3,000,000 wage-workers, is an indispensable and highly hopeful +measure of relief. The place of this in a general system of industrial +insurance will be indicated in the next chapter. + + +[Footnote 1: See above, ch. 20, sec. 1.] + +[Footnote 2: See ch. 23, secs. 5-7, on the old law of employer's +liability.] + +[Footnote 3: See Vol. I, pp. 292-293.] + +[Footnote 4: See Vol. I, p. 304.] + +[Footnote 5: See Vol. I, pp. 293 and 303.] + +[Footnote 6: See above, ch. 12, sec. 2.] + +[Footnote 7: Great importance should not be attached to these +figures for they contain errors resulting from the inexact notions +of inexperienced enumerators as to what constitutes unemployment, +and from the inclusion of all persons gainfully employed, whether +self-employed or in professional, salaried, or wage-earning +positions.] + +[Footnote 8: See Vol. I, p. 207, on irregularity of employment as +influencing wages, psychic income, and choice of employment.] + +[Footnote 9: On static, see Vol. I, ch. 32; on the scarcity of labor, +see Vol. I, ch. 18, sec. 2 and references there; on value of +services and wages see Vol. I, ch. 18, especially sec. 3, and ch. 19, +especially sec. 7.] + +[Footnote 10: See above, ch. 21, sec. 9 on the minimum wage.] + +[Footnote 11: See Vol. I, p. 223, on friction in the adjustment of +wages.] + +[Footnote 12: See above, ch. 10, secs. 6 and 7, on the industrial +crisis.] + +[Footnote 13: See Bulletin of the United States Bureau of Labor +Statistics, No. 159 (April, 1915). ] + +[Footnote 14: See above, ch. 8, secs. 6, 7; ch. 9, secs. 6, 8; ch. 10, +secs. 14, 16; ch. 14, sec. 12. ] + + + + +CHAPTER 23 + +SOCIAL INSURANCE + + § 1. Purpose and meaning of social insurance. § 2. Increasing need + of social insurance. § 3. The new era of social insurance. § 4. Features + of social insurance. § 5. Historical roots of accident insurance. § 6. + Development of compensation for accidents. § 7. The compensation plan + in America. § 8. Standards for a compensation law. § 9. Historical + roots of sick-insurance. § 10. Need of sick-insurance in America. + § 11. Old-age and invalidity pensions. § 12. Unemployment insurance. + § 13. Need of ideals in social insurance. § 14. Insurance rather than + penalty. § 15. The compulsory principle. § 16. State insurance and + a unified system. § 17. The contributory principle. + + +§ 1. #Purpose and meaning of social insurance.# In importance +surpassing at present any one of the various measures on behalf of +the wage-earning class that have thus far been considered is the +remarkable development now under way of plans and agencies to provide +insurance for "the common man." Insurance means making some kind +of provision out of present means, so as to reduce the injury and +suffering that would result from a future mishap. Usually, likewise, +it implies uniting with others to distribute the expense fairly over +all in the group. Social insurance is the term most frequently applied +to the various institutions and plans provided, more or less under +the regulation of law, for the protection of the lower-paid workers in +most modern countries. The terms industrial insurance and workingmen's +insurance are likewise used. The principal types of events for which +social insurance in its various branches provides, are (1) accident, +(2) sickness, (3) incapacitation (either by old age or by invalidity, +that is, permanent failure of health within the normal working years), +(4) death (generally called "life" or "survivor" insurance), and (5) +unemployment. + +The direct aim of social insurance is not to prevent these mishaps +(tho that may be an indirect result), but it is to provide some +financial indemnity for the economic loss and expense involved in the +mishap. The principal kinds of losses are two. First, that occasioned +directly in caring for the sick or injured person, the expense of +medical attention, nursing, hospital care, drugs and special apparatus +such as crutches and glasses, and burial expenses. The second is the +loss of income because of inability to work as a result of injury, +of illness, or of permanent disability, or (in the case of life +insurance) of the death of the bread-winner, or of want of employment. + +§ 2. #Increasing need of social insurance.# In various connections we +have observed how the changes that have been occurring in modern times +have increased the uncertainties of the industrial life and of the +earning power of the mass of the workers.[1] It should be further +observed that in city conditions, a working family does not have, as +in agricultural conditions, the supplementary sources of income from +garden, field, forest, and stream, and it is not so possible to use +the earning power of children, of old people, and of the partially +disabled. The faster working pace of factories, the rapid fluctuations +of employment with changing fashions, inventions, shifts of +population, and waves of industrial prosperity and depression, all +have introduced new risks and problems into the worker's life. The +increasing payment of wages in money, and the more temporary nature +of employment of men in many kinds of factory work, have added to +the problem. With these changes have come a growing interest in +the welfare of the mass of the workers and a growing sense of +responsibility on the part of the public. + +There is an appalling mass of misfortune in the United States +requiring social insurance for its relief, altho satisfactory +statistics of the various types of misfortune are still lacking. On +the basis of the experience of private industrial insurance companies +it appears that there are not less than 25.000 fatal industrial +accidents yearly, and 700,000 injuries causing disability for more +than four weeks, to say nothing of the enormous number of slight +injuries--if injuries, many of them very painful, disabling for a +period from one day to four weeks, should be called slight. As to loss +of time due to illness, the experience of Germany shows an average of +eight or nine days a year per worker, which figure, applied to those +gainfully employed in America, would mean nearly 300,000,000 days of +illness, or 1,000,000 one-man working years, causing a loss estimated +to be $750,000,000 annually. + +It is estimated that one on eighteen of American wage-workers attains +the age of sixty-five with no financial provision for old age, and +that about 1,250,000 persons above the age of sixty-five are dependent +on their families or on charity, public or private, receiving +$250,000,000 yearly. + +The losses and suffering to dependents due to the death of the +bread-winner are very partially accounted for by accidents, but no +estimate of much value can now be made of the other cases. Some notion +of the losses from unemployment has been given in discussing that +subject in the preceding chapter. + +§ 3. #The new era of social insurance.# Some not insignificant +attempts to deal with these problems were made throughout the +nineteenth century, but the new era of social insurance may be said to +date from the message of the Emperor William to the German Reichstag +in 1881, in which he said: + + We consider it our imperial duty to impress upon the Reichstag the + necessity of furthering the welfare of the working people.... In order + to realize these views, a bill for the insurance of workmen against + industrial accidents will first of all be laid before you; after which a + supplementary measure will be submitted, providing for a general + organization of industrial sick-relief insurance. Likewise, those who are + disabled in consequence _of_ old age, or invalidity, possess a + well-founded claim to more relief on the part of the state than they have + hitherto enjoyed. + +The program here outlined was carried out by the enactment between +1883 and 1889 of a series of laws, which taken together constituted +a pretty effective system of social insurance for the mass of +wage-workers in the German Empire. Later amendments have extended +and improved the various features of the plan, which has served as a +stimulative example to other countries. America has been the tardiest +among all the industrial nations to undertake this kind of social +reform. + +§ 4. #Features of social insurance.# The plans of social insurance, +in force in various countries, present a great variety of features +combined in many ways. The main characteristics in which they may +differ relate to (1) the element of compulsion, (2) contributions by +the insured, (3) the nature of the insurance organization. + +Insurance may be _voluntary_ or _compulsory_. It is voluntary when +the state simply encourages the formation of insurance agencies, and +perhaps contributes something to them, leaving it to the individuals +to insure themselves as they choose, in mutual societies, or in +privately managed companies. In the case of accident insurance, +however, there is often a semi-compulsion by which the employer is +requires to pay indemnity to his workers, according to fixed scales of +compensation, but is left free to insure himself against this risk +or not as he pleases, in which case it is still called voluntary +insurance. Compulsory insurance is that which the state requires to +be provided be means of some mutual organization of the insured, or of +the employers, or by the state. + +Insurance may be _contributory_ or _noncontributory_. It is on the +contributory plan when the insured workers contribute something +toward the premiums that provide the funds for eventual payment. It is +noncontributory when the funds are provided either by the employers or +by the state without any payments from the insured. + +Insurance may be (a) in _private_ companies, carrying on the business +for profit; or (b) in _mutual_ companies of workingmen, or of +employers insuring themselves against the cost of compensation in case +of accident to their employees; or (c) in a _state_ bureau, or fund, +organized and conducted by government. + +§ 5. #Historical roots of accident insurance#. The different kinds +of social insurance had different origins, some knowledge of which is +necessary to an understanding of the present situation. These origins +still affect the nature of social insurance to-day, and have prevented +the development of a truly unified and logical system in accord with +present conceptions of needs and of justice. + +Accident insurance had its beginnings in the liability of employers +for accidents that happened as a result of the employer's negligence, +a principle found to some degree in all countries. Thus the earlier +payments to workers in cases of accidents were not insurance indemnity +but merely damages collected in court for the fault of the employer. +In Great Britain and the United States, indeed, by judicial +interpretation the law grew more strict as against the claims of the +workers, until about 1880 in Great Britain and 1910 in the United +States. To collect damages it was not enough for the workman to prove +the employer's negligence, for collection was made more difficult by +(1) the doctrine of contributory negligence, (2) the doctrine of the +assumption of risk, and (3) the fellow-servant doctrine. + +By the doctrine of contributory negligence, the workman's claim could +be defeated by showing that he had by his carelessness contributed +to the accident even when the employer had been negligent. By the +doctrine of assumption of risk the workman was presumed, in entering +upon employment, to have taken upon himself the risks usually incident +to the employment, including the chance of imperfections in the +machinery, of which he might by some care have known. By the +fellow-servant doctrine the employer was freed from responsibility for +accidents due to the negligence of other employees, "fellow servants," +even when it was impossible for him to know their character and +reputation as in the case of a large factory or of a great railroad. + +§ 6. #Development of compensation for accidents#. In some countries of +continental Europe, notably Germany and France, the law of employers' +liability was altered in favor of the worker early in the nineteenth +century, so as to make compensation more usual and adequate. Since +1885, especially, this liability has been much further extended in +many countries and in various directions, and yet the laws of accident +compensation still retain many features of the old liability laws and +remain in their legal character somewhat apart from the other branches +of social insurance. Even in the newer type of "compensation" laws the +indemnity paid by employers on account of accident is looked upon as +commuted damages, but the old employers' defenses, just named, are +abolished or made more difficult to plead. The new plan has the +advantages of granting compensation by a schedule fixed in the law, +insuring greater certainty, more adequate payments, greater ease of +securing redress, and abolishing the cost of law suits. Still, in most +countries and in most states in America, the worker has the option +of suing under the old law. In some forty countries the principle of +compensation by a prearranged schedule of rates has to some degree +replaced that of litigation, and determination by a jury of the +damages, in each separate case. The insurance spoken of in relation to +accidents is technically that which the employers may or must take to +protect themselves against loss, not that which the workman has. + +The situation as to compensation in a few leading countries is as + follows, the dates given being those of important legislation. + + ACCIDENT INSURANCE + + _Voluntary_ (as to employers insuring, but compulsory compensation). + + Great Britain, 1897, 1906, 1907. + + France, 1898, 1907, (compulsory for seamen, 1898, 1905). + + Denmark, 1898, 1908. + + Belgium, 1903, (voluntary except for miners). + + + _Compulsory insurance of their risks, by employers_. + + Belgium, for miners, 1868. + + Germany, 1884, (in employers' associations), 1887, 1900, + 1911 (voluntary for some classes). + + Austria, 1887 (as in Germany), 1894 (voluntary for some + classes). + + Norway, 1894 (in a state central insurance office), 1896. + + Italy, 1898, 1904. + + Holland, 1901 (in the Royal Bank or in private companies). + + Sweden, 1901 (as in Norway). + +§ 7. #The compensation plan in America#. Under the practical operation +of the law of employers' liability in force in any American state +until 1911, a very small proportion of the workers injured while +at work were legally entitled to any indemnity, and a still smaller +proportion could succeed in recovering any substantial amount. +Employers, and the accident companies with which employers insured, +either compromised the claims for small amounts or fought bitterly +in the courts the claims of those who refused to compromise. When the +courts awarded damages, large or small, a large part of the proceeds +went for legal expenses. But a small proportion of the total costs to +employers came as benefits to the victims of accidents. It appeared +in an extensive investigation of the business of the large industrial +insurance companies that but 28 per cent of the premiums paid by +employers were paid to workmen as indemnity. + +Between 1911 and 1916 the laws have been changed to some extent in +their application to selected occupations in at least 34 states and +territories of the United States, and covering nearly all but some of +the distinctly agricultural states. This remarkable development has +been largely actuated and guided by a comparatively small group +of socially minded nonworking class citizens rather than by either +employees or organized workers. It is an encouraging example of +what can be done by skilful methods, when conditions are ripe, in +furthering righteous social legislation without the use of money or of +corrupting influences. + +§ 8. #Standards for a compensation law#. The standards which, in +detail, in one jurisdiction or another, have already been attained, +and which are the provisional ideals now sought by reformers, may +be briefly stated as follows.[2] All employments should be included, +altho, as yet, there are various exceptions, such as farm labor +and domestic service, employers with but few employees (the +number excepted being one to five), and nonhazardous employments. +Compensation should be granted for all injuries, suffered in the +course of employment, that cause disability beyond a definite waiting +period of three to seven days. Compensation should include medical +attendance for a limited period, and two-thirds of the estimated +loss of wages for disability, either total or partial, during its +continuance; and, in case of death, funeral expenses, and from one to +two-thirds of the estimated wages, to the widow (or dependent widower) +and children, or to other dependent relatives. To secure the full +benefit of the plan it must be made the exclusive remedy, replacing +entirely the old remedy of suits for negligence. The employer should +be required to insure his risk, and general sentiment is moving +rapidly toward the plan of a state insurance bureau as the exclusive +agency.[3] For the administration of the system an accident and +insurance board should be created in each jurisdiction. Experience +shows the importance of careful attention to numerous other details, +and many amendments will be made as the needs become manifest in +practice. + +§ 9. #Historical roots of sick-insurance.# Sick-insurance had its +origin partly in trade unions and in fraternal societies voluntarily +organized by workers, and partly in the system of public poor +relief. The voluntary societies were first recognized, regulated, and +encouraged by law (in some cases being given state subsidies), and +later, in some cases, being made compulsory for some classes of +members (i.e., such as miners and seamen). On these institutions have +been built the later state systems of social sick-insurance. This +movement had made large headway by the end of the third quarter of the +nineteenth century in various European countries. The two systems that +are the most typical and influential examples are those of the German +Empire and of Great Britain, the former local and the latter national +in organization. The British plan of national health insurance +promises to be on the whole of the greatest influence upon American +opinion and policy. However, the best informed American students +favor in some features the more decentralized German rather than the +centralized British system. While it is impossible to describe the +various systems in detail, the situation in the leading industrial +countries of Europe may be indicated as follows. + + SICK-INSURANCE + + _Voluntary_. + + France, 1850, 1898 (voluntary except for miners). + Belgium, 1851, 1894. + Italy, 1886. + Sweden, 1891. + Denmark, 1892. + Holland (authorized private societies and poor relief). + + + _Compulsory_. + + Germany, 1883, 1911 (voluntary for others with earnings + of $500). + + Austria, 1888 (voluntary for some classes). + + France, for miners, 1894. + + Norway, 1909. + + Great Britain, national system 1911 (was voluntary 1875-1911). + +§ 10. #Need of sick-insurance in America#. Contrary to the usual +opinion in America, the sick-insurance in Germany is, both in amount +of contributions collected and in importance to the welfare of the +workers and their families, of more importance than is either accident +compensation or the system of invalidity pensions. Yet, thus far, our +interest and efforts in America have been directed almost entirely +toward the reform of accident compensation and almost everything +remains to be done in the matter of social insurance against sickness. +It is true that in recent years there has been a rapid development, +in some of the larger cities, of medical insurance clubs conducted by +private companies, with dues of ten cents weekly. They give medical +care in ordinary cases, but require extra payments for surgical +treatment and for medical supplies. They as yet touch only the +outer fringe of the problem, but they testify to the need and to the +increasing desire of the wage-workers for insurance of this kind. It +is believed that at least 4 per cent of the income of wage-workers +now is expended for the care of sickness and for burial insurance. The +losses of wages meantime remain unequalized by insurance indemnities. +A large proportion of the cases of temporary destitution in ordinarily +self-supporting families is due to sickness. The German experience +shows that 4 per cent of wages, collected in part from employers and +in part from wage-workers, is sufficient to give a far better medical +service than can be had through private effort, to give some indemnity +for loss of wages, and to carry on a very useful hygienic work for the +families and for the public health. + +§ 11. #Old-age and invalidity pensions#. Insurance to provide pensions +for old-age and permanent (partial or total) disability is in nature +but an extension of the insurance against accident and sickness. In +a relatively small number of cases accidents result in permanent +disability and it is both illogical and inhumane to limit, +arbitrarily, the compensation in such cases to a certain period, +as two or three years, as is done in many compensation laws. The +disability due to advancing years is in nature a chronic illness, +inevitable, sooner or later, to all who survive. The movement to +provide some indemnity in such cases has been rapid in European +countries, doubtless because the problem was a very pressing one where +the average earnings are low. In Germany and Austria this development +has been more in connection with other forms of insurance; in Denmark, +Great Britain, and France it has had more the aspect of an extension +of poor relief. In the United States little has been done to provide +for these great needs. Massachusetts in 1907 authorized savings +banks to sell insurance and old-age pensions to those who applied. An +increasing number of corporations, especially railroads, are adopting +a pension system for men growing old in their service, but nothing has +been done of a general public nature toward compulsory and universal +protection against these misfortunes. + +The following table shows the situation in some of the leading +countries: + + OLD AGE AND INVALIDITY PENSIONS + + _Voluntary_. + + Belgium, 1850, 1903 (voluntary except for miners). + + Italy, 1898, 1907 (all wage earners). + + + _Compulsory_. + + Belgium, for miners, 1868. + + Germany, 1889, 1899, 1911. + + Austria, 1889 (miners only); 1906 (office employees). + + Denmark, 1891, 1908 (noncontributory). + + France, for seamen 1850, 1881; for miners, 1894, 1905, + 1907 (noncontributory, all indigent citizens); 1910 (contributory, + all workmen and employees; was voluntary + by laws 1850, 1886). + + Great Britain, 1908 (noncontributory, old age pensions, + granted by the government). + + Sweden, 1913 (universal, contributory). + +§ 12. #Unemployment insurance#. The most difficult of all the problems +of insurance is that of unemployment. There the amount of the risk +in any case is so largely dependent on the personal qualities of the +worker. There are obvious objections to making the competent, steady, +sober members of any trade bear the burden of the infirmities of their +fellows. But, on the other hand, as we have seen,[4] a large part of +the problem of unemployment is chargeable to social maladjustments +rather than to individual faults. + +At present development in this field is along two lines, that +of subsidized trade-union relief (the Ghent system), and that of +compulsory state insurance in certain industries. The former has been +adopted by many cities and by some countries in western Europe, the +public paying a certain proportion (from one sixth to one third) of +the amounts of the benefits paid by the unions. Great Britain is +the only country as yet to adopt a compulsory state system. It began +operation in 1912, and applied to 2,500,000 persons, or one sixth of +all the wage-earners. The contributions are made 3/8 by employers, 3/8 +by wage-earners, and 2/8 by the state. There are several original and +interesting features of the act, such as rewarding, by the refunding +of dues, those employers that provide regular employment and older +workmen that have received benefits amounting to less than their +contributions. Its administration in close connection with the labor +exchanges will give valuable experience in this field. The working +out of the many minor problems of classification, assessment, and +administration, of unemployment insurance, will require many more +years of experimentation. + +§ 13. #Need of ideals in social insurance#. The world has had nearly +forty years of experimentation of a remarkably varied kind, in the +field of social insurance, since the German system was inaugurated in +the eighties of the nineteenth century. America stands almost at the +beginning of a development along those lines that is certain to be of +enormous extent and importance. It would be folly for us to repeat +the costly errors of other countries by failing to recognize certain +principles which have been clearly established by experience. If these +could be grasped and firmly kept in mind our progress in this field +in America would be faster, more certain, less costly, and farther +reaching than it promises otherwise to be. We can here attempt no more +than merely to outline these principles that must be embodied in an +ideal system of social insurance in America. + +§ 14. #Insurance rather than penalty#. The principle of social +insurance rather than that of legal penalty should be universally +recognized. At present, in all countries where the several kinds of +insurance are found side by side, accidents are indemnified on plans +that are still rooted in the notion of employers' liability for +negligence; whereas, necessarily, the indemnity in case of sickness +and of old age has no such explanation. The unfortunate result of +this difference of view is that whereas all cases of sickness and +invalidity entitle to benefits, only those accidents suffered "in +the course of employment" are indemnified, and the worker is left +unprotected in a large share of the accidents to which he is liable. +The worker's need and the social need are thus not adequately met. We +have started along the same line of development in America, and it +is to be feared that only through a long series of legal fictions and +contradictory judicial decisions shall we be able to work out toward +consistency in this matter. Another unfortunate result of this +difference is that accident compensation, being made peculiarly the +task of the employers, does not develop the spirit of responsibility +on the part of the workers and of coöperation between them +and employers that other forms of insurance call forth, where +representatives of both parties sit together in the administration of +the system. + +§ 15. #The compulsory principle#. Insurance must be general in its +application to all the persons within broad wage-earning classes, +and in order to be general it must necessarily be compulsory, +not voluntary, in its application. To leave any form of insurance +optional, or elective, with either employers or wage-workers, is to +fail of the main purpose in a large proportion of the individual cases +where it is most needed, and to increase the expense to those that are +included. Within a compulsory system, however, there should be given +wide opportunity for the voluntary principle by admitting to the +system others that are not compelled to insure, and to enable any +insured person to increase his paid-up, nonforfeitable insurance at +any time by extra payments made at times of unusually high wages, from +legacies, or from any other exceptional income. + +§ 16. #State insurance and a unified system#. The state, through +the public insurance office, must ultimately be the sole agency for +insurance. Only in this way can the maximum of simplicity and economy +be attained. Of course, this calls for a better appreciation of expert +training, and a broader sentiment in favor of the merit system in the +public service than we yet have in America. + +There should be a unification of various kinds of insurance in one +general plan and under one general administration for the whole state. +This should be done with full regard to the actuarial differences in +costs as among various kinds of insurance, various trades, various +establishments, and, to some extent, even the various individuals, so +as to ascertain the costs and to distribute them equitably. + +Only in this way can provision be made for entire mobility of labor, +so that men may not be bound, as a condition for obtaining benefits, +to continue in the service of any one employer. To this end there +should be interstate comity and coöperation, so that the insured could +at any time transfer his actuarial equity from one state to another. + +§ 17. #The contributory principle#. The contributory principle should +be adopted, and both employers and wage-earners contribute to the cost +in equal amounts. But further, the general public interests may +be recognized through the payments in aid of the funds (subsidies, +subventions). Both employers and employees usually seek to escape +the burden, by getting the state to bear the whole expense[5] or by +getting the other party to pay all or the larger part. But it is much +to be desired that in large part the finances of a system of social +insurance should be disassociated from the ordinary budgetary system +of taxation and public expenditures. The fundamental reason why the +premiums should be divided between employers and employees is that +this is most favorable to the equal participation and coöperative +efforts toward reducing the risk, and developing right industrial +and political relations. Everywhere it is the practice to provide for +representation nearly in proportion to contributions. + +It is usually assumed by employers, by wage-workers, and by others in +the discussion of the subject, that the burden remains and is borne by +those who directly pay the premiums, and just in proportion to their +payments. This is an almost utterly mistaken view. There is, on the +contrary, every reason to believe that the general principles of +shifting and incidence of taxation apply fully here.[6] It cannot be +doubted that, if wages are not arbitrarily fixed, if they result, as +we must believe, from an adjustment and equilibrium of the various +classes of labor in a general economic situation, then after a +time the premiums become a part of that general situation. Payments +compulsorily made by employers (by all, without exception) will +ultimately be offset by a lower wage, and if transferred to the +workmen will ultimately be offset by a higher wage. Of course, there +is some delay and friction in making the adjustment, but, under any +settled policy, the adjustment once made will be maintained. The +benefit of social insurance to the workingmen is not mainly that their +wages are increased by the direct contributions of employers to the +premiums, tho there are doubtless some cases of "parasitic" industries +and parasitic employers that escape their due share of payments for +risk, now that there is no insurance system. The great benefits are +that total wages and losses are apportioned economically to the points +of maximum utility; that accumulation of capital by and for the wage +workers is made regular, automatic, safe, and in great amounts; and +that financial aid, physical care, and mental relief from, some of the +most tragic anxieties of life, are given effectively and economically +to the masses of the people. + +But, as has been indicated in another connection above, it is far +from being a matter of indifference, psychologically, where the first, +immediate burden of premium payment falls. The persons paying the +premiums, in whole or in part, are far more keenly aware of the cost, +and alive to reducing and removing the evil conditions. Moreover, +their interest is stimulated by the fact that they are the first +to gain by any temporary economies, and the more so because of the +illusory belief sure to persist, that they are the ultimate as well as +the immediate bearers of the costs. + +The development of a complete system of social insurance along these +lines promises to do more than any other single measure of practical +social reform now under consideration to change the conditions and the +outlook of the wage-earning class. + + +[Footnote 1: See above ch. 2, sec. 14; ch. 10, sec. 7; ch. 20, sec. 1; +ch. 22, secs. 11-18.] + +[Footnote 2: The American Association for Labor Legislation has issued +a pamphlet describing these features more in detail.] + +[Footnote 3: Thirteen states had, in 1916, state insurance funds, +and, in five states (Oregon, Nevada, Washington, West Virginia, and +Wyoming), they are the only insurance agencies allowed.] + +[Footnote 4: Ch. 22, secs. 14-18.] + +[Footnote 5: See examples in the lists of laws above cited, sec. 11.] + +[Footnote 6: See above, ch. 16, sec. 14.] + + + + +CHAPTER 24 + +POPULATION AND IMMIGRATION + + § 1. Nature of the population problem. § 2. Complexity of race problems. + § 3. Economic aspects of the negro problem. § 4. Favorable economic + aspects of early immigration. § 5. Employers' gains from immigration. + § 6. Pressure of immigration upon native wage-workers. § 7. + Abnormal labor conditions resulting from immigration. § 8. Popular + theory of immigrant competition. § 9. Divergent views of effects on + population. § 10. The displacement theory; its fundamental assumption. + § 11. Magnitude of the inflow of immigrants. § 12. Earlier and recent + effects of immigration upon wages. § 13. _Laissez-faire_ policy of + immigration. § 14. Social-protective policy of immigration. § 15. + Population and militarism. § 16. Problem of maximum military power. + + +§ 1. #Nature of the population problem.# No one of the problems of +labor thus far discussed is of so great importance in relation to +popular welfare as is "the problem of population." By this is meant +the problem of determining and maintaining the best relation between +the population and the area and resources of the land. What is to be +deemed "best" in this case depends, of course, on the various human +sympathies and points of view of those pronouncing judgment. Very +generally, until the nineteenth century, the only view that found +expression was that of a small ruling class which favored all increase +in population as magnifying the political power of the rulers and as +increasing the wealth of the landed aristocracy. This view still is +unconsciously taken by the members of a small but influential class, +and is echoed without independent thought by many other persons. +But more and more, in this and other labor problems, another more +democratic standard of judgment has come to be taken, that of the +abiding welfare of the masses of the people. This is the point of view +that must be taken by the political economist in a free republic. + +The problem of population presents two main aspects: one as to +composition, and the other as to numbers of the people. Changes in +either of these respects concern the welfare of the masses. Changes in +the kinds of people, or in their relative numbers, may greatly affect +the welfare of the people, in some cases touching special large +classes, and in others affecting the whole mass of the people. + +§ 2. #Complexity of race problems.# The questions of race composition +that we shall here consider are those of the negro and of the +immigrant.[1] Both of these questions are complex and go beyond +the limits of mere economic considerations, touching the most vital +political and social interests of the nation. Indeed they involve the +very soul and existence of peoples, for who can doubt that ultimately +racial survival and success are mainly to be determined by physical +and spiritual capacity? + +The negro in America is the gravest of our population problems. In +large portions of our land it overshadows every other public question. +Yet the negro is here because men of the seventeenth century ignored +the complexity of the labor problem and thought only of its economic +aspect. The landowners wished cheaper labor and, reckless of other +consequences, they imported slaves from Africa to get it. They gained +for themselves and a few generations of their descendants a measure +of comparative ease, but at a frightful cost to our national life--a +cost of which the Civil War now seems to have been merely a first +installment on account rather than a final payment. + +§ 3. #Economic aspects of the negro problem.# The negro as a wage +earner is found very little outside of the least skilled branches of +a limited range of occupations. Of these the principal ones, as is a +matter of common knowledge, are farm work, domestic service (including +janitor service in stores and factories and work in hotels), and crude +manual outdoor labor. Repeated attempts to operate factories with +a labor force of negroes have proved unsuccessful. In some of the +better-paying occupations in which large numbers of negroes were found +in the North soon after the Civil War, such as barbering, waiting +on table in the best hotels, and skilled manual work, they have been +largely displaced by European immigrants. Negroes are a disturbing and +unwelcome influence in labor organizations, and even when nominally +eligible to membership are in fact rarely accepted. They very +frequently are employed as strike-breakers and this fosters race +antagonism both immediately and permanently. + +The negro problem is, from our present outlook, insoluble. The most +laudable of present efforts, that for industrial training, represented +by Hampton and Tuskegee Institutes, and the work of Booker T. +Washington, leaves the dire fact of two races side by side and +yet unassimilated socially, politically, and, in large measure, +economically. Two other possibilities, race admixture and caste, +are both so repellent to white American thought, that they cannot be +looked upon as solutions. Segregation in a separate state, or separate +states, is a thorogoing proposal, but is practically impossible. +Finally there is the conceivable, but improbable, event of the +decrease and extinction of the negroes in America, Their relative +number has declined since 1800,[2] but their absolute number still +continues to increase. It seems probable that if European immigration +were to be stopped that a very large migration of negroes from the +South to the North and the West would occur to take places hitherto +filled by unskilled immigrant workers. In the year 1915, following the +check to immigration as a result of the European war, a very marked +movement of this kind set in. If this occurred on a much larger scale +it might result in greatly reducing the negro population in some +portions of the South, and as the "natural rate of increase" of the +negroes in the North is a negative quantity, it might cause the total +negro population of the country to begin absolutely decreasing. + +§ 4. #Favorable economic aspects of earlier immigration.# Regarding +the immigration problem we are not confined to futile expressions of +regret as in the last case. For by the "immigration problem" is +meant primarily and mainly the coming of immigrants, and we can by +legislation limit or stop their coming, if we will. The question at +issue is whether their coming really is an evil or, on the whole, a +blessing to the country. + +The historic American attitude toward immigration has been highly +favorable to it. The early settlers on these coasts were led by +various motives, some political, some religious, but far the largest +part economic, the motive of bettering their worldly condition. +Land was plentiful and all men of any capacity could easily become +landowners. An inflow of laborers was favorable to the interests +of all the influential elements of the population, especially to +landowners and active business men. Increase of numbers, favoring +division of labor and the economies of production in manufacturing, +and reducing the dangers from Indians and from foreign enemies, seemed +an unmixed blessing. Many of the newcomers soon became landowners and +employers, and in turn favored a continuance of the movement. Thus was +hastened the peopling of the wilderness. The interest of these classes +harmonized to a certain point with the public interest; but likewise +it was in some respects in conflict with the abiding welfare of the +whole nation. It led to the fateful introduction of slavery from +Africa, and it encouraged much defective immigration from Europe, the +heritage of which survives in many defective and vicious strains of +humanity, some of them notorious, such as the Jukes, the Kallikak +family, and the Tribe of Ishmael. + +§ 5. #Employers' gains from immigration.#. The immigration from Europe +has furnished an ever-changing group of workers, moderating the +rate of wages which employers otherwise would have had to pay. The +continual influx of cheap labor aided in imparting values to all +industrial opportunities. A large part of these gains have been in +trade, in manufacturers, and in real estate as the cities have taken +and retained an ever-growing share of the immigrants. Successive waves +of immigration, composed of different races, have ever been ready to +fill the ranks of the unskilled workers at wages somewhat lower than +the current American rate. + +The lower enterprisers' costs that resulted from immigration surely +did not accrue to the advantage of the employers alone. Bearing in +mind the fact that the employing-enterpriser is a middleman,[3] we +may see that the lower costs must, in most cases, be passed on to +the consumers in the form of lower prices of products. And often the +consumer, as the employer of domestic service at lower rates than +otherwise would be possible, gets this advantage directly. This +increases the number of those whose self-interest, at least when +narrowly judged, leads them to favor the policy of unrestricted +immigration, Tho perhaps less general than it once was, this sentiment +in favor of immigration is still potent. The continuous inflow +of immigrants has in many industries come to be looked upon as an +indispensable part of the labor supply. Conditions of trade, methods +of manufacturing, prices, profits, and the capital value of the +enterprises have become adjusted to the fact. Hence results one of +those illusions cherished by men whenever they identify their own +profits with the public welfare. Without immigration, it is said, "the +supply of labor would not be equal to the demand." It would not at the +wages prevailing. But supply and demand have reference to a certain +price. At a higher wage the amount of labor offered and the amount +demanded would come to an equality. This would temporarily curtail +profits, and other prices would, after readjustment, be in a different +ratio to wages. + +§ 6. #Pressure of immigration upon native wage-workers.# There +must always have been cases where the labor incomes of workers were +somewhat depressed by the incoming of immigrants. Indeed, that must to +some extent always be so when the natives continue to work alongside +of the immigrant at just the same job. But before the Civil War living +conditions were simple, wages comparatively high and (more important) +pretty steadily rising, and the wage-earning class not yet a large +share of the population. Moreover, this conflict of interest was +minimized and often quite avoided by the native changing to another +occupation. In the old days there was always the outlet of free +land on the frontier, now closed. Always there has been a better +opportunity for natives to move into higher positions of foremanship +or as employers of immigrant labor. + +As the wage-earners have become relatively more numerous, many of +them have felt more keenly the pressure of competition from immigrant +labor. Moreover, the immigration since 1890 has been increasingly +from southern and southeastern Europe, from countries with much lower +standards of living, and has been of enormous proportions. Here are +some significant figures as to immigration since 1820. + + -------------------------------------------------------------- + | | | Immigration, + | Immigration | Increase of | per cent of + Decade | in the period | population | population- + | | | increase + -----------------|---------------|-------------|-------------- + 1820-30 | 124,000 | 3,300,000 | 3.8 + 1830-40 | 528,000 | 4,200,000 | 12.3 + 1840-50 | 1,604,000 | 6,100,000 | 26.3 + 1850-60 | 2,648,000 | 8,200,000 | 32.3 + 1860-70 | 2,369,000 | 8,400,000 | 28.2 + 1870-80 | 2,812,000 | 10,400,000 | 27.0 + 1880-90 | 5,246,000 | 12,700,000 | 41.3 + 1890-1900 | 3,687,000 | 13,100,000 | 28.1 + 1900-1910 | 8,795,000 | 16,000,000 | 55.0 + Total, 90 yrs. | 27,800,000 | 82,400,000 | 33.7 + +§ 7. #Abnormal labor conditions resulting from immigration.# The +labor supply coming from countries of denser population and with low +standards of living creates, in some occupations, an abnormally low +level of wages and prices. Children cannot be born in American homes +and raised on the American standard of living cheaply enough to +maintain at such low wages a continuous supply of laborers. Many +industries and branches of industry in America are thus parasitical +A condition essentially pathological has come to be looked upon as +normal. The commercial ideal imposes itself upon the minds of men in +other circles. + +Statistics show that the prevailing wages for unskilled manual workers +in America have risen much less since the Civil War than have other +wages.[4] Wages in the great lower stratum of the unskilled and +slightly skilled workers are much lower in America relative to those +of more skilled and professional workers than they are in Europe. It +can hardly be doubted that the most important, tho not the sole, cause +of this situation has been the unceasing inflow of immigrants going +into these low-paid occupations. The "general economic situation" in +America, but for immigration, would compel higher wages to be paid to +the masses of the workers. If immigration were suddenly stopped in a +period of normal or of increasing business, wages in these occupations +would at once rise, and that, without the aid of organization, of +strikes, or of arbitration. This would affect most those occupations +which now present the most serious social problems, in mines, +factories, and city sweatshops. In some small measure the war in the +Balkan States, by recalling many men for service, had this influence +in 1912; and the great war beginning in 1914, by stopping a large +part of the usual immigration, gave a striking demonstration of +this principle. In employing circles the rise of wages was sometimes +referred to with an air of grievance as due to the "monopoly of +labor," as if the economic situation here, enabling the wage-earners +(millions of them immigrants), to get a higher competitive wage when +immigration temporarily was diminished, constituted a monopoly. + +§ 8. #Popular theory of immigrant competition.# The depressing effect +of the ever-present and ever-renewing supply of immigrant labor upon +wages appears most clearly at the time of wage contests, and often +seems to be the most important aspect of the question. Laws against +contract labor, passed to prevent this particular evil, have put +no check to the great stream of those guided by friends to a "job." +Organized labor thinks most of these immediate effects. Commonly +labor's protest is expressed in terms of the untenable "lump of labor" +theory of wages. "Every foreign workman who comes to America" is +believed to take "the place of some American workman." The error in +this too rigid conception of the influence exerted upon wages by new +supplies of labor is evident in the light of the principles of wages. +Yet it may be true that, both immediately and ultimately, the foreign +workman depresses the incomes of those already here with whom he +directly competes. On the other hand, those in occupations into +which few immigrants enter may, as consumers of cheaper products, +be immediately the gainers in real wages, by the very change +that depresses the wages in the lower strata.[5] The +manufacturing-employers advocate "protection" which enhances the price +of their products, while usually favoring "free trade" in immigration +to cheapen their costs. What more natural than that laborers should +favor a policy of protection to labor, to keep foreigners from coming +here to be their competitors. + +§ 9. #Divergent views of effects on population.# The foregoing views +of the effects of immigration upon wages, both of those favoring and +those opposing it, are short-time views, relating to immediate rather +than ultimate effects. If the immediate causes are continuously +repeated throughout the lives of successive generations the results +are for those mortal men as ultimate as anything that concerns them. +In this case it would make no difference to the millions of workers, +whose wages are depressed, if it could be shown that wages fifty or +a hundred years from now would be no lower as a result of continued +immigration than they otherwise would be; or to the employer that +wages would then be no higher. But to the social philosopher and to +the statesman, interested in the abiding general welfare, the ultimate +economic effects are of the greatest importance. + +The question is: What will be the far-reaching, long-time effects of +immigration upon the general economic situation, as that determines +the welfare of the mass of the people? We confine ourselves here to +the economic effects, leaving aside as far as possible the racial, +moral, religious, political, and general social aspects of the +subject. + +We are met at the outset by two divergent opinions as to the permanent +results of immigration upon the growth of population. The one is that +all immigrants coming to our shores are net additions, hastening by +so much the growth in density of population; the other opinion, the +displacement theory, is that immigration has the effect of checking +the natural increase of the native stock so much that it does not +materially change the total population, or actually causes it to be +less than it would have been had no immigration occurred. + +§ 10. #The displacement theory; its fundamental assumption.# The +latter opinion which still has many upholders[6] was first advanced by +a distinguished economist, Francis A. Walker, but his first statement +of it referred only to the period between 1830 and 1860. The main +argument in support of this opinion was that in the three decades from +1830 to 1860 during which a large immigration occurred, the decennial +rates of increase of the population were almost the same as in the +three decades from 1800 to 1830.[7] The conclusion drawn from these +figures is that the immigrants were the cause of the decline of the +average birthrate that occurred in the families of native stock. The +validity of this conclusion is absolutely dependent on the assumption +that no other forces were at work to produce this result. Must we +believe that, but for immigration, the native birthrate would not have +declined at all? This is incredible. The birthrate of the native stock +had already begun to decline before 1820 as is shown by many family +records, and by the fall of the decennial rate of increase from 35 and +36 in the decades ending 1800 and 1810, to 33.1 and 33.5 in the next +two decades. This occurred despite the enormous western settlement +then under way on the Louisiana Purchase. The decline of the birthrate +began at that time to appear as a world-wide phenomenon, accompanying +improved transportation (roads, steamboats, steam railways), the rapid +growth of cities, and the general industrial revolution. The general +birthrate has declined of recent years in Australia and New Zealand, +where there has been little immigration, more rapidly than it has in +the United States.[8] + +§ 11. #Magnitude of the inflow of immigrants.#In view of these facts +it seems necessary to modify the displacement theory greatly. To the +extent that the coming of immigrants caused a net addition to the +population, it doubtless hastened the growth of cities and the +development of industrialism, and thus helped to reduce the birthrate +in some classes. But this view admits the effect upon population which +the displacement theory denies. Probably, in a good many cases the +more rapid business advancement of the natives, because of the +coming of the immigrants, led to the decline of birthrate that is a +consequence of economic success.[9] But a large part of this change +would have inevitably occurred even if there had been no immigration +after 1820. Between 1820 and 1910 the population increased 82,400,000, +and the total number of immigrants was 27,800,000, or 33.7 per cent +of the total increase. In an urban environment the birthrate among +immigrants always has been very much higher than that of native +Americans. This fact alone might well be taken as sufficient to offset +whatever depressing effects the coming of the immigrants may have +had upon the native birthrate, leaving the immigration nearly a net +addition to population. It does not seem possible to believe that +if there had been no immigration, our native population, rapidly +advancing in average wealth, wages, and general education, would have +continued with an unchecked birthrate, and would have filled all the +places taken by immigrants. And no believer in the displacement +theory has ever ventured to claim, as the argument requires, that if +immigration were now stopped, the birthrate would again return to the +old standard of 1820, or would cease to decrease somewhat. Especially +of late, since the rate of increase of the native population has +become much less, is the effect of continuing immigration apparent. +In the decade of 1900-1910 the total population increased 16,000,000, +while nearly 9,000,000 immigrants arrived. Of the remaining increase, +3,000,000 consisted of children born of foreign parents. That leaves +three or at the most four million (4,000,000) increase attributable to +the native stock, white and negro combined. + +§ 12. #Earlier and recent effects of immigration upon wages.# Let us +now correlate the principle of decreasing returns and the facts as to +the exploitation of our natural resources[10] with the growth of +our population, on the assumption that immigration has been a net +contribution to our numbers. While the vast frontier was open to +settlement, the growth of population could not fail to be looked +upon as a blessing, even tho somewhat mixed with political evils, +immorality, and pauperism. Beginning in colonial times, the policy of +"the open door" to immigrants came thus to be deemed the traditional, +patriotic American policy. Yet there is grave reason to believe that +the rate of growth in the nineteenth century was wastefully rapid and +that a slower and sounder growth might have been better.[11] However, +this rapid growth was largely extensive, spreading over wider areas, +and was consistent with a pretty steady rise of real wages in America +until about 1895,[12] the level continuing higher than that of Europe +despite the contemporaneous rise of wages there. Much of this general +rise is undoubtedly attributable to the adoption of better tools, +machinery, and industrial processes, the more so as inventions and +new methods have rapidly become free goods.[13] The beneficial +improvements long cooperated with the rapid exploitation of rich +resources to raise real wages, and then undoubtedly continued to +offset for a time the unfavorable effects as the richer resources +began to show signs of exhaustion. Since the end of the last century, +however, the net trend upward seems to be checked, and "the rising +cost of living" (real cost) has come to be a serious actuality for +larger sections of the population.[14] + +Yet so long as wages are enough higher in America to pay the passage +of the low-paid workers of the industrially backward nations, they +will continue to come. The ease and cheapness of migration in these +days of steamships, the encouragement of immigration by the agencies +and advertisements of the steamship lines, and the increasing +readiness of the peasantry to migrate, have become well known through +recent discussions. Unless immigration is limited, it must continue to +depress the wages of American workingmen, through both its immediate +and its ultimate effects. + +§ 13. #Laissez-faire policy of immigration.# There are those who take +a fatalistic, or a _laissez-faire_, view of the subject, and declare +that the problem will solve itself as the level of American wages +comes to be nearly the same as that of the countries of Europe from +which our immigration is coming. True enough, if this can be called a +"solution." There are many who cherish the commercial ideal according +to which cheap labor is absolutely desirable and needful to produce +cheaper products. This ideal has spread to wider circles. Here, for +example, are the words of a man who combines wide knowledge of the +facts of immigration with keen sympathy for the working classes:[15] +"The past industrial development of America points unerringly to +Europe as the source whence our unskilled labor supply is to be drawn +. . . America is in the race for the markets of the world; its call +for workers will not cease." Yet a little further on he must say: "All +wage-earners in America agree that it is not as easy to make a living +to-day as it was twenty years ago, and the dollar does not go so far +now as it did then. The conflict for subsistence on the part of +the wage-earner is growing more stern as we increase in numbers and +industrial life becomes more complicated, and the fact must be faced +that the vast army of workers must live more economically if peace and +well-being are to prevail." + +§ 14. #Social-protective policy of immigration.# A different kind of +solution is offered by those who favor the strict limitation, if not +the complete prohibition, of immigration. + +The foregoing study indicates that the time has come, if it is not far +past, when the traditional policy of fostering immigration is opposed +to the welfare of the masses of the people. This belief can be based +solely on grounds of numbers, the relation of population to resources, +quite apart from a preference for particular races or the familiar +arguments regarding social and political evils and lack of +assimilation, however valid they may be. The limitation of immigration +would immediately improve working-class conditions where they are +worst in America,[16] and would check and probably reverse the +tendency to diminishing returns already manifest in many directions. +This opinion does not necessitate an absolute prohibition of +immigration; it is consistent with the continuance of immigration of a +strictly selected character, and in numbers so small that all European +immigrants now here could be rapidly and completely assimilated, +economically and racially. With a slow national increase of population +and with the continued progress of science and the arts, it should be +possible for real wages to continue indefinitely rising in America. +The selection of immigrants to be admitted should be a part of a +national policy of eugenics,[17] which aims to improve the racial +quality of the nation by checking the multiplication of the strains +defective in respect to mentality, nervous organization, and physical +health, and by encouraging the more capable elements of the population +to contribute in due proportion to the maintenance of a healthy, +moral, and efficient population. In such a view, a eugenic opportunity +is presented in the selection and admission of immigrants that are +distinctly above (not merely equal to) the average of our general +population. + +§ 15. #Population and militarism#. In view of the recrudescence of the +spirit of armed national aggression evident of late, and especially +in the outbreak of the Great War in 1914, the military aspect of the +population question deserves serious consideration. The growth of +savage and barbarian tribes in numbers, so that their customary +standards of living were threatened, frequently has led to the +invasion and conquest of their richer neighbors.[18] To-day nations +on a higher plane of living are probably repeating history. The nation +with an expanding population is tempted to seek an outlet for its +numbers and for its products by entering upon a policy of commercial +expansion, which in turn has to be supported by stronger military and +naval establishments. It is led by primitive impulses that to it +carry their own moral justification, to possess the territory of its +neighbors. The immediate occasion is probably some matter of internal +politics, such as growing discontent and democratic sentiment among +the people. Nations with slowly growing populations, and still +possessed of ample territories to maintain their accustomed standards +of life, naturally favor the _status quo_, and are pacifist or +nonmilitarist. If they arm it is for their own safety. In this view, +militarism is seen to consist not in having drilled soldiers and +stores of munitions, but in the national state of mind that would +use these for aggression, not merely for defense. When, therefore, +a powerful nation has reached a certain stage in the relation of its +population to resources, limitation of population not limitation +of armaments is the real pacifism; and increase of population, not +increased military training or a larger navy, is the real militarism. + +§ 16. #Problem of maximum military power.# It is a grave question, +however, whether a nation with a comparatively sparse population, +high wages, and great wealth can safely limit that population in the +presence of a capable, ambitious, and efficient rival that covets such +opportunities. On the one hand, a population may be so sparse that +it has not soldiers enough to defend its territory against a numerous +enemy; on the other hand, it may be so dense, and consequently average +incomes be so low, that it cannot properly train, arm, and support +its population of military age. The recent developments in the art +of warfare call for great use of the mechanical industries, for +great power to endure taxation, and for great financial resources, +conditions found only where the average of national income is high. +The point of maximum military power must be far short of the maximum +possible population. It would seem that a nation of 100,000,000 +inhabitants favorably situated to resist aggression, well supplied +with the natural materials for munitions, and well equipped to produce +them, might safely limit its numbers so as to ensure a high level of +popular income. This safety would be greatly increased by permanent +alliance with other peoples likewise limiting their numbers and, +therefore, interested in maintaining the peace of the world. In +this way it would be possible for them all to maintain a standard +of popular well-being even higher than is fully consistent with +the maximum military power, even in the presence of prolific and +aggressive rival nations. + + +[Footnote 1: Even more important than these is the relative decrease +of the successful strains of the population, briefly treated in Vol. +I, ch. 33. This is the problem of eugenics, the choice and biologic +breeding of capable men to be the citizens of the nation, and broadly +understood, it includes both the negro and the immigrant problems.] + +[Footnote 2: See Vol. I, p. 430, figure 58, showing the fall in the +decennial rate of increase of negroes compared with whites; and see +comment in accompanying note.] + +[Footnote 3: See above, ch. 20, sec. 11, and references in note.] + +[Footnote 4: See below, sec. 12.] + +[Footnote 5: See Vol. I, p. 221, on non-competing classes.] + +[Footnote 6: The latest and best statement is that of H.P. Fairchild, +"Immigration," pp. 215-225, citing various opinions, and accepting the +view of Walker. But he says (p. 216): "It must be admitted that +this is not a proposition which can be demonstrated in an absolutely +mathematical way, which will leave no further ground for argument."] + +[Footnote 7: See Vol. I, p. 429, for figures of population and of +decennial rates of increase.] + +[Footnote 8: The effect of the growth of cities is discussed in the +"American Journal of Sociology," Vol. 18, p. 342, in an article on +"Walker's Theory of Immigration," by E.A. Goldenweiser.] + +[Footnote 9: See Vol. I, p. 420.] + +[Footnote 10: See Vol. I, chs. 34 and 35.] + +[Footnote 11: E.g., see above ch. 14, sec. 11 on the prodigal land +policy.] + +[Footnote 12: See Vol. I, p. 436 ff.] + +[Footnote 13: See Vol. I, ch. 36, on machinery and wages.] + +[Footnote 14: For analysis of the available statistics bearing on the +subject, with conclusions that real wages are no longer rising, see +H.P. Fairchild, in "American Economic Review" (March, 1916), "The +standard of living-up or down?"] + +[Footnote 15: Peter Roberts, in "The New Immigration," 1912, preface, +p. viii, and p. 47.] + +[Footnote 16: See above, sec. 7; also ch. 21, sec. 9.] + +[Footnote 17: See above, sec. 2, note; also Vol. I, p. 422.] + +[Footnote 18: See Vol. I, p, 412, on war and the pressure of +population.] + + + + +PART VI + + +PROBLEMS OF INDUSTRIAL ORGANIZATION + + + + +CHAPTER 25 + +AGRICULTURAL AND RURAL POPULATION + + § 1. Agriculture and farms in the United States. § 2. Rural and + agricultural. § 3. Lack of a social agricultural policy in America. § 4. + Period of decaying agricultural prosperity. § 5. Sociological effects of + agricultural decay. § 6. Fewer, relatively, occupied in agriculture; use + of machinery. § 7. Transfer of work from farm to factory. § 8. The + rural exodus. § 9. The farmer's income in monetary terms. § 10. + Compensations of the farmer's life. § 11. Ownership and tenancy. + + +§ 1. #Agriculture and farms in the United States#. There were +nearly 12,400,000 persons in the United States gainfully occupied in +agriculture in 1910, this being 32.5 per cent of all in occupations. +These, together with other family members not reported as engaged +in gainful occupations, constitute the agricultural population, and +comprize more than one third of the total population of the country. +"Agriculture" is here used in a broad sense, including floriculture, +animal husbandry (poultry, bee culture, stock raising), regular +fishing and oystering, forestry and lumbering. Agriculture thus +produces not only the food but (excepting minerals, including coal, +stone, natural gas, and oil) the raw or partly finished materials for +all the manufacturing and mechanical industries. + +With the exception of areas devoted to forestry on a large scale and +to fishing, the industry of agriculture is pursued on the 6,400,000 +farms, covering 46 per cent of the total land area of the country. Of +the land in farms, a little over half is classified as improved. The +estimated value of farm property, including buildings, implements, +machinery, and live stock, was, in 1910, about $41,000,000,000, +somewhere near one fourth of the estimated wealth of the country at +that date.[1] + +§ 2. #Rural and agricultural.# The adjectives rural and agricultural +are often used loosely as synonyms. Agricultural refers primarily to +the occupation of cultivating the soil, and is properly contrasted +with other occupations, as mechanical and professional; whereas rural +refers to place of residence outside of incorporated places of +a specified minimum population (of late, 2500), and is properly +contrasted with urban, applied to those living in larger population +groupings. In 1910 the rural population comprised 53.7 per cent of the +total population. It is true that the two groups of the agricultural +and the rural populations are largely composed of the same persons, +but to a considerable extent they are not. Many farm houses, together +with part or all of the farm lands, lie inside urban boundaries, and, +besides, some persons engaged in agriculture reside in urban places. +On the other hand, any one acquainted in the least with a rural +district (in the statistical sense) can at once think of many +persons living there that are not engaged in agriculture; they may +be merchants, warehousemen, railway employees, physicians, +handicraftsmen, teachers, artists, retired business men, and others. +The percentages given in this and in the preceding section indicate +that about two fifths of the rural families are not engaged in +agriculture. + +It is often important to make this distinction, tho it is difficult +to do; for some of the much-discussed rural questions are of a +broad social nature, are matters of rural sociology, relating pretty +generally to the rural population; while other questions of "rural +economics" are more strictly matters of agricultural economics and +relate to the farm as a unit of industry, or to agriculture as an +occupation. + +§ 3. #Lack of a social agricultural policy in America.# It is a common +remark that the farmer lives an independent life. This develops in him +a self-reliant spirit. He readily gives and takes simple neighborly +help in informal ways, but he does not readily turn to government +for aid. While every influential urban group, organized or +unorganized--manufacturers, merchants, wage-earners--has sought and +obtained special protective social legislation, the farmer has, from +choice or necessity, usually had to work out his economic problems +unaided. The exceptions are few and of small importance. For example, +the prodigal land-policy of the state and national governments +encouraging the settlement of the frontiers was not a farmers' +policy. It was originally inspired by the larger political purpose +of extending the bounds of the nation; later it was advocated and +fostered by a land-speculating element, linked with bad politics, in +the frontier states, and not by farmers as such. It in time greatly +injured the farmers of the eastern states. The "Granger legislation," +to regulate railroad rates, was so called by the East in a spirit of +derision because it began in the distinctively agricultural states +of the Northwest; but it had neither the aim, nor the result, of +obtaining especially for farmers any rates that were not open to +every one on the same terms. The tariff rates on American agricultural +products, placed in the acts as a matter of form, have, with minute +exceptions, been ineffective to favor farmers, as the shipments were +all outward and none inward, while heavy and effective rates were +placed on most things that the farmers had to buy.[2] + +In part the explanation of the lack of legislation favoring farmers +is to be found in their small part and influence, as a class, in +political affairs, outside of minor executive offices in township and +county governments. In the state legislatures farmers are few relative +to their numbers in the community, and still fewer in either House in +Washington. Among the real exceptions to the otherwise fair record of +the farming class in this respect is the tax on oleomargarine and the +special favor accorded to farmers' associations in the Clayton Act. It +might be cynically said that the farmer has not been "sharp" enough +to get his share of the "good" things" that the business classes were +passing around in protective legislation. But farmers have, as has +every economic group, interests which may legitimately be the subject +of social legislation; whereas they have limited their attention to +their private affairs at home and have been prone to vote patiently +and proudly the "straight ticket" to elect business men and lawyers to +office. + +§ 4. #Period of decaying agricultural prosperity#. Despite the facts +just stated, every campaign orator admits that there is no other +occupational class of the nation of greater importance to the nation +than the farmers, or more deserving of prosperity. Every other part +of the industrial organization of a nation is interrelated with +its agriculture. Great changes, in respect to growth of population, +immigration, exhaustion of natural resources, mechanical inventions, +scientific discovery, and many things more, have been occurring, +which have altered and, in some communities, have destroyed the very +foundations of agricultural enterprise in America since the close +of the Civil War in 1865. But the farmers have been left to struggle +individually with their individual difficulties, tho the outcome was +of the gravest portent to the whole social economy. Such was the case +in the period of agricultural depression from 1873 to about 1896.[3] +Multitudes of ancestral homesteads were then left behind by the last +farmer-descendant of the old line. No longer able to make a living on +the soil, he took up an urban occupation. + +§ 5. #Sociological effects of agricultural decay#. Such changes caused +a relative decline in the birthrate of the old American stock. The places +of many of these long-settled families remained unfilled as thousands of +abandoned farm houses testified. The places of others were taken by a +tenantry, white or black, lacking the thrift of ownership; the lands of +others passed to new owners of alien races. The populations of many rural +neighborhoods thus became heterogeneous, with results calamitous to the +social life. Once prosperous schools declined, once thronging country +churches were deserted, and much of the old neighborhood democracy +disappeared. When, about the year 1900, prosperity began slowly to return +to the American countrysides in the form of rising prices of farm produce, +it was in large part too late to remedy the evil, except as it may be +done by generations of effort under more favoring conditions. There +are merely suggested here some of the complex sociological effects of +past economic changes in American agriculture. It is certain that in +the future also the economic changes in this field will be related +closely to social and political changes of a fundamental character. + +§ 6. #Fewer, relatively, occupied in agriculture; use of machinery.# +Probably ever since the first census in 1790, the relative number of +agriculturists in this country has been decreasing. Beginning in +1880, the numbers of those occupied in agriculture for gain have +been reported at the census dates in a form that makes them fairly +comparable.[4] + +The explanation of this decrease in the proportion of the population +that is engaged in agriculture is twofold; the first is the real +increase in the productive output per person in agricultural industry. +In larger part this is due to the increasing use of machinery in place +of simple hand tools, and the substitution of horse-, hydraulic-, +windmill-, steam-, and gasoline-power for human labor. This change has +been made readily in the regions of level fields, but of late has been +made possible to a greater extent in hilly country, by rearranging +and combining the old irregular fields into regular fairly level +rectangular fields easily tillable, while turning the rougher lands +and hillsides into wood lots and pastures.[5] One man, thus, driving +three or four or more horses, can do the work formerly done by two +or more men and do it just as well. The farmers' incomes in different +parts of the country vary pretty nearly with the amount of horse-power +used per man. Economies equally great are made in the work done in the +barnyards and barns. In most parts of the country only a beginning +has been made in these ways, and in future the census will continue to +reflect the progress in these directions. + +§ 7. #Transfer of work from farm to factory#. The other part of the +explanation of the decrease in the proportion of the population that +is engaged in agriculture is that many operations are, step by step, +being transferred from the farm to the factory. "Agriculture," we have +observed, is a great complex of industries, in which many different +products are taken from the first simplest extractive stage, and then +put through successive processes to make them more nearly fitted for +their final uses. Not so long ago grain cut in the field was threshed, +winnowed, shelled, made into flour, and baked on the farm, as it still +is in many places. Logs were cut into boards, planed, and made into +houses or furniture by the farmer. The old-time farmer made by hand a +large number of his farm implements--rakes, ax handles, pumps, carts, +and even wagons. Until a generation ago all butter, cheese, and other +dairy products were made on the farm. Now these things are being done +in steadily increasing proportion by workers classified as in the +manufacturing industries, and agriculture contains fewer separate +industries and processes. Of course there is economy of labor in +nearly all of these changes, but the number occupied in agriculture is +greatly reduced. Many farmers and more farmers' sons are moving from +agriculture into occupations of manufacturing, trade, transportation, +and the professions, and are becoming more narrow specialists. + +§ 8. #The rural exodus#. The percentage of persons in the rural +population changes at about the same rate as does that of the persons +occupied in agriculture. In 1890 it was 64, in 1900 it was 60, and in +1910 it was 54 per cent. The percentage of the population in cities of +8000 or more has steadily increased. This phenomenon has been marked +in all of the countries that have been developing along industrial +lines. It has been variously described as "the rural exodus," "the +abandonment-of-the-farm-movement," and "the city-ward drift."[6] It +is only in part explained by the change from agriculture to other +occupations; perhaps even in greater part it is due to the decline +and disappearance in many rural places of small manufacturing and +mercantile businesses before the competition of large business in the +cities. In much of the long-settled area of the country every hillside +stream once turned a little mill to saw timber, grind corn, forge +iron, or weave cloth. Most of these mills are now deserted. In +countless villages the old blacksmith shop, once a center of business, +is abandoned. Here and there a patriarchal smith still serves a +dwindling group of customers and speaks with mingled pride and pathos +of his sons, now in the automobile business in the city. + +The movement away from the countryside has been but little +counteracted as yet, but may be more in future, by the growing +enjoyment of rural life, by the back-to-the-land movement, by +interurban railways, by improved roads, and by automobiles. + +§ 9. #The farmer's income in monetary terms#. Census figures and some +additional investigations have led to the estimate of the average +real income of the farmers of the United States in 1909, expressed in +monetary terms, as $724. The estimated value of all products, whether +sold or used by the farmer, plus the value of his house rent and fuel +consumed by family, was $1236, from which expenditures of $512 are +deducted for outside labor, and for materials used for operating and +maintaining the farm. Of the $724 the sum of $402 is estimated to +be the labor-income of the family and $322 is estimated to be the +wealth-income (at 5 per cent of the capitalization of the farm). This +was in a period of rising values in farm lands, averaging about $323 +per farm annually, and this to most farmers was equivalent to so much +monetary savings. The main items of net income, therefore, are as +follows: + + Rent $125 + Food from the farm 261 + Fuel 35 + Cash 303 + + Total $724 + Increase in value of farm 323 + + Total estimated monetary income $1047 + +Of the total, $422 is a labor-income, and $645 is a wealth income.[7] + +It would be difficult, even if the available statistics were much more +exact than they are, to compare exactly the farmer's income with those +of urban classes. Averages of such large numbers and over such a wide +area have a limited significance in the specific case; and living +conditions and the purchasing power of money are so different in +country and city and in different parts of the country.[8] + +§ 10. #Compensations of the farmer's life#. In bare monetary terms +the average farmer's family gets a labor-income less than that of the +ordinary wage-earner in a factory, and it is only by the aid of the +wealth-income that it appears to fare as well or better. Even the few +largest incomes made in farming are small in comparison with many of +those made in commerce, transportation, and manufacturing. The great +mass of farmers of the nation are hard-laboring men, poor in the eyes +of the city dwellers.[9] + +But this much is certain: the farmer's income in monetary terms has +on the average much larger power to purchase the main goods of life +(material and psychic goods) than it would have in town. Equally good +house usance would cost more in nearly all towns, and much more in +larger cities. Retail prices of the same food and fuel even in small +towns would be much greater. The necessary outlay for clothes to +maintain the class standard is much less for farmers than for city +dwellers. Moreover, in the use of horses and carriages, and now of +automobiles, and in the free control of his own time--in many elements +of psychic income--the farmer is on a parity with men in other +occupations of double or quadruple his income expressed in monetary +terms. + +Tho the farmer's working day in the busiest season of summer is very +long compared with that of factory or office workers, his working +day at other seasons is usually much shorter than the average urban +worker's day. The farmer's life is nearly always free from the +excessive pressure, haste, and competition of city life, and the +value, to many a man, of the more natural and wholesome conditions of +outdoor life and outdoor work are hardly to be measured in terms of +even the most untainted dollars. + +§ 11. #Ownership and tenancy.# Since 1880, when the first figures +on farm tenures were collected, the proportion of farms operated by +owners has steadily decreased. + + Percentage of farms operated by + Owners Cash tenants Share tenants + + 1880 ............ 74.5 8.0 17.5 + 1890 ............ 71.6 10.0 18.4 + 1900 ............ 64.7 13.1 22.2 + 1910 ............ 63.0 13.0 24.0 + +These statistics arouse fears that the class of independent farmers +operating their own farms is gradually giving way to a tenantry +in America. But in some respects the figures are misleading unless +carefully interpreted. The increasing proportion of tenants is due not +so much to owners falling into the class of tenants as to the +hired laborers rising into the class of tenants. The number of male +operating owners compared with all male workers (not merely with all +farms) has remained almost constant at about 42 per cent; while the +per cent of hired workers has decreased from 43.3 (in 1880) to 41.4 +(in 1890) and to 34.6 (in 1900). Most hired men on farms are farmers' +sons; the city boy does not adapt himself readily to farm work. Most +hired men of native stock become tenants, and finally owners. Only 11 +per cent of the hired workers in agriculture (in 1900) were over 35 +years of age. + +The landlord of a farm let to a tenant, especially to a share tenant, +is still to a large extent the general manager, controlling in a +large measure through the renting contract and by his oversight, the +operations of the farm. Older men find that letting the farm to +a share tenant is easier for them and gives better results than +continuing to operate the farm with hired labor. And it evidently +gives a man a somewhat higher status to become a tenant than to +continue to be a hired laborer. In the South this movement has taken +on large proportions in the breaking up of large plantations once +operated by the owner with hired labor, and now let in smaller lots +to operating tenants. Yet such a change appears, statistically, as a +decrease in the proportion of farms operated by owners. Despite these +somewhat reassuring facts, the problem of maintaining and increasing +operating ownership of farms in America is one deserving of the most +earnest thought and efforts. The best form of farm tenure is +not necessarily that giving the best immediate economic results. +Politically in a democratic nation, and sociologically in its effects +upon the size of families and the raising of healthy children, the +preservation of an independent American yeomanry is of fundamental +importance to the nation. + +The problem is as difficult as it is important, and becomes more +difficult with the rise in the acreage value of lands and with the +economical size of farms, both calling for a larger investment to +become an owner. Changes in the system of taxation should be made with +reference to this object; the system of agricultural credit should be +developed and administered to assist; special efforts in agricultural +education should be made and active administrative efforts should be +directed, toward this important end. + + +[Footnote 1: See above, ch. 1, secs. 7 and 8.] + +[Footnote 2: See ch. 14, sec. 5.] + +[Footnote 3: See Vol. I, p. 437.] + +[Footnote 4: It must be observed in studying these figures, that +farmers' wives and children, working at home, are not reported as +gainfully occupied. But a widow or a spinster owner, if herself acting +as the enterpriser, is reported as "occupied" in agriculture. The +increasing number of such cases in the past generation in part +explains the growing number and percentage of females in agriculture. + + Number occupied in agriculture Per cent of all persons occupied + Males Females Both sexes Males Females Both sexes + + 1880... 7,068,658 594,385 7,663,043 47.9 22.5 44.1 + 1890... 7,787,539 678,824 8,466,363 41.4 17.3 37.2 + 1900... 9,272,315 977,336 10,249,651 39.0 18.4 35.3 + 1910...10,582,039 1,806,584 12,388,623 35.2 22.4 32.5 +] + +[Footnote 5: See further, ch. 26, secs. 1 and 2 on the size of farms +as an economic factor.] + +[Footnote 6: See above, sec. 2, on the distinction between rural and +agricultural. In part the change here noted results from increases in +the population of towns and incorporated places from a little below +2500 to something about 2500. For example, if there were 2499 persons +in a town in 1900 they would all be classified as rural; if in 1910 +there were 2500 or more they would all be classified as urban.] + +[Footnote 7: Sec Vol. I, p. 225, and note 11.] + +[Footnote 8: See Vol. I, p. 206.] + +[Footnote 9: See Vol. I, p. 227, note, for figures on owners and farm +laborers.] + + + + +CHAPTER 26 + +PROBLEMS OF AGRICULTURAL ECONOMICS + + § 1. Size of farms, and total farming area. § 2. Influences acting + upon the size of farms. § 3. Self-sufficing versus commercial farming. + § 4. Farming viewed as a capitalistic enterprise. § 5. Diversified versus + specialized farming. § 6. Conditions favoring diversified farming. § 7. + Intensive farming in Europe and America. § 8. Prospect of more intensive + cultivation of land in America. § 9. The new agriculture. § 10. + Difficulty of coöperation among farmers. § 11. Rapid growth of farmers' + selling coöperation. § 12. Some economic features of farmers' selling + coöperation. § 13. Coöperation in buying. § 14. Need of agricultural + credit. § 15. Recent provisions for farm loans. + + +§ 1. #Size of farms, and total farming area#. The average area of +farms has varied from a maximum of 203 acres, in 1850 (the first +figures), to a minimum of 134 acres in 1880, being 138 acres in 1910. +A better index, perhaps, is the average improved area per farm, which +has been more nearly stationary, varying from a maximum of 80 acres +in 1860 to a minimum of 71 acres in 1870 and 1880, being 75 acres in +1910. Here again the statistics require interpretation, for in the +spread of the frontier the addition of large farms in the arid and +semi-arid regions may raise the average, or the breaking up of large +plantations in the South may decrease the average, without this +indicating any essential change in the technical conditions of farming +in the country generally. Since about 1900 the total area in farms has +increased very slowly. Between 1900 and 1910 the increase was only 4.8 +per cent; whereas a larger increase occurred in the area of improved +land, 15.4 per cent, and the unimproved area in farms decreased +5.6. Future changes of farm areas may be expected to be of this same +nature, mainly in the improvement of rough pastures, swamps, partly +cleared woodlands, and desert lands awaiting irrigation. An increasing +population will have to be provided with food and other products of +agriculture on a farming area that henceforth will be increasing less +rapidly than it has in the past and than the population increases. + +§ 2. #Influences acting upon the size of farms#. In these averages +for the whole country many conflicting influences unite and neutralize +each other. Making for smaller farms is the breaking up of large +grazing areas in the West into smaller general purpose farms or +irrigated fruit districts, and of larger general farms in the North +and East into small poultry, flower, and fruit farms. Opposed to this +is a movement toward the merging of farms of 50 to 100 acres into +larger farms of 300 acres, more or less. The economic cause of this +movement is interesting and important. The typical and economic size +of farms when the Atlantic states were settled, was determined by the +use of hand tools, which permitted a man and his family to operate a +farm of about 75 acres of which about half was tilled and the rest was +in permanent pasture and woodland. The fields were small and were laid +out irregularly, which was no disadvantage for hand cultivation. But +for the most economic use of land in field crops and under more modern +conditions it is necessary to have pretty level fields, of regular +rectangular shape. The farm unit should be of such extent as to permit +of the proper use of the soil by rotation of crops, and to employ +fully the best modern labor-saving machinery for each purpose. +Numerous recent agricultural surveys point to the conclusion that for +general farming this unit is a comparatively large area of about 300 +acres. + +These conditions offer a reward to those agricultural enterprisers +who can purchase lands at a price based upon the high costs and lower +yields of the older methods and cultivate them at the lower costs and +with the larger yields of the newer methods. This movement, therefore, +toward the consolidation of smaller into larger farms is likely to +continue in many communities for several decades. This is likewise +an advantage to the community in increasing the production with less +labor. But the net effect upon the social life of the countryside is +more doubtful, and calls for careful consideration. + +§ 3. #Self-sufficing versus commercial farming. The typical American +farming family once produced nearly everything it used, and used +nearly everything it produced. It was very nearly a self-sufficing +economic unit, "a closed economy," as it sometimes called. Food, +clothing, fuel, lumber, houses, furniture, tools, were on the farm +carried through the various processes from the first gathering of the +raw materials to the finished product. They were then consumed by the +farm household. It is true that even in the first settlements there +were some craftsmen, cobblers, millers, weavers, blacksmiths--whose +services and wares were got by trading some of the surplus products +from the farms--butter, cheese, eggs, wool, hides, furs, live stock, +grain lumber. A few rare commodities of foreign make found their way +to the farm through peddlers and merchants; but altogether the goods +produced outside the farm were a small fraction of the family's +consumption, and were exchanged for but little of the farm's +production. Most farmers tried to produce for themselves, as far as +possible, everything their families needed, when the soil and +situation were poorly suited to the purposes. True, there were early +some exceptions to the general rule, where only one kind of crop was +taken from the land. Such was the forest product of masts, shingles, +lumber, and turpentine, and the great southern staple, tobacco, and +later, cotton. The exceptions have been tending to become the rule +in more and more communities. Farmers have been specializing more +and more in the kinds of products to which their farms are adapted in +respect to soil, relation to market, and otherwise. These products are +taken to market and sold for money with which are bought the things +needed for use on the farm. + +§ 4. #Farming viewed as a capitalistic enterprise#. Thus the farm +comes to be looked upon more and more, not just as a home, but much as +if it were a commercial enterprise or a factory, by which products are +made for sale. This change, to be sure, is far from complete, as the +figures for the average farmer's income show that a large share of the +family living still comes from the farm. It has gone on much further +in some districts than in others, as is indicated in the types of +farming discussed below. But just to the extent that the farmer grows +crops to sell, his outlook on his work undergoes a change. He is +less exclusively a farmer, concerned with the technical processes of +farming; he must be more largely a business man. Like a manufacturing +enterpriser, he buys the factors of production, combines them into +new products, and sells them again. He becomes interested in market +conditions and prices. He grows more commercially-minded. He views +the farm no longer as a fixed area, but one that may be enlarged by +purchase or by rental, and that may be reduced by selling or letting +the less needed parts. One-fifth of farm owners now rent additional +land. In commercial farming the land is not contrasted with capital as +something apart, consisting of the value of the equipment and stock; +but the whole complex of land and other goods is thought of as a +capital-investment. The greater ease of transferring landed-property +in America and the greater mobility of our population have always made +it more natural here than in Europe to look upon land as a capital +investment. This view is now becoming more general as a result of the +commercializing of farming enterprise. + +This change has been favored by other influences. Particularly has +the use of machinery and of other equipment, calling for a larger +investment per man and per acre, been making agriculture, in its +form of enterprise, more and more like manufacturing and commercial +undertakings. + +§ 5. #Diversified versus specialized farming#. To be self-sufficing a +farming family must carry on general farming, that is, must produce +a diversity of products. As farming becomes more commercialized it +necessarily becomes somewhat more specialized, and produces a smaller +variety of products. In some parts of the country and on particular +farms this specialization is extreme: in California, citrus fruits, or +prunes, or beans, may be the only crop raised; wheat in Kansas and +the Dakotas, and dairy products in thousands of farms surrounding +the great cities, are the main, tho not the exclusive products. Many +farmers in these districts have no gardens or orchards, keep no cow, +and buy much or all of the grain for their horses, as well as milk, +butter, vegetables and fruits for their own use. Poultry and eggs +are shipped in trainloads two thousand miles from the Middle West to +California to be consumed by orange growers. Many farmers in the East +no longer keep sheep, pigs, or beef cattle, and they buy out of the +butcher's wagon all the meat except fowls used by their families. This +partly explains the decrease of live stock in the whole country in +recent years and the increase in the price of meat. + +§ 6. #Conditions favoring diversified farming#. There are, however, +limits to the net advantage of specialization in crops, and competent +authorities on agriculture question whether in many cases that limit +has not been readied and passed. Most farms have a variety of soils +and of conditions--hilltops, slopes, bottom lands--which are suitable +for different purposes. A rotation of crops is necessary to get good +yields. Live stock must be kept to maintain the fertility of the land, +which deteriorates fast if hay and grain are continually sold. Some +live stock can be kept on every farm very cheaply with the food that +would go to waste otherwise. The specialization in stock raising in +the prairie states ceased to be profitable when lands became more +valuable. Specialization in wheat production in the states just west +of the Mississippi is possible only so long as wheat will grow on +the virgin soil without costly fertilizers. The cotton farmers of +the South, especially the negro farmers, have been forced by debt and +thriftlessness into a one-crop policy that is now seen to be wasteful +in the long run. A variety of production is necessary to employ labor +somewhat regularly on a farm throughout the year. These and other +conditions will make most farming always an industry of comparatively +diversified products. Only 1 per cent of the farms get as much as 40 +per cent of their receipts from fruit; 2 per cent get that much from +tobacco; 3 per cent from vegetables; 6 per cent from dairy products; +and 19 per cent from cotton. The remaining 60 per cent of receipts +were in most cases from various sources, and these figures did not +include the value of produce consumed by the farmer's family. + +§ 7. #Intensive farming in Europe and America#. No other farm problem +interests the city man so much as that of increasing the production +of the land. To most city men farming hardly seems to be an occupation +giving livelihood and life to the farmer; it seems rather to exist +for the sole purpose of feeding men living in cities. The city man, +therefore, measures the success of farming not by the farmer's income, +by the level of countryside prosperity, but by the number of bushels +per acre raised to ship to town. Every city newspaper and magazine +contains articles pointing to the fact that larger crops per acre +are raised in Europe than in America, and broadly suggesting that the +American farmer could do as well, if only he would. Foreign travelers +comment in like vein on the wasteful use of land in America as +compared with farming methods in Europe. + +Land is used most extensively, with respect to labor, when it is in +forests; somewhat less so when in pasture as care must be given to the +live stock; and still less when used for hay, grain, and other crops. +But the use of machinery in large fields is far more extensive than +the patient work of peasants with their hand tools. The more labor or +the more equipment (or both together) that is put upon an acre, the +larger the product, but the larger the cost per unit. It is a familiar +economic principle.[1] It would bankrupt any farmer, excepting the +millionaire amateur, to farm in America by European methods. American +farmers, at least many of them, could raise as many bushels per +acre and keep their farms as thoroly cultivated as do the European +peasants, if wages were as low here as are the peasants' incomes. + +§ 8. #Prospect of more intensive cultivation of land in America#. As +the aggregate need for food increases in America there must come a +steady pressure upon our stock of land uses, resulting in decreasing +returns to labor in agriculture, unless this movement can be +counteracted by the spread of better methods in agriculture--not +European peasant methods, but new American methods consistent with +high labor-incomes. A good deal of our farm land is undoubtedly too +intensively used now in view of present and prospective commodity +prices and wages. Maladjustment of land uses has resulted +from mistaken judgment, from changing conditions as to prices, +transportation, and markets, and from loss of soil fertility. There +are thus, on nearly every old farm, some fields that would better be +in pasture and much hillside pasture that would better be woodland. It +is often declared extravagantly that our country could support easily +the total population of China, or as great a population per square +mile as that of Italy. If it did so it would be only on the penalty +of lowering wages toward, if not quite to, the level of the Chinese +coolie or of the Italian peasant. Great metropolitan dailies gravely +present as an argument in favor of unrestricted immigration, the +proposition that "if" the cheaper immigrants would but go upon our +"waste" land (which they refuse to do), and raise food by European +methods the problem of the rising cost of food in the cities would be +solved. This urban ideal of a frugal, low-paid agricultural peasantry +can hardly be adopted in America as the national ideal. Rather, +it would seem, any movement toward more intensive agriculture that +necessitates a lowering of the standard of living of the masses of the +American people will, when it is recognized, be condemned and opposed. + +§ 9. #The new agriculture#. Agricultural method, the technic of +farming, has been constantly progressing for two hundred years in +Europe and in America, Were it not for this, the great growth of +population on this combined area would have been quite impossible. +But the betterments since about 1890 in America have been especially +great. They are mostly the first large fruits of the scientific study +made possible by the land-grant colleges and agricultural experiment +stations fostered by state and national, legislation. These many +diverse improvements are grouped under the general title of "the +new agriculture." Its chief features are: new machinery and other +labor-saving methods; better methods of cultivation of the soil; +better selection of seed; introduction of new plants and trees from +abroad to utilize low-grade lands; plant-breeding to develop new +varieties of better quality, heavier bearing, or immune to disease; +more efficient and economical ways of maintaining soil fertility; +better methods of marketing; and better technical education of the +individual farmer. Each of these topics, and a number of other minor +ones, would require a chapter in a complete treatise on agricultural +economics. Here this mere enumeration must be allowed to convey its +own suggestion of far-reaching results for the whole political economy +of the nation and of the world. + +Indeed, so much has been written in a Barnumesque way of the +wonders of the new agriculture, that its actual results and further +possibilities are in many minds absurdly exaggerated. It has not as +yet been potent enough to prevent diminishing returns in respect to +the great staple foods and raw materials obtained by agriculture. +It apparently has barely kept pace with the needs of the growing +population of Christendom. It has enabled a larger population to exist +in about the same, if not in a worse condition, on the same area, +while progress in cheapness of goods has come almost entirely from the +side of the chemical and the mechanical industries. It does not +give the promise of an indefinite amelioration of the lot of an +indefinitely multiplying population. But to a population slowly +increasing, a new and ever newer agriculture, utilizing constantly the +achievements of the natural sciences and the mechanic arts, ensures +the possibility of a steady betterment of the popular welfare in city +and in open country alike. + +§ 10. #Difficulty of coöperation among farmers#. Rural communities +are proverbially conservative; the American farmer is proverbially +an individualist. No wonder, then, that the new ideas and plans of +coöperation in business matters have made headway in agriculture +slowly and with difficulty. The need of mutual aid among American +farmers is especially great, for, as has often been, said, isolation +is the problem of the farm as congestion is that of the city. On the +frontier a coöperative spirit manifested itself frequently in mutual +helpfulness, in house raising bees, husking bees, threshing bees, and +other similar gatherings. + +But this spirit seems to have almost disappeared in the older +communities, the more rapidly doubtless in the period of decaying +agricultural prosperity.[2] To-day, for example, it is impossible on +a certain Pennsylvania road for one more progressive farmer to get +his neighbors to coöperate in so simple a matter as hauling their +milk cans to the creamery, and so every day in the year ten horses are +hitched to ten delivery wagons carrying two or three milk cans apiece, +and driven by ten drivers along the same road to and from the railroad +station. One driver and two horses could easily carry as much or +more, as is done now in many other dairy districts. Even of successful +coöperation among farmers sympathetic critics are forced to say: "Many +students of rural economics assert that coöperation as applied to the +distribution and marketing of farm products is not very successful +unless it is founded upon dire necessity. When the records of the +organizations of the country are analyzed it becomes almost necessary +to accept that statement. So long as farmers do fairly well in their +own way they are not inclined to coöperate." + +§ 11. #Rapid growth of farmers' selling coöperation#. Despite what has +just been said, coöperation among farmers now is more developed and is +growing faster than all other kinds of coöperation in America. This +is most marked in farming communities in the West, especially in +California and in the Middle Western or Northwestern states (e.g., +Minnesota and Wisconsin). There the farmers are younger, and many have +been educated in the state agricultural colleges. They all produce +nearly the same kinds of crops of staple produce which must be shipped +to distant markets. The need of uniting to get what they thought +would be fair treatment from the railroads, and to protect themselves +against the abuses of the competitive commission salesagents, seems to +have given the first impetus to farmers' coöperation. + +The most notable developments were those of the California Fruit +Exchange and of coöperative societies of the Northwest for marketing +grain. The membership of the former is made up entirely of the +local citrus growers' associations in California. It has a complete +organization of selling agents in the Eastern cities and a remarkably +efficient, tho simple, system of equalizing and expediting shipments. +Now the agricultural coöperative associations of various kinds are +multiplying all over the country, for shipping live stock, fruits, +butter, cheese, and other farm products. Coöperation for these +purposes called forth new activities; packing houses were built, and +grain elevators and creameries and dairies, and now a goodly number of +the simple manufacturing processes are undertaken by these societies, +now numbering thousands. + +§ 12. #Some economic features of farmers' selling coöperation#. This +type of producers' selling coöperation is proving in America to be far +more successful than producers' coöperation among workingmen;[3] and +certain important economic features in it should be noted. The local +producers' selling coöperative society is composed of farmers who as +enterprisers own and carry on their own separate businesses; they +are not, as in the other case, wage workers. Any productive processes +undertaken by this kind of society are subordinate to the main +business, being such as picking, packing, drying, preserving, and +making boxes for packing. This form of coöperation with the related +form of consumers' coöperation that is fostered by it, promises to +have a wide extension. + +Some of these societies, as those dealing in citrus fruits, regulate +with some success the picking and the marketing so as to distribute +them more evenly throughout the year. They watch the markets and +direct their agents by telegraph to divert cars _en route_ away from +markets that are glutted with products and into markets where prices +are higher. They take some of the products, as eggs in the spring at +the period of low prices, and pack or refrigerate them, to be sold +when prices are higher. For thus withholding the supply they are said +by some to exercise a monopolistic power. But this is a more than +doubtful view. So long as only the seasonal variations are equalized +and the total supply of the year is not reduced it is, on the marginal +principle, an economic service to the consumers, comparable to +insurance in its utility. Any reduction of the area planted or of the +entrance of others into the industry would be a monopolistic act but +this as yet has not occurred. + +§ 13. #Coöperation in buying.# Coöperative buying (called also +consumers' coöperation or distributive coöperation) has had a large +growth in the British Isles, since 1844, when the society called the +Rochdale Pioneers was founded by a group of factory workingmen. The +coöperative stores, both in Great Britain and on the Continent, have +continued to develop mainly among the industrial classes in urban +centers. However, this has not been exclusively the case, and +particularly in Denmark and Ireland coöperative buying has increased +in agriculture in connection with selling associations. Since 1890 +the growth of consumers' coöperation among European industrial +wage-earners has been phenomenal, especially in Belgium, Germany, and +Switzerland. American wage-workers, however, have made few and feeble +efforts in this direction. + +In the period beginning 1867 many coöperative stores were founded in +America by farmers in the Grange movement, who operated also grain +elevators, warehouses, and steamboat lines. But the movement failed +about 1877. This result is easily explained by lack of commercial +knowledge and lack of harmony among the members, selling on credit, +and inefficient management. A new era in consumers' coöperation for +farmers began about 1900 and now in several widely separated parts +of the country--Minnesota, Kansas, California, Washington, and +elsewhere--the movement is spreading rapidly, supported in large part +by the same persons who are members of the selling associations. + +§ 14. #Need of agricultural credit.# Banking originated in cities and +for the use of the merchant-class. It still retains pretty faithfully +its commercial character. The change of farming toward a more +commercial form[4] has been little aided by banking credit. National +banks and many others were forbidden in their charters to lend on the +security of real-estate, the farmer's one business asset.[5] A great +number of farms are always in course of being purchased, the balance +of purchase money being borrowed by the purchaser. A group of private +agencies such as life insurance and mortgage loan companies and local +money lenders has supplied in somewhat costly ways the need of farm +credits. Tho rates of interest have become more equalized throughout +the whole country, they still range between 7 and 10 per cent in the +Southern and Western states, averaging 7 per cent in the whole country +for interest and commission. The need of better opportunities for +credit in the agricultural districts has long been recognized. The +high rate of interest for borrowed money necessarily placed a limit on +improvements in equipment and methods of farming.[6] + +§ 15. #Recent provisions for farm loans#. The Federal Reserve Act +made two important changes to improve agricultural credit.[7] Soon +afterward some of the states took more vigorous action to provide +a special system of agricultural credit, especially New York and +Missouri. In the latter state, on the initiative of a public-spirited +citizen of St. Louis, was passed in 1915 a notable act of legislation +known as the Gardner State Land Bank Act (effective December 1, 1916, +provided a constitutional amendment is adopted in November, 1916). +This authorizes the establishment of a land bank, with power to lend +on the security of farming lands, for buying farms and for productive +improvements, and to issue bonds to be sold to investors. + +Following this general plan the Federal Farm Loan Act became law +July 17, 1916. It authorized the establishment of twelve Federal Land +Banks, each with a capital of not less than $750,000 to make loans +through national farm loan associations organized somewhat after the +model of the building and loan associations. The bonds issued by these +banks are to bear not to exceed 5 per cent interest. It is hoped that +they will have the high credit of municipal bonds so that they may +be sold at parity, bearing interest at 4 or 4.5 per cent. The loan +is repaid by the farmers under a regular plan of amortization. The +practical results of these measures are yet to appear. They are +expected to give to loans that are made on the security of farms as +wide a market and as high credit as state and municipal bonds now +have. They bid fair to bring the rate of interest on long-time loans +to farmers down to 5 per cent or less in the remotest parts of the +land. This will stimulate agricultural improvement, and facilitate +the purchase of land by tenants. Where the interest rate has been +the highest it should raise the value of farm lands as it brings them +within the circle of a lower-interest-rate economy. This may hasten +the transfer of the lands from less provident to more provident +owners, who are willing to take the land at a higher capitalization. +But the system of loans will probably help to develop greater thrift +in the younger farming population. + + +[Footnote 1: See Vol. I, chs. 12 and 13 on proportionality and +usance.] + +[Footnote 2: See ch. 25, secs. 4 and 5.] + +[Footnote 3: See above, ch. 19, secs. 13, 14, 15.] + +[Footnote 4: See above, sec. 3.] + +[Footnote 5: See ch. 8, sec. 8.] + +[Footnote 6: See Vol. I, pp. 495-497, on the relation between lower +interest rates and productive processes.] + +[Footnote 7: See ch. 9, sec. 7 on time deposits, and sec. 9 on farm +loans.] + + + + +CHAPTER 27 + +THE RAILROAD PROBLEM + + § 1. Rise of the corporation concept. § 2. The modern era of + corporations. § 3. Beginning of corporation problems. § 4. The era of + canals. § 5. Rapid building of American railroads. § 6. Reasons for + governmental aid. § 7. Kinds of governmental aid. § 8. Emergence of + the railroad problem. § 9. Discrimination as to goods. § 10. Local + discrimination. § 11. Personal discrimination. § 12. Economic power + of railroad managers. § 13. Political power of railroad managers, + § 14. Consolidation of railroads. § 15. State railroad commissions. § 16. + Passage of the Interstate Commerce Act. § 17. Working of the Act. + § 18. Public nature of the railroad franchise. § 19. Other peculiar + privileges of railroads. § 20. Private and public interests to be + harmonized. + + +§ 1. #Rise of the corporation concept#. In the legal systems of +primitive people and long afterward, only natural persons had legal +rights, could make contracts, have property, and carry on a business. +But in a number of cases, very early, groups of men came to have +certain interests in common and certain possessions. Gradually some +such groups gained more or less of legal recognition, with certain +political and economic rights as a body and not as individuals. +Thus evolved the conception of a "corporation" (body) having men as +"members," an artificial person, yet not the same as any one or as all +the individuals together, and legally distinct from the individuals. +A group of burghers obtaining a charter from the lord of the realm +became a municipal corporation; a group of teachers, a _collegium_, +became the corporation of the college or a university (a number of +persons united into one association); a group of craftsman became a +gild-corporation. Each corporation had certain rights, privileges, and +immunities, and used a corporate seal as a signature. All of the early +corporations had some economic features that were incidental to the +main purposes, which were political, ecclesiastical, educational, +and fraternal. Toward the end of the Middle Ages groups of traders +obtained charters to act as corporations permanently for business +purposes, such as foreign trade, colonization, and banking. These +increased in the sixteenth and seventeenth centuries, and in the +eighteenth century this form of organization was adopted also and +parliamentary charters obtained, by groups of men for building +turnpikes and canals and for carrying on other kinds of business. + +§ 2. #The modern era of corporations#. The great era of the +corporations did not begin, however, until well on in the second +quarter of the nineteenth century. Then, both in Europe and in +America, the corporate form of organization was extended to a greater +number, and to other kinds, of enterprises. It proved itself to be +well adapted to enterprises for the construction and operation of +canals and railroads, requiring a larger amount of capital than +usually could or would be risked by one person. The investor in a +corporation bought shares, and his liability for debts and losses +was limited by charter to his share capital. It is an advantage that +permanent enterprises of that kind are owned by corporations +with charters perpetual or for long periods. It is possible for +corporations to make investments running for longer periods than would +be safe for individuals. The corporation with an unlimited charter +has legally an immortal life. Sale and change of management are not +necessary on the death or failure in health of any one owner. As the +factory system and large production developed, the corporate form of +organization was found to have these same advantages in manufacturing. +It appeared in textile, iron, mercantile, and other industries. After +1865 the corporate form of organization increased at a cumulative +rate, until now it is applied to many enterprises of small extent and +local in operation. There are 300,000 corporations making returns +to the United States Commissioner of Internal Revenue.[1] There were +70,000 manufacturing corporations, which were 26 per cent of the whole +number of manufacturing establishments, but which employed 76 per cent +of all wage earners and turned out 79 per cent of the whole product. + +§ 3. #Beginning of corporation problems.# With the corporations +came "the corporation problem," a single name for a complex of +problems--legal, political, moral, and economic--which arise out of +the relations of corporations to their individual stockholders, to +their employees, to the state, to the general public, and to their +competitors in business. The problems differ also in corporations of +different sizes and in different businesses. We shall discuss in +this and succeeding chapters but a few of the larger aspects of the +corporation problem, the railroad, the industrial trust, and certain +other kinds of monopolistic industry. + +Of the various forms of corporations, banks first presented problems +calling for economic legislation and regulation. This is explained by +the fact that it was the first kind of business corporation to become +important, and further by the fact that its work was in various ways +closely connected with the coinage and regulation of money, which had +already become a governmental function. The railroad was the form +of corporation next in point of time to become a great problem; this +because of the peculiarly vital and far-reaching effects that such +railroad transportation has upon all other kinds of business in the +community, as appears in what follows. + +§ 4. #The era of canals.# Canals were used in the ancient empires +for irrigating, for the supplying of cities with water, and for +navigation. In the late eighteenth and the early nineteenth centuries +they were rapidly built in England and America. Six canals had been +built in the United States before 1807, but the "canal-era" in America +dated from the beginning of work on the Erie canal in 1817, and +continued until about 1840, when nearly all new work ceased; over 4000 +miles of canals had been built at a cost of $200,000,000. + +The great advantage of canals is cheapness of operation due to the +simplicity of the machinery needed and to the great loads that can be +moved with small power. A cent a ton-mile proved to be a paying rate +on a small canal. For heavy, slow-moving freight, a railroad can even +now barely rival a parallel canal at its best. As canals, however, can +be built only along pretty level routes and where the water supply is +at high level, their construction is limited to a small portion of the +country. The principle of diminishing returns applies strongly to +the construction of canals; the first canals in favored locations +are easily constructed and economically operated, but it is only +with greater cost and difficulty that the system can be successively +extended. In temperate climates the use of canals is limited by ice +to a part of the year, and by the summer's drought sometimes still +further. At its best, therefore, the small land-locked canal is fitted +only to be a supplementary agent in the system of transportation +wherever another transportation agency of higher speed and greater +regularity is possible. Far different is the case of the oceanic canal +in a tropical climate. + +Canals do not appear to have developed any serious problems calling +for public regulation of rates. A first simple legislative act fixing +the rate of tolls for boats was sufficient. Charges were made by +distance as on a toll road and the boats were owned by different +private shippers or by common carriers among whom competition +prevailed. + +§ 5. #Rapid building of American railroads#. The canal was just +reaching the peak of popular favor when the railroad in 1830, after a +half-century of slowly accumulating technical improvements, burst into +view as a demonstrated success as a means of transportation.[2] The +railroad excels in adaptability any other agent of transportation; it +can go over mountains or tunnel through them. It is markedly superior +in certainty; it may be blocked for a day or two by floods and snows, +but it suffers no seasonal stoppage of traffic. In speed, even the +early railroad so far excelled that the canal could survive only by +dividing the traffic, taking the lower grades of freight, and leaving +to the railroad the passenger traffic and fast freight. Even in +respect to cheapness, the unique virtue of waterways in favored +localities, the railroad made rapid gains. Improvements in roadbed, +rails, cars, engines, and other equipment soon reduced greatly the +cost of conducting traffic on the main lines of roads. Because of +these qualities railroads soon surpassed in importance every other +agency of internal transportation. The miles constructed and miles in +operation in the United States, by decades since 1830 were as follows +(route mileage, not counting double tracks and sidings): + + Miles constructed Total route miles + in decade. in operation. + + 1830 ........................ 23 23 + 1840 ........................ 2,795 2,818 + 1850 ........................ 6,203 9,021 + 1800 ........................ 21,605 30,626 + 1870 ........................ 22,296 52,922 + 1880 ........................ 40,345 93,267 + 1890 ........................ 73,924 167,191 + 1900 ........................ 31,773 198,964 + 1910 ........................ 51,028 249,992 + 1915 (5 yrs.) ............... 13,555 263,547 + +The extension of railroads was so rapid that there was not time for +a gradual adjustment of industrial conditions. In many places the +resulting changes were revolutionary. The building of railroads in +the Mississippi valley in the seventies lowered the value of eastern +farms, ruined many English farmers, and depressed the condition of +the peasantry in all western Europe.[3] With the lower prices that +resulted when the fertile lands of the western prairies were opened +to the world's markets, the less fertile lands of the older districts +could not compete. Many other changes, of no less moment in +limited districts, resulted from the building of railroads. Local +trading-centers decreased in importance. Villages and towns, hoping +to be enriched by the railroads, saw their trade going to the cities. +Commerce became centralized. Enormous increases of value at a few +points were offset by losses in other localities. + +§ 6. #Reasons for governmental aid#. The growth of railroads in +America was more rapid than in any other part of the world, but it +did not occur without much help to private capital from governmental +agencies. The railroad enterprise was uncertain, the possibilities of +its growth could not be foreseen, and private capital would not invest +without great inducements. In European countries the railways were +built through comparatively densely populated districts to connect +cities already of large size. Yet railroad extension was very slow +there, even tho the states in many ways aided the enterprises. America +was comparatively sparsely populated, and most of the railroads were +built in advance of and to attract population, business, and traffic. +In many cases railroad building in America was part of a gigantic +real-estate speculation undertaken collectively by the taxpayers of +the communities. + +§ 7. #Kinds of governmental aid#. American states recklessly abandoned +the policy of non-interference, and vied with each other in giving +railroad enterprises lands, money, and privileges, in loaning bonds, +in subscribing for stock, and in releasing from taxation. These +fostering measures were expected to increase wealth and to diffuse a +greater welfare through the community. Many states were forced to +the point of bankruptcy by their reckless generosity, and some states +repudiated the debts thus incurred. + +The national government then took up the same policy and granted lands +to the states to be used for this purpose. The first case of this kind +was the grant to the Illinois Central road, in 1850, of a great strip +of land through the state from north to south. Grants were made in +fourteen states, covering tens of millions of acres of land. Then the +national government, between 1863 and 1869, aided the building of the +Pacific railroads by granting outright twenty square miles of land for +every mile of track and by loaning the credit of the government to +the extent of fifty million dollars,--a debt which was settled by +compromise only after thirty years. + +Counties, townships, cities, and villages then entered into keen +competition to secure the building of railroads, projected by +private enterprise. Bonds, bonuses, tax-exemptions, and many special +privileges were granted. To obtain this new Aladdin's lamp, this great +wealth-bringer, localities mortgaged their prosperity for years to +come. The promoters bargained skilfully for these grants, playing off +town against town, cultivating the speculative spirit, punishing the +obdurate. Not the civil engineer, but the railroad promoter determined +the devious lines of many a railroad on the level prairies of America. +The effects of these grants were in many cases disastrous, and after +1870 they were forbidden in a number of states by legislation and by +constitutional amendments. But before this era of generosity ended, +probably the railroads in America had received more public aid than +has ever been given to any other form of industry in private hands. + +§ 8. #Emergence of the railroad problem#. In most charters and laws +authorizing the building of railroads, either nothing was specified +regarding rates, or maximum rates were fixed which proved to be so +high that they were of little, if any, practical effect. But very soon +began to appear some serious evils in the policy of railroads toward +the shipping and traveling public in matters of rates and of service. + +As the ownership of the wagons, ships, and canal-boats of a country +is usually divided, ocean ports and points along the lines of +turnpikes and canals enjoy competition between carriers. In the early +days of the railroads it was believed that a company or the government +would own the rails and charge toll to the different carriers, who +would own cars and conduct the traffic as was done on the canals. +Experience soon showed the impracticability of this scheme and the +need of unified management. An operating railroad company, therefore, +has a monopoly at all points on its line not touched by other +carriers. This, like any other monopoly, is limited, for the railroad, +to secure traffic, is led to meet competition of whatever kind--that +of wagons, canals, rivers, or of other railroads--wherever it occurs. +The railroads in private hands early began to "charge what the traffic +would bear," high where they could, and low where they must, to get +the business. Thus developed the various forms of discrimination which +are now to be described. + +§ 9. #Discrimination as to goods#. Discrimination as to goods is +charging more for transporting one kind of goods than for another +without a corresponding difference in the cost. When reasonably +understood, this proposition does not apply to a higher charge for +goods of greater bulk, as more per pound for feathers than for iron, +the "dead weight" of car being much greater in one case than in the +other. It does not apply where there is a difference in risk, as +between bricks and powder, or coal and crockery; nor where there is a +difference in trouble, as between live stock and wheat. Any difference +that can reasonably be explained as due to a difference in cost is +not discrimination; on the other hand a difference in cost without a +difference in rate is discrimination. Discrimination as to goods may +be by value, as low rates for heavy, cheap goods, and high rates for +lighter, valuable ones. Coal always goes at a low rate as compared +with dry goods, and sometimes more is charged for coal to be used for +gas than for coal to be used for heating purposes. + +Railroad discrimination so frequently has resulted in injustice to the +shipping public that the term has taken on an evil significance. But +it is well to observe that the word discrimination is not derived from +_crimen_ (crime), but from _discernere_ (to discern). There are +both reasonable and unreasonable forms of discrimination. In +general discrimination as to goods more often appears, under certain +conditions and made with due regard to the public interest, to +be reasonable; less often to be justified is the form of local +discrimination, next to be described; and least often of all to be +justified is the last named form of personal discrimination. + +§ 10. #Local discrimination#. Discrimination between places (called +also local discrimination) is charging different rates to two +localities for substantially the same service. This occurs when local +rates are high and through rates are low; when rates at local points +are high and at competing points are low; when less is charged for +shipments consigned to foreign ports than for domestic shipments; +when, more is charged for goods going east than for goods going west. +The causes of local discrimination are: first, water-competition, +found at great trade centers such as New York and San Francisco; +second, differences in terminal facilities, making some places better +shipping-points than others; third, competition by other railroads, +which is concentrated at certain points, only one tenth of the +stations of the United States being junctions; fourth, the influence +of powerful individuals or large corporations and the personal +favoritism shown by railroad officials. + +The effects of local discrimination are to develop some districts and +depress others; to stimulate cities and blight villages; to destroy +established industries; to foster monopolies at favored points; and to +sacrifice the future revenues of the road by forcing industry to move +in the competing points to get the low rates. The power of railroad +officials arbitrarily to cause rates to rise or fall is happily +limited in practice by the need of earning as large and as regular +an income as possible, but even as exercised it has been at times as +great as that possessed by many political rulers. + +§ 11. #Personal discrimination#. Discrimination between shippers +(personal discrimination) is charging one person more than another for +substantially the same service. This most odious of railroad vices, +rarely practised openly, is done by false billing of weight, by +wrong descriptions or false classification to reduce the charge below +published rate-sheets, by carrying some goods free, by issuing passes +to some and not to all patrons under the same conditions, or by +donations or rebates after the regular rate has been paid. In some +cases a subordinate agent shares his commission with the shipper, and +the transaction does not appear on the books of the company. In other +cases favored shippers are given secret information that the rate is +to be changed, so that they are enabled to regulate their shipments to +secure the lower rate. + +One group of reasons for personal discrimination is connected with the +interests of the road. It is to build up new business; it is to +make competition with rival roads more effective by favoring certain +agents, as was very commonly done in the Western grain business; it +is to exclude competition, as by refusing to make a rate from a +connecting line or to receive materials for a new railroad which is +to be a competitor; and it is to satisfy large shippers whose power, +skill, and persistence make the concession necessary. Another group of +reasons has to do with the interests of the corporate officials. It is +to enable them to grant special favors to friends; or it is to build +up a business in which they are interested; or it is to earn a bribe +that has been given them. + +The evils of personal discrimination are great. It introduces +uncertainty, fear, and danger into all business; it causes business +men to waste, socially viewed, an enormous fund of energy to get good +rates and to guard against surprises; it grants unearned fortunes and +destroys those honestly made; it gives enormous power and presents +strong temptations to railroad officials to injure the interests of +the stockholders on the one hand and of the public on the other. + +§ 12. #Economic power of railroad managers.# Other evils of +unregulated private management of railroads appeared. When the +railroad was a young industry, it was thought to be simply an +iron-track turnpike to which the old English law of common carriers +would apply. This and similar notions soon, however, proved illusory. +It was seen that the higher railroad officials had, in the granting +of transportation service and the fixing of rates, a great economic +power. They had complex and sometimes conflicting duties to +the stockholders and to the shipping public. They wore their +conscience-burdens lightly, before the days of effective regulation, +and frequently made little attempt to meet the one and no attempt +whatever to meet the other obligation. The opportunities for private +speculation brought to many railroad managers great private fortunes. +There were no precedents, no ripened public opinion, no established +code of ethics, to govern. It was a betrayal of the interests of +the stockholders when directors formed "construction companies" and +granted contracts to themselves at outrageously high prices. It was +an injury not only to shippers, but also to the stockholders, when +special rates were granted to friends and to industries in which the +directors were interested. In general, however, the interests and +rights of the stockholders were more readily recognized than +were those of the public. A railroad manager is engaged by the +stockholders, is responsible to them, and looks to them for his +promotion. Hence their interests are uppermost whenever the welfare +of the public is not in harmony with the earning of liberal dividends. +The managers long felt bound to defend the principle of "charging what +the traffic will bear" in the case of each individual, locality, and +kind of goods, even if this ruined some men and enriched others, and +if it destroyed the prosperity of cities to increase the earnings of +the road. + +§ 13. #Political power of railroad managers.# Likewise in various ways +railroad managers may exercise great political influence and power. +Some writers maintain that the power to make rates on railroads is +a power of taxation. They point out that if rates are not subject to +fixed rules imposed by the state, the private managers of railroads +wield the power of the lawmaker. By changing the rates on foreign +exports or imports, the railroads frequently have made or nullified +tariff rates and have defeated the intention of the legislature. +High rates on state-owned roads in Europe have been used in lieu of +protective duties. These facts go to show that a change of railroad +rates between two places within the country is similar in effect to +the imposing or repeal of tariff duties between them. + +The wealth and industrial importance of the railroads soon began to +give them widespread political power in other ways. It was commonly +charged in some states that the legislature and the courts were +"owned" by the railroads. The railroads, in part because they were +the victims at times of attempts at blackmail by dishonest public +officials, declared that they were compelled, in self-defense to +maintain a lobby. The railroad lobby, defensive and offensive, was, in +many states, the all-powerful "third house." Railroads even had their +agents in the primaries, entered political conventions, dictated +nominations from the lowest office up to that of governor, and elected +judges and legislators. The extent to which this was done differed +according as the railroads had large or small interests within the +state. These statements can with approximate truth now be made in +the past tense, as was not possible a few years ago. A better code +of business morality has developed, and the railroad management's +relationship of private trusteeship toward the shareholders and of +public trusteeship toward the patrons of the road is now much more +fully recognized. The change was not brought about without long and +strenuous agitation and effort, educational and legislative, as is in +part described below. + +§ 14. #Consolidation of railroads#. Gradually the consolidation of the +railroad mileage into larger units put into fewer hands greater and +greater economic power. The early railroads, many of which were built +in sections of a few miles in length, have been slowly welded into +continuous trunk lines with many branches. The New York Central +between Albany and Buffalo was a consolidation, by Commodore +Vanderbilt, of sixteen short lines. The Pennsylvania system was formed +link by link from scores of small roads. In the decade of the nineties +the growth of consolidation went on more rapidly than ever before. In +1903 it could be said that 60 per cent of the mileage of the United +States was under the control of five interests; 75 per cent was +controlled by a group of men who could sit about one table. The +country was being divided territorially into great railroad domains, +within each of which one financial interest was dominant. Since that +time the policy of the leading roads has been still further unified +by great financial alliances and by the method known as "community of +interests." + +Toward this result strong economic forces have been working. +Consolidation has many technical advantages: it saves time, reduces +the unit cost of administration and of handling goods, gives better +use of the rolling stock and of the terminal facilities of the +railroads, and insures continuous train service. It has the advantage +of other large production and the possible economies of the trusts. +Most important, however, from the point of view of the railroads, is +the prevention of competition and the making possible of higher +rates and larger dividends. The statement that competition is not an +effective regulator of railroads often is misunderstood to mean that +it in no way acts on rates. It is true that competition between roads +does not prevent discrimination and excessive charges between stations +on one line only; but competition usually has acted powerfully at +well-recognized "competing points." The larger the area controlled +by one management, the fewer are the competing points; the larger, +therefore, is the power over the rate and the more completely +the monopoly principle applies. It is a grim jest to say that +consolidation does not change the railroad situation as regards the +question of rates. + +§ 15. #State railroad commissions.# When it became evident that public +and private interests in the railroads were so divergent, it still was +not easy to determine how the public was to be safeguarded. At first, +some general conditions such as maximum rates were inserted in the +laws and charters; but these were not adaptable to changing conditions +and, for lack of administrative agents, could not be enforced. Some +early efforts at state ownership were disastrous. The old law of +common carriers gave to individual shippers an uncertain redress in +the courts for unreasonable rates; but the remedy was costly because +the aggrieved shipper had to employ counsel, to gather evidence, and +to risk the penalty of failure; it was slow, for, while delay was +death to the shipper's business, cases hung for months or years in +the courts; it was ineffectual, for, even when the case was won, the +shipper was not repaid for all his losses, and the same discrimination +could be immediately repeated against him and other shippers. + +In the older Eastern states, attempts to remedy these and other evils +by creating some kind of a state railroad commission date back to the +fifties of the last century. Massachusetts developed in the seventies +a commission of "the advisory type" which investigated and made public +the conditions, leaving to public opinion the correction of the evils. +A number of the Western states, notably Illinois and Iowa, developed +in the seventies commissions of "the strong type," with power to fix +rates and to enforce their rulings. The commission principle, strongly +opposed at first by the railroads, was upheld by the courts and became +established public policy. By 1915 every state and the District of +Columbia had a state commission. In Wisconsin and in New York, in +1907, in New Jersey, in 1911, and in many other states since, the +"railroad" commissions were replaced by "public utilities" or "public +service" commissions, having control not only over the railroads but +over street railway, gas, electric light, telephone, and some other +corporations. The state commissions have found their chief field +in the regulation of local utilities, and they fall far short of a +solution of the railroad problem. Altho they from the first did much +to make the accounts of the railroads intelligible, something to make +the local rates reasonable and subject to rule, and much to educate +public sentiment, on the whole their results have been disappointing. +It was difficult to get commissioners at once strong, able, and +honest; the public did not know its own mind well enough to +support the commissions properly; and the courts decided that state +commissions could regulate only the traffic originating and ending +within the state. + +§ 16. #Passage of the Interstate Commerce Act.# Public hostility to +private railroad management was greatest in the regions where the +most rapid building of roads occurred from 1866 to 1873. One center of +grievances was in "the granger states' of Illinois, Wisconsin, Kansas, +Nebraska, Iowa, and Minnesota; another center was in the oil regions +of Ohio and Pennsylvania. The Eastern states were not without their +troubles, for the report of the Hepburn Committee of the New York +legislature in 1879 showed that discrimination between shippers +prevailed to an almost incredible degree in every portion of New York +state. When the courts, in 1886, decided that the greater portion of +the railroad rates could not be treated by state commissions, national +control was loudly demanded. Scores of bills were presented to +Congress between 1870 and 1886, and, despite much opposition, the +Interstate Commerce Act was passed in 1887. + +The act laid down some general rules: that rates should be just and +reasonable; that railroads should not pool, or agree to divide, +their earnings to avoid competition; that they should, under similar +conditions, and, unless expressly excused, fix rates in accordance +with the long- and short-haul principle (to charge no more for a +shorter distance than for a longer one on the same line and in the +same direction, the shorter being included within the longer). The +act provided for a commission of five men, to be appointed by the +President, which might require uniform accounts from the railroads, +and which should enforce the provisions of the act. + +§ 17. #Working of the Act.# The commission in its earlier years +gave promise of effectiveness, but its powers, as interpreted by the +courts, proved inadequate to its assigned task. The railroads in many +cases refused to obey its orders, and court decisions paralyzed its +activity. Competent authorities declared in 1901, after fourteen years +of the commission's operation, that discrimination never had been +worse, and a series of exposures of abuses strengthened the popular +demand for stricter legislation. The result was first the Elkins' Act +of 1903, aimed at discrimination and rebates, and then the Hepburn +Act Of 1906, which marked a new era in railroad regulation in this +country. The commission was increased to seven members, its authority +was extended to include express, sleeping car, and other agencies of +transportation, and it was given the power to fix maximum rates, +not to be suspended by the courts without a hearing. It became thus +unquestionably a commission of "the strong type." It began to exercise +its new powers with vigor, and the carriers reluctantly accepted its +authority. Responsive to a calmer but insistent popular demand +further amendments were made by the Mann-Elkins Act of 1910, +which strengthened the long-and-short-haul clause, and gave to the +commission, among other new powers, that of suspending new rates +proposed by carriers. A special Commerce Court of five judges was +created with exclusive jurisdiction in certain classes of railroad +cases, but this was abolished after a short trial. + +It cannot be said that a final satisfactory solution of the railroad +problem has been attained; indeed, in most human affairs such a thing +is unattainable. But it can be said that there is no considerable +sentiment anywhere in favor of reversing the railroad policy that has +been developed, as here briefly outlined. Certainly the public has no +such sentiment, and the railroads, which for many years opposed the +progress of strong federal control, are now foremost in advocacy of +a policy of exclusive national regulation, to remedy the evil of +"forty-nine masters." + +§ 18. #Public nature of the railroad franchise.# A pretty definite +public opinion regarding the nature of the problem has emerged from +the nearly half-century of experience and discussion, since the +first vigorous agitation of the subject in the seventies of the last +century. Railroads in our country are owned by private corporations +and are managed by private citizens, not, as in some countries, by +public officials. They have been built by private enterprise, in +the interest of the investors, not as a charity or as a public +benefaction. Railroad-building appears thus at first glance to be +a case of free competition where public interests are served in the +following of private interests. But, looked at more closely, it may +be seen to be in many ways different from the ordinary competitive +business. Competition would make the building of railroads a matter of +bargain with proprietors along the line, and an obdurate farmer could +compel a long detour or could block the whole undertaking. But the +public says: a public enterprise is of more importance than the +interests of a single farmer. By charter or by franchise the railroad +is granted the power of eminent domain, whereby the property of +private citizens may be taken from them at an appraised valuation. +The manufacturer, enjoying no such privilege, can only by ordinary +purchase obtain a site urgently needed for his business. Why may the +railway exercise the sovereign power of government as against the +private property rights of others? Because the railway is peculiarly +"affected with a public interest." The primary object is not to +favor the railroads, but to benefit the community. These charters and +franchises are granted sparingly in most European countries. In this +country they have been granted recklessly, often in general laws, by +states keen in their rivalry for railroad extension. When thus +great public privileges had been granted without reserve to private +corporations, it was realized, too late in many cases, that a mistake +had been made and that an impossible situation had been created. + +§ 19. #Other peculiar privileges of railroads.# Further, do the +various grants of lands and money to the railroads make them other +than mere private enterprises? One answer, that of those financially +interested in the railroads, was No. They said that the bargain was +a fair one, and was then closed. The public gave because it expected +benefit; the corporation fulfilled its agreement by building the road. +The terms of the charter, as granted, determined the rights of the +public; but no new terms could later be read into it, even tho the +public came to see the question in a new light. Similar grants, tho +not so large, have been made to other industries. Sugar-factories were +given bounties; iron-forges and woolen-mills were favored by tariffs; +factories have been given, by competing cities, land and exemption +from taxation; yet these enterprises have not on that account, been +treated, thereafter, in any exceptional way. So, it was said, the +railroad was still merely a private business. + +But the social answer is stronger than this. The privileges of +railroads are greater in amount and more important in character than +those granted to any ordinary private enterprise. The legislatures +recognize constantly the peculiar public functions of the railroads. +In other private enterprises, investors take all the risk; +legislatures and courts recognize the duty of guarding, where +possible, the investment of capital in railroads. Laws have +been passed in several states to protect the railroads against +ticket-scalping. Whenever the question comes before them, the courts +maintain the right of the railroads to earn a fair dividend. Private +enterprise has been invited to undertake a public work, yet public +interests are paramount. + +§ 20. #Private and public interests to be harmonized.# If an extremely +abstract view is taken there is danger of losing sight of the real +problem, which is that of harmonizing these two interests in thought +and in public policy. Yet the extreme advocates of the private +control of railroads for a long time resented indignantly any public +interference with railroad rates and with railroad management as +an infringement of individual liberty. Before the passage of the +Interstate Commerce Act, in 1887, this position was inconsistently +taken by those in whose interests free competition had been violently +set aside at the very outset of railroad construction, and for whom +governmental interference had made possible great fortunes. It has +become generally recognized that the railroads ought not to be allowed +to change from a public to a private character just as it suits +their convenience. True, they are private enterprises as regards the +character of the investment, but they are public enterprises as to +their privileges, functions, and obligations. + +Finally, it might be said that if there were none of these special +reasons for the public control of railways, there is an all-sufficient +general reason in the fact that a railroad is always, in some respects +and to some degree, a monopoly. Therefore, the railroad problem may be +viewed as but one aspect of the general problem of monopoly. To other +aspects of this problem we are now to turn our attention. + + +[Footnote 1: Returns for 1915. The following figures are from the +census taken in 1909.] + +[Footnote 2: See A.T. Hadley, "Railroad Transportation," pp. 10, 32.] + +[Footnote 3: See Vol. I, pp. 437, 438, 443.] + + + + +CHAPTER 28 + +THE PROBLEM OF INDUSTRIAL MONOPOLY + + § 1. Kinds of monopoly. § 2. Political sources of monopoly. § 3. + Natural agents as sources of monopoly. § 4. Capitalistic monopoly; + aspects of the problem. § 5. Industrial monopoly and fostering + conditions. § 6. Growth of large industry in the nineteenth century. § 7. + Methods of forming combinations. § 8. Growth of combinations after + 1880. § 9. The great period of trust formation. § 10. Height of the + movement toward combinations. § 11. Motive to avoid competition. + § 12. Motive to effect economies. § 13. Profits from monopoly and + gains of promoters. § 14. Monopoly's power to raise prices. + + +§ 1. #Kinds of monopoly.# Monopolies may, for special purposes, be +classified as selling or buying, producing or trading, lasting or +temporary, general or local, monopolies. The terms selling or buying +monopoly explain themselves, tho the latter conflicts with the +etymology.[1] Under conditions of barter the selling and the buying +monopoly would be the same thing in two aspects. A selling monopoly +is by far the more common, but a buying monopoly may be connected with +it. A large oil-refining corporation that sells most of the product +may by various methods succeed in driving out the competitors who +would buy the crude oil. It thus becomes practically the only outlet +for the oil product, and the owners of the land thus must share +their ownership with the buying monopoly by accepting, within certain +limits, the price it fixes. The Hudson Bay Company, dealing in furs, +had practically this sort of power in North America. Many instances +can be found, yet, relatively to the selling monopolies, those of the +buying kind are rare. + +A producing monopoly is one controlling the manufacture or the source +of supply of an article; a trading monopoly is one controlling the +avenues of commerce between the source and the consumers. + +Monopolies are lasting or temporary, according to the duration of +control. By far the larger number are of the temporary sort, because +high prices strongly stimulate efforts to develop other sources of +supply. Yet the average profits of a monopoly may be large throughout +a succession of periods of high and low prices. + +Monopolies are general or local, according to the extent of territory +where their power is felt. At its maximum where transportation and +other costs most effectually shut out competition, monopoly power +shades off to zero on the border-line of competitive territory. The +frequent use of the adjectives partial, limited, and virtual are +implied but usually superfluous recognitions of the relative character +of monopoly. + +§ 2. #Political sources of monopoly.# Monopoly gets its power from +various sources. A political monopoly derives its power of control +from a special grant from the government, forbidding others to engage +in that business. The typical political monopoly is that conferred +by a crown patent bestowing the exclusive right to carry on a certain +business. A second kind is that conferred by a patent for invention, +or the copyright on books, the object of which is to stimulate +invention, research, and writing by giving the full control and +protection of the government to the inventor and the writer or their +assignees. In this case the privilege is socially earned by the +monopolist; it is not gotten for nothing. Moreover, the patent, being +limited in time, expires and becomes a social possession. A third +kind is a governmental monopoly for purposes of revenue. In France and +Japan the governments control the tobacco trade, and the high price +charged for tobacco makes this monopoly yield large revenues. A fourth +kind is that derived from franchises for public service corporations, +such as those supplying electricity, gas and water. These franchises +are granted to private capitalists to induce them to invest capital in +enterprises that are helpful to the community. + +§ 3. #Natural agents as sources of monopoly.# "Economic" monopoly, +so-called, arises when the ownership of scarce natural agents, as +mines, land, water-power, comes under the control of one man or one +group of men who agree on a price. Economic monopoly is a result of +private property that is undesigned by the government or by society. +It is exceptional, considering the whole range of private property, +but it is important. The oil-wells embracing the main sources of the +world's supply have largely come under one control. One corporation +may control so many of the richest iron mines of the country as to +be able to fix a price different from that which would result under +competition. Coal mines, especially those of some peculiar and +limited kind, such as anthracite, appear to become easily an object +of monopolization. Economic monopoly merges into political monopolies, +such as patents and franchises. Private property is a political +institution designed to further social welfare, and only rarely is +property in any particular business a monopoly. Private control of +great natural resources might have been prevented in many cases had it +been foreseen. + +§ 4. #Capitalistic monopoly; aspects of the problem.# Capitalistic +monopoly, variously called contractual, organized, commercial or +industrial monopoly, arises when men unite their wealth to control +a market, to overpower or intimidate opposition, and to keep out or +limit competition by the mere magnitude of their wealth. These +various kinds so merge into each other that they cannot always be +distinguished in practice. A patent may help a capitalistic monopoly +in getting control of a market; great wealth may enable a company to +get control of rare natural resources. + +In the discussion of industrial monopoly, the problem now before us, +there is a good deal of vagueness and misunderstanding because of +lack of definiteness in the use of words which have rapidly shifted in +meaning. The word "trust" originally applied, and still in legal usage +applies, to a particular form of organization, that of a board of +trustees holding the stock, and thus unifying the control, of two or +more formerly separate enterprises. The Standard Oil Company at one +time had this form of organization, which was declared by the courts +to be illegal _(ultra vires)_ for corporations. Now "trust" often +is used in the sense of a corporation having monopoly power in some +degree; either broadly, of any monopolistic corporation (including +railways and local public utilities), or, oftener, limited to +manufacturing and commercial monopolies, otherwise called "industrial +trusts" in contrast with franchise trusts and railroads.[2] The word +"combination" referred originally to a more or less thoro "merger," +with a view to attaining monopolistic power, of a number of formerly +separate organizations, as in the case of the United States Steel +Corporation. But the word is often used as if it were a synonym for +trust (in a narrower or wider sense) even as applied to a single +enterprise that has grown to be monopolistic. A "trust" in the legal +sense of a form of organization, and "combinations" as above defined, +might have no monopoly power whatever; whereas a monopoly may be +possessed by an individual owner (e.g., of a patent right, railroad, +waterworks plant), or by a single corporation that has simply grown +monopolistic without the trust form of organization or without +combination. + +Now it is evident that the real problem is that of monopoly, however +attained. Monopoly may be defined as such a degree of control over +the supply of goods in a given market that a net gain will result if a +portion is withheld.[3] In accord with growing and now dominant +usage it is well to observe the following meanings in our discussion. +"_Combination"_ is a term referring particularly to one method by +which monopolies are formed. "_Trust,"_ in the now popular sense, is +best limited to an industrial, primarily manufacturing, enterprise or +group of enterprises, with some degree of monopoly power due not to +a "special franchise" giving the use of streets and highways and the +right of eminent domain, nor to a single patent, but to a group of +favoring technical, financial, and economic conditions. The trust may +consist of a single establishment; or of a group of establishments +separately operated but united in a "pool" to divide output, +territory, or earnings; or of such a group held together by a holding +company, or combined into one corporation. Public utility is the +name of special franchise enterprises of the kind just mentioned, +including, in the broad sense, railroads and local utilities such as +street railways, gas, water, and electric light-plants. + +§ 5. #Industrial monopoly and fostering conditions.# The problem of +monopoly is probably as old as markets. From the first coming together +of groups of men to trade there were doubtless efforts made by some +individuals and groups of traders to manipulate conditions so as to +get higher prices than they could get in a free and open market.[4] +There are traces of these practices in ancient times, and the history +of the Middle Ages is full of evidences both of monopolistic practices +and of the efforts to prevent or control them. + +If this fact is borne in mind it may help us to distinguish in thought +four features of enterprise that are readily and constantly +confused, viz: large individual capital, large production, corporate +organization, and monopoly.[5] Evidently any one of these features may +appear without the other; e.g., a person of large aggregate capital +may have his investments distributed among a large number of small +enterprises, such as farms, without a trace of corporate organization +or monopoly, and numerous examples could be given of large production, +or of corporate organization, or of monopoly without one or more of +the other features. + +But the presence of any one of these features is a favoring condition +for the development of the others. Hence they are frequently found +together, and of late this occurs increasingly. It is difficult to say +in every, indeed in any, case which feature has been cause and which +effect in this development, but, on the whole, large production seems +to have been primary. Itself made possible by inventions, by better +transportation, and by the widening of markets, it in turn helped to +build up large individual fortunes, and then to create a need for the +corporate form of organization. And monopoly power no doubt is more +easily gained by large aggregations of capital in a corporation having +the advantages of large production. + +§ 6. #Growth of large industry in the nineteenth century.# The great +recent growth of the monopoly problem is in part to be explained as +the result of the growth of large industry, not as the sole cause, +but as a favoring condition. Before the middle of the last century a +tool-using household industry, on farms and in homes where the greater +part of the things used were produced in the family, was still the +typical organization in the United States.[6] A family produced +somewhat more than it needed of food and cloth and exchanged with its +neighbors; so with shoes, candles, soap, and cured meats. The early +factories growing out of the household industry were small. Since +that time two counter forces have been at work to affect the ratio +of manufacturing establishments to population. The number of small +establishments has been increased by the many industries producing the +things once made on farms, and by increasing demands for comforts and +luxuries. Many establishments producing the staple products that can +be transported have been consolidated or have been enlarged, so +that the unit of production now averages much larger. The number of +cotton-weaving factories was about the same in 1900 as it had been +seventy years earlier, while population has grown six fold. Iron- +and steel-mills were fewer in 1900 than in 1880. In industries having +local markets or local sources of materials, such as grist mills +and saw mills, the change in numbers was less, for many small +establishments were started in outlying districts at the same time +that the mills became larger in the great population centers. But the +average number of employees and the average capital per establishment +increased in every period between census enumerations. + +§ 7. #Methods of forming combinations.# Combinations of previously +independent enterprises may be more or less complete and are made by +different methods. Four major methods are: + +(1) The pool, by which the enterprises continue to be separately +operated, but divide the traffic (or output), or the earnings, or the +territory, in prearranged proportions. + +(2) The trust, in a legal sense (as defined above in section 5). + +(3) The holding company, a corporation with the sole purpose of +holding the shares of stock, or a controlling number of them, in +various corporations otherwise nominally independent. + +(4) Consolidation into one company. + +At least five minor methods may be distinguished; these are here +numbered continuously with the preceding four. + +(5) Lease by one company of the plants of one or more other companies. + +(6) Ownership of stock by one corporation in another corporation, +sufficient to give substantial influence over its policy, if not +absolute control. + +(7) Ownership of stock in two or more competing companies, by the same +individual or group of individuals, to such an extent as appreciably +to unify the policies of the competing companies. + +(8) Interlocking directorates, that is, boards of competing companies +containing one or more of the same persons as directors. + +(9) Gentlemen's agreements, mere friendly informal conferences and +understandings as to common policies. + +§ 8. #Growth of combinations after 1880.# Undoubtedly industry before +1860 had some elements of monopoly. Monopoly constituted part of the +banking problem; it began to be evident in the railroads almost at +once, and it rapidly increased as street railways and other public +utilities were constructed. But after 1880 occurred the formation in +larger numbers of industrial enterprises which appeared to exercise +some monopoly power. In the years between 1890 and 1900 this movement +was still more rapid. Consolidation took place on a great scale in +railroads and in manufactures. Much of this has been of such a kind +that it does not appear at all in the figures showing the number of +establishments and of employees. In the data regarding this movement +given by different authorities, many discrepancies appear, as there is +no generally accepted rule by which to determine the selection of the +companies to be included in the lists. One financial authority +gave the following figures[7] regarding the industrial companies +reorganized into larger units in the United States between 1860 +and 1899, not including combinations in such businesses as banking, +shipping, and railroad transportation. Some of the enterprises here +included have much and others probably have little or no monopolistic +power. + + _Decade Number Organized Total Nominal Capital_ + + 1860-60 ............... 2 $ 13,000,000 + 1870-79 ............... 4 135,000,000 + 1880-89 ............... 18 288,000,000 + 1890-99 ............... 157 3,150,000,000 + --------------- ------ --------------- + Total, 40 years ........ 181 $3,586,000,000 + +§ 9. #The great period of trust formation.# The number of trusts +organized and the capital represented by this movement in the last +of these decades were seven times as great as in the thirty years +preceding. The figures by years for the decade 1890-1899 are as +follows: + + Decade Number Organized Total Nominal Capital + + 1890 ................... 6 $82,000,000 + 1891 ................... 13 168,000,000 + 1892 ................... 13 140,000,000 + 1893 ................... 5 226,000,000 + 1894 ................... 2 35,000,000 + 1895 ................... 7 104,000,000 + 1896 ................... 3 40,000,000 + 1897 ................... 6 93,000,000 + 1898 ................... 22 574,000,000 + 1899 ................... 80 1,688,000,000 + ---------------- ---- -------------- + Total, 10 years ......... 157 $3,150,000,000 + +The influence of great prosperity shows in the large number of +combinations; but in 1893, the number was less, altho the total +nominal capital (stocks and bonds) was still the greatest it had ever +been in any year. Then came the period of depression, 1894-97, when +both the numbers and the capital were comparatively small. Then from +1898 to 1901 followed the period of the greatest formation of trusts +the world has ever seen. + +The list of these four years contains the names of the most widely +known American combinations, a few of which are here given with the +years of their formation: 1898, American Thread, National Biscuit; +1899, Amalgamated Copper, American Woolen, Royal Baking Powder, +Standard Oil of N.J., American Hide and Leather, United Shoe +Machinery, American Window Glass; 1900, Crucible Steel, American +Bridge; 1901, United States Steel Corporation, Consolidated Tobacco, +Eastman Kodak, American Locomotive. + +§ 10. #Height of the movement toward combinations.# In a list by +another authority[8] it appears that the data for all industrial +trusts are in round numbers as follows: + + Number of + Plants Acquired Total + Date Number or Controlled Nominal Capital + + Jan. 1, 1904 318 5288 $7,246,000,000 + +These figures compared with those given above would indicate that the +industrial trusts had about doubled in the years 1900-1903 inclusive. +Probably most of this growth was in the years 1900 and 1901; then the +movement became very slow, because, as is generally believed, of +the aroused public opinion, of more vigorous prosecution by the +government, and of additional legislation against trusts. The +authority last cited gives in a more comprehensive list, in six +groups, all the monopolistic combinations in the United States, at +the date of January 1, 1904, as follows (the figures just given above +being the totals of the first three groups): + + No. of Plants Total Nominal + Groups Number Acquired or Controlled Capital + + 1. Greater industrial + trusts 7 1528 $2,260,000,000 + 2. Lesser industrial + trusts 298 3426 4,055,000,000 + 3. Other industrial + trusts in process + of reorganization + or readjustment 13 334 528,000,000 + 4. Franchise trusts 111 1336 3,735,000,000 + 5. Great steam + railroad groups 6 790 9,017,000,000 + 6. Allied independent 10 250 380,000,000 + --- ----- -------------- + Total, 445 8664 $20,000,000,000 + +§ 11. #Motive to avoid competition.# This remarkable movement toward +the formation of united corporations from formerly independent +enterprises called forth a variety of explanations. The organizers of +trusts gave as the first explanation of their action that it was the +necessary result of excessive competition. It is not to be denied +that a hard fight and lower prices often preceded the formation of +the trusts. But as this excessive competition usually is begun for the +very purpose of forcing others into a combination, this explanation +is a begging of the question. It is fallacious also in that it ignores +the marginal principle in the problem of profits. Profits are never +the same in all factories, and to those manufacturers that are on the +margin competition may appear excessive. It generally has been the +largest and strongest factories, in the more favored situations, +that, in order to get rid of troublesome competitors, have forced the +smaller, weaker, industries to come into the trust. In other cases the +smaller enterprises have been eager to be taken in at a good price, +altho they might have continued to operate independently with moderate +profits. When, therefore, it is said that competition is destructive, +it may be a partial truth, but more likely it is a pleasantry +reflecting the happy humor of the prosperous promoters of the +combination. + +§ 12. #Motive to effect economies.# Another advantage of the +combination of competing plants that was strongly emphasized was the +economy of large production.[9] The economies that are possible within +a single factory may be still greater in a number of combined or +federated industries. The cost of management, amount of stock carried, +advertising, cost of selling the product, may all be smaller per unit +of product. Each independent factory must send its drummers into every +part of the country to seek business. In combination they can divide +the territory, visit every merchant and get larger orders at smaller +cost. A large aggregation can control credit better and escape +losses from bad debts. By regulating and equalizing the output in +the different localities, it can run more nearly full time. Being +acquainted with the entire situation, it can reduce the friction. A +combination has advantages in shipment. It can have a clearing-house +for orders and ship from the nearest source of supply. The least +efficient factories can be first closed when demand falls off. +Factories can be specialized to produce that for which each is best +fitted. The magnitude of the industry and its presence in different +localities often, in the period of trust formation, served to +strengthen its influence with the railroads, and to increase its +political as well as its economic power. + +Another phase of corporate growth is the "integration of industry," +that is, the grouping under one control of a whole series of +industries. One company may carry the iron ore through all the +processes from the mine to the finished product. A railroad line +across the continent owns its own steamers for shipping goods to Asia +or Europe. Large wholesale houses own or control the output of entire +factories. + +§ 13. #Profits from monopoly and gains of promoters.# There are, +however, well-recognized limitations to the economy of large +production in the single establishment,[10] and of late there has been +ever-increasing skepticism as to the net economy actually attributable +to combinations. Undoubtedly the merging of a number of old plants has +sometimes effected an immediate improvement in the weaker ones. A new +broom sweeps clean. This movement chanced to be contemporaneous with +the development of "efficiency engineering," and of "scientific +cost-accounting," and these better methods, already developed and +applied in comparatively small plants, could be more quickly extended +to the other plants brought into the combination. Moreover, the +personal organizations in the separate enterprises had been brought to +a high state of efficiency by the stimulus of competition, and there +is reason to fear that, after some years of centralized bureaucratic +organization, much of this efficiency may be lost. + +There seems no doubt that the strong motive for forming combinations +is the profit to the organizers.[11] Whatever was the more generous +motive or more fundamental economic reason assigned by the promoters, +the investing public confidently expected that higher prices would be +the chief result. There are indirect as well as direct gains to the +promoters of a combination. There is the gain from the production and +sale of goods to consumers, and there is the gain from the financial +management, from the rise and fall in the value of stock. The +promoters of a combination often expect to make from sales to the +investing public far more than from sales to the consumer of the +product. A season of prosperity and confidence, when trusts and their +enormous profits are constantly discussed, has an effect on the +public mind like that of the gold discoveries in California and in the +Klondike. Then is the time for the promoter to offer shares without +limit to investors. + +§ 14. #Monopoly's power to raise prices#. There is no doubt that the +formation of a combination from competing plants can and does give a +control over prices, a monopoly power, not possessed by the separate +competing establishments. The same kind of power might be attained by +the growth of one establishment outstripping all its competitors, +or by a new enterprise coming into the field backed by powerful +capitalists. But this would work slower and less extensive results +than does the formation of a combination. + +Of course, the fundamental principles of price cannot be changed by a +trust; a selling monopoly can affect price only as it affects supply +or demand.[12] The strongest trust yet seen has not been omnipotent. +Many careless expressions on the subject are heard even from +ordinarily careful writers and speakers: "The trust can fix its own +prices," "has unlimited control," "can determine what it will pay +and for what it will sell." This implies that trusts are benevolent, +seeing that the prices they charge are usually not far in excess of +competitive prices in the past. Such a view overlooks the forces that +limit the price a monopoly can charge. If the supply remains the same, +no trust can make the price go higher. The monopoly usually directs +its efforts to affecting the supply, leaving the price to adjust +itself. It can affect the supply either by lessening its own output or +by intimidating and forcing out its competitors. It is true that this +logical order is not always the order of events. The trust may not +first limit the supply, and then wait for prices to adjust themselves; +it may first raise its prices, but unless it is prepared to limit the +supply in accordance with the new resulting conditions of demand, +such action would be vain. The control of the sources of supply is the +logical explanation of the higher price, even tho the limitation +of supply is effected later by successive acts found necessary to +maintain the higher price. + +The report of the Federal Industrial Commission, which, from 1898 +to 1901, investigated the trusts, showed that immediately upon their +formation, the industrial combinations had raised their prices.[13] +Prices might be lowered again but only when and where competition +became troublesome, thus causing either "price-wars" or +discrimination. + + +[Footnote 1: See Vol. I, p. 76.] + +[Footnote 2: As in the list in sec. 8, below.] + +[Footnote 3: See Vol. I, chs. 8 and 31.] + +[Footnote 4: See Vol. I, ch. 8, on competition and monopoly, and ch. +31, on monopoly prices and large production. An understanding of the +definitions and of the general principles distinguishing competition +and monopoly is a necessary prerequisite to a profitable discussion of +the practical problem of monopoly.] + +[Footnote 5: See Vol. I, p. 267, on capital; pp. 388-393, on large +production. See also references in preceding note on monopoly; and ch. +27, secs. 1 and 2, on corporate organization.] + +[Footnote 6: See above, ch. 26, sec. 3; and ch. 25, secs. 6 and 7.] + +[Footnote 7: Compiled from data given by "The Journal of Commerce and +Commercial Bulletin," reprinted in "The Commercial Year Book," Vol. V, +1900, pp. 564-569.] + +[Footnote 8: John Moody, "The Truth About the Trusts," 1904] + +[Footnote 9: See Vol. I, pp. 388-393.] + +[Footnote 10: See Vol. I, pp. 391-392.] + +[Footnote 11: See Vol. I, p. 334, on the function of the promoter.] + +[Footnote 12: See Vol. I, pp. 80-85, 382-387, 394-396.] + +[Footnote 13: A summary of this evidence is given in the author's +"Principles of Economics" (1904), pp. 327-330. A fuller outline of +the results of the Commission's conclusions may be found in "The Trust +Problem," by J.W. Jenks, who acted as expert in the investigation.] + + + + +CHAPTER 29 + +PUBLIC POLICY IN RESPECT TO MONOPOLY + + § 1. Moral judgments of competition and monopoly. § 2. Public character + of private trade. § 3. Evil economic effects of monopolistic price. + § 4. Common law on restraint of trade. § 5. Growing disapproval of + combination. § 6. Competition sometimes favored regardless of results. + § 7. Increasing regard for results of competition. § 8. Common law remedy + for monopoly ineffective. § 9. First federal legislation against + monopoly. § 10. Policy of the Sherman anti-trust law. § 11. Policy of + monopoly-accepted-and-regulated. § 12. Field of its application. § 13. + Industrial trusts,--a natural evolution? § 14. Artificial versus natural + growth. § 15. Kinds of unfair practices. § 16. Growing conception of + fair competition. § 17. The trust issues in 1912. § 18. Anti-trust + legislation in 1914. + + +§ 1. #Moral judgments of competition and monopoly.# What should be the +attitude of society toward monopoly? Is it good or bad as compared +with competition? Some very strong ethical judgments bearing on +practical problems are found in the popular mind connected with the +ideas of competition and monopoly. Competition usually is pronounced +bad when viewed from the standpoint of the competitors who are losing +by it, and as good when viewed from the standpoint of the traders on +the other side of the market who gain by that competition. Competition +among buyers thus appears to sellers to be a good thing; that among +sellers appears to themselves to be a bad thing (and _vice versa_). +Many persons are moved by sympathy to pronounce competition among +low-paid and underfed workers to be bad, and each worker is convinced +that it is so in his own trade. Yet nearly all men are of one mind +that competition is a good thing in most industries, those that are +thought of as supplying "the general public." Monopoly is believed by +the public to be wrong in such cases, and competition to be the normal +and right condition of trade. Yet there are some men interested in +"large business" who look upon competition as bad, and upon monopoly +as having essentially the nature of friendly coöperation. The roots +of these opinions, or prejudices, are easily discoverable in the +theoretical study of the nature of monopoly.[1] Yet often different +men or groups of men feel so strongly on this matter, viewing it from +their own standpoints, that they are quite unable to understand +how any one else can feel otherwise. There is thus a great deal of +controversy to no purpose. + +§ 2. #Public character of private trade.# Any such general judgment as +that of the public, tho it may be mistaken in some details, is likely +to be a resultant of broad experience. There is in competitive trade a +public, a social character, which monopoly destroys. Even in a simple +auction, when the bidding is really competitive, price depends far +less on shrewd bargaining, on bluff, or on stubbornness, than is the +case in isolated trade. Each bidder is compelled by self-interest to +outbid his less eager competitors, and thus the limits within which +the price must fall are narrowly fixed. The auction-sale is less a +purely personal matter, takes on a more public aspect, has a more +socialized character than isolated trade, depends more on forces +outside the control of any one man, and results in a price fixed with +greater definiteness. The price in a more developed market results +from the play of impersonal forces, or at least from the play of +personal forces which have come under the rules of the market.[2] This +price men are ready to accept as fair. It has a democratic character, +whereas the gains of monopoly price arouse resentment as being the +work of personal, and felt to be despotic, power. Monopoly price is a +bad price to the one who pays it, not only because it is a high price +but because it bears the character of personal extortion. + +The medieval notion of _justum pretium_, the just price, may have +been often misapplied, and it was often criticized and ridiculed by +economists in the period of idealized competition (from Adam Smith +to John Stuart Mill). But at the heart of the notion was the judgment +that general uniform prices fixed in the open market are the proper +norms for prices when one of the traders is caught at an exceptional +disadvantage. The modern world has been compelled to reëxamine the +conception of the just price. + +§ 3. #Evil economic effects of monopolistic price.# Theoretical +analysis confirms this view. Any exercise of monopolistic power over +price keeps some, the weaker bidders, from getting any of the desired +goods, or limits them to their most urgently desired units. What +may be called "the theoretically correct price"[3] with two-sided +competition is the one that permits the maximum number of trades +with a margin of gain to each trader. In narrowing the possibility of +substitution of goods by trade, the sum of values of goods for most +men is diminished. All citizens thus that are the victims of an +artificially created scarcity look upon monopoly as "bad," just +as they do upon the evils of nature--drought, locusts, fires, and +pestilence. A monopoly has an indirect and more distant effect upon +the spirit of all those trading with it. If they are producers selling +at prices depressed by monopoly, their money incomes are reduced; if +they are consumers buying at monopoly prices, their real-incomes are +reduced; in either case their psychic incomes, the motives of all +industry, are diminished, and their industrial energies are relaxed. + +§ 4. #Common law on restraint of trade.# The first recorded case in +English law, wherein the courts sought to prevent the limiting of +competition by agreement, runs back to the year 1415, in the reign +of Henry V. This was a very simple case of a contract in restraint of +trade, whereby a dyer agreed not to practise his craft within the town +for half a year. The court declared the contract illegal (and hence +unenforceable in a court) and administered a severe reproof to the +craftsman who made it. Thus was set forth the doctrine of the moral +and legal obligation of each economic agent to compete fully, freely, +and without restraint upon his action, even restraint imposed upon +himself by a contract voluntarily entered into for his own advantage. + +Not until the eighteenth century was this rigid doctrine somewhat +relaxed so as to permit the sale of the "good will" of a business +under limited conditions, and some "reasonable" contracts in restraint +of trade. Later the emphasis was somewhat further shifted, by judicial +interpretations, from the notion of free competition to that of "fair" +competition, so as to permit contracts involving moderate restraint of +trade, if the essential element of competition was retained. Thus +it was said that a piano manufacturer might by contract grant an +exclusive agency to a dealer in a certain territory, there being many +other competing makes of pianos, and such a contract "does not operate +to suppress competition nor to regulate the production or sale of any +commodity."[4] But with such moderate limitations the courts in cases +under the common law have steadily disapproved contracts in restraint +of trade that would appear to be to the disadvantage of third parties, +whether producers or consumers. + +§ 5. #Growing disapproval of combination.# The attitude of the courts +became in one respect stricter. Some earlier cases involved the +doctrine that what is lawful for an individual to do alone is lawful +if done in combination with others. Indeed, a comparatively recent +case[5] declared regarding a group of dealers, agreeing not to deal +with another, that "desire to free themselves from competition was a +sufficient excuse" for such action. But the general trend has been +to the doctrine that a combination of men "has hurtful powers +and influences not possessed by the individual." Hence threats of +associations of traders (retailers or wholesalers) not to deal with +another if he continued to deal with some third party have been +declared acts in restraint of trade.[6] Yet in the case cited the +court seemed to have been more concerned with protecting "the +individual against encroachment upon his rights by a greater power," +"one of the most sacred duties of the courts," than with rights and +interests of the general public, endangered by such restraint of +trade. + +§ 6. #Competition sometimes favored regardless of results.# In another +respect the courts have wavered in their attitude toward competition, +the general doctrine being that competition, particularly the cutting +of prices, is absolutely justifiable, regardless of circumstances. In +the leading English case[7] the facts were that the larger steamship +companies sent to Hankow additional ships, now called, figuratively, +"fighting ships," to "smash" freights in order to ruin tramp steamship +owners and drive them out of the field. The court held that this +constituted no legal wrong to the tramp steamship owners, and scouted +the idea of the court's looking at the motives in price cutting, +or taking into consideration in any way what the court called "some +imaginary normal standard of freights and prices." And of this case +the lawyer is forced to say: "Undoubtedly the excellent opinion just +quoted represents the law everywhere," even tho there are other cases +difficult to harmonize with it.[8] + +To the economist, not bound in like manner by legal precedent, such +a verdict was from the first impossible. The court appears to have +considered that only the rights of the private litigants, the tramp +steamship owners, were involved, not the rights and interests of the +shipping public; it considered the immediate and not the ultimate +effects of the "smashing" of rates; it allowed itself to be deceived +by the appearance of acts that in outer form were competition, +but that had as their purpose the strengthening and maintenance of +monopoly. These acts are forms of the "unfair" practices that will be +mentioned later.[9] + + +§ 7. #Increasing regard for results of competition.# Despite the +binding precedents, the courts in some later decisions have refused +to look upon competition as good regardless of its motives and of its +consequences. In a federal case[10] the judge, in a brief and acute +dictum, recognized the evil of a rate war that would result from +threats of definite cuts. They impair "the usefulness of the railroads +themselves, and cause great public and private loss." The court's +opinion was no doubt largely influenced by the fact that railroad +rates were already subject to regulation: "Every precaution has been +taken by state legislatures and by the congress to keep them just and +reasonable,--just and reasonable for the public and for the carriers." + +In a state case[11] the facts were that a man of wealth started a +barber shop and employed a barber to injure the plaintiff and drive +him out of business. The court recognized that while, as a general +proposition, "competition in trade and business is desirable," it +may in certain cases result in "grievous and manifold wrongs to +individuals"; and in this case the "malevolent" man of wealth was +declared to be "guilty of a wanton wrong and an actionable tort." +The economists can but pronounce this judgment admirable so far as it +goes, but it is remarkably confined to a consideration of the private +legal rights of the injured competitor, and gives hardly a hint of +a higher criterion for judging competitive acts, that of the general +welfare. + +§ 8. #Common law remedy for monopoly ineffective.# The common law +contained prohibitions enough, both broad and specific, against +contracts and acts in restraint of trade. The common law contained +likewise a closely related body of doctrine by which the railroads, +as common carriers, ought to have given equitable and undiscriminating +rates to all shippers. There was a strong body of influential opinion +that long maintained that the case was sufficiently covered, that the +only thing needed was to enforce the common law. Even now, after all +that has elapsed, there are some in railroad and business circles +who still appear to hold that opinion. But the evils of railroad +discrimination and of other monopolistic practices continued, and for +some cause the common law was not enforced, excepting occasionally, +disconnectedly, and without important results. + +Why? The answer may be ventured that in the common law the whole +question of restraint of trade was treated primarily as one of private +rights and only incidentally as one involving general public policy. +Cases came before the courts only on complaint of some individual +that felt injured. Now the injury of higher prices due to contracts in +restraint of trade is usually diffused among many customers, and +the loss of any one is less than the expense of bringing suit. +Consequently, it rarely happened that cases were brought before the +courts except by one of the two equally guilty parties to a contract +in restraint of trade, when the other party had failed in some way to +do his part. When such an illegal contract in restraint of trade was +proved before a court by a defendant in a civil suit the contract was +declared unenforceable, and the only penalty in practice was that the +plaintiff could not collect his debt or secure performance from the +defendant.[12] A very similar situation existed in the case of the +individual's grievances against railroad charges and services. + +§ 9. #Federal legislation against monopoly.# The passage of the +Interstate Commerce Act in 1887[13] prohibiting discrimination and +railway pooling, and that of the Act of 1890 "to protect trade and +commerce against unlawful restraints and monopolies," popularly known +as the "Sherman Anti-trust Law," were part of one public movement to +remedy monopoly. From one point of view it seems true, as has often +been said, that in essence these statutes were simply enactments +of long established principles of the common law. Section 1 of the +Sherman law declared illegal "every contract, combination in the +form of trust or otherwise, or conspiracy, in restraint of trade or +commerce among the several states, or with foreign nations." Section 2 +made it a misdemeanor "to monopolize, or attempt to monopolize." + +But from another point of view, these new laws showed a marked change +both in the conception of the interests involved and in the means of +preventing the evils. The evil was at last conceived of as a general +public evil; the laws are not merely to protect individuals,[14] +but "to regulate commerce," "to protect trade and commerce." +More important still, it was made the duty of public officers +(district-attorneys of the United States) to institute proceedings in +equity "to prevent and restrain" violation of the Sherman Act, and a +special Commission was instituted to deal with railroad cases. It was +this undertaking of the initiative by the government, the treatment of +the problem as one of the general welfare, that marked a new epoch +in this field. The methods and agencies provided might be at first +inadequate and ineffective, but time and experience could remedy those +defects. + +§ 10. #Policy of the Sherman anti-trust law.# But in important +respects opinion and policies were not yet clear and consistent. They +wavered from one to another conception of the method for dealing with +the problem. It was clear only that _laissez-faire_ had been laid +aside. There are three other possible policies reflecting as +many different conceptions of the problem of monopoly: (1) +monopoly-prosecuted, (2) monopoly-accepted-and-regulated, +(3) competition-maintained-and-regulated. The policy of +monopoly-prosecuted is merely negative. This is the policy of +the Sherman law. It opposed no positive action to the making of +monopolistic contracts and to the formation of combinations, but +declared them to be illegal and provided for their prosecution and +punishment after the mischief had been done. The great epoch of the +formation of combinations[15] followed the enactment of this law. +True, lack of experience by the department of justice, and lack of +vigorous effort to enforce the law, and the slow action of the courts +were largely to blame for this result. The law has proved to be more +effective to prevent new combinations since it has been successfully +enforced in a few notable cases. But once large combinations have +been formed and complex individual financial interests have become +involved, the courts have proved to be incapable of undoing the deeds. +In practice the most sweeping remedy attempted under the law has been +the dissolution of enormous combinations formed years after the law +went into effect. This has been called the job of unscrambling the +eggs. The most notable cases were those of the Standard Oil Company +and of the Tobacco Company, decided in 1911, the results being +absurdly futile. + +§ 11. #Policy of monopoly-accepted-and-regulated.# A second policy may +be called that of monopoly-accepted-and-regulated. This is represented +by the Interstate Commerce Act (at first weakly, and more vigorously +after its amendment), and by the great mass of state legislation +putting the local and interurban public utilities under the control +of regulative commissions. For some decades after these industries +developed, the public faith was in competition as the effective +regulator. If monopolistic prices were too high, another company was +chartered to build a parallel railroad or another horse-car line on +the next street, or to lay down another set of gas pipes in the same +block. Almost from the first some students of the subject saw the +wastefulness and futility of this kind of competition, and nearly a +half century later the public reluctantly came to this view. Still, +sad to relate, the same history had to be repeated in regard to the +telegraph and telephone industry, and in some quarters the ultimate +outcome is not yet recognized. The Interstate Commerce Act itself, +with odd inconsistency, contains an anti-pooling provision (section +5) the purpose of which seems to have been to compel competition as to +rates which is now practically impossible under the other provisions +of the law. The policy of "monopoly-accepted" was seen to involve as +a necessary feature, public regulation of rates, to the point, if +necessary, of absolutely fixing them. The principle has come to be +accepted that wherever competition ends there public regulation of +prices and service begins. Monopolistic enterprises are _ipso facto_ +quasi-public institutions. + +§ 12. #Field of its application#. This policy, gradually extending +in practice, came to be applied to the class of industries which, +for lack of a better name, are called local utilities. The one +characteristic that they all have in common is that the service, +or product, which is sold requires for its delivery an expensive, +permanent, physical plant, and some special use of public highways. +Thus gas pipes, water pipes, poles and wires for telegraph, telephones +and electric light, street railways, regular steam railroads and some +other minor industries all answer to this test.[16] + +Beginning about the year 1900 one state after another enlarged the +powers of its state railroad commission or created a new corporation +commission to regulate these "local" or "public utilities."[17] They +have accomplished much, but the development of this kind of regulation +has not proceeded in many cases beyond the adjustment of relative +rates and the abolition of discrimination among the different +individuals and classes of customers. Experience has shown the great +difficulty of determining what is a fair absolute level of charges. +A new science of accounting has been developing to assist in the +solution of a problem, the complexity of which transcends the agencies +at hand to deal with it. With this policy applied to the local utility +(and railroad) phase of monopoly, there remains still the problem of +the industrial trusts in the manufacturing enterprises. + +§ 13. #The industrial trust,--a natural evolution?# The policy that +one is inclined to favor regarding industrial trusts depends very +much on one's answer to the question: Are or are not industrial trusts +natural growths? In this bare form the question is somewhat vague, but +the thought of those who answer it in the affirmative is positive if +not always entirely clear. They (at least the extreme representatives +of this view) declare that trusts have been, are, and will continue +to be, the results of a "natural evolution" of business conditions, as +inevitable as the great changes in the physical world. If this is so +man and society must recognize the facts, must waste no efforts vainly +in fighting against fate, but should accept the trusts and realize +their possibilities for good. And these are declared to be great, for +it is assumed that without the trusts all of the economies of large +production must be sacrificed. Irresistible economic forces, it is +said, are creating larger and larger units of business; friendly +coöperation and unified action must take the place of competition in +business. + +The outcome must be monopoly in every important line of manufacturing +industry and perhaps of commerce. In view of public opinion toward +monopoly, its acceptance necessitates its regulation. This argument +is supported by appeal to the experience in the field of railroads +and other local utilities, where public opinion has, after long +hesitation, recognized competition to be impracticable and the +acceptance of monopoly as inevitable. As extremes often meet, the view +of the industrial trust as a natural evolution is most favored on the +one hand by men of "big business," already interested financially +in trusts, and on the other hand by the most radical communists (or +socialists) whose ideal is the complete monopolization of industry +under the government. + +§ 14. #Artificial versus natural growth.# Opposed to this view is a +deep and widespread popular opinion or prejudice, against the trust +and in favor of competition. General opinion in this case (as not +always) finds much support in special economic studies of the methods +by which the existing industrial trusts came into being. First the +question properly is raised; just what is meant by "natural"? In a +sense everything has been the natural outcome of evolution,--the steam +engine, the submarine, the boycott, militarism. In an equally good, +if not better sense, every mechanical invention and every method of +industrial organization is artificial, has been the result of man's +choice and effort. In any case men may choose as good or reject as +unsuitable or bad, any particular mechanical device, and society +may decide to adopt any particular policy toward a certain form of +business organization and certain business practices (unless, indeed, +our philosophy be that of automatism, crude determination or fatalism, +regarding all human affairs). + +Now when one examines the methods which the notable trusts actually +did employ, and apparently had to employ, even when they were already +powerful single enterprises, in order to destroy their competitors and +to attain their monopolistic power, the word "natural" seems hardly to +describe the process. The evidence is not a matter of hearsay but is +embodied in a long line of judicial decisions, and in numerous special +inquiries by governmental commissions and officials.[18] + +§ 15. #Kinds of unfair practices#. This evidence is a startling +array of "unfair practices" and "unfair" forms of competition, which, +however novel in appearance, are essentially of the kind that has been +illegal under the common law for the past five hundred years. Many of +these practices were baldly dishonest, many of them were contemptibly +mean. The manifold varieties of unfair competition may be roughly +grouped under three headings according as they are connected with (1) +Illegal favors received from public or quasi-public officials; (2) +Discrimination against, or control of, customers; (3) Foul tactics +against competitors. + +(1) Among the practices in the first group are discriminatory rates +and rebates from railroads, favoritism in matters of taxation, undue +influence in legislatures, special manipulation of tariff rates +through powerful lobbies, or paid agents, undue influence in the +courts through the employment of lawyers of the highest talent, who +often later became judges. + +(2) Among the unfair practices toward customers are discriminations +among them by the various forms of price cutting, grants of credit, +and kinds of service. The liberty of retail dealers is limited in +a variety of ways, such as fixing resale prices, requirement of +exclusive dealing, and full-line forcing. + +(3) All the methods just mentioned as employed in dealings with +customers are likewise unfair toward competitors. Many other methods +are used to the same end, such as: enticing away their employees, +or corrupting and bribing them to act as spies, paying secret +commissions, false advertising, misrepresenting competitors, imitating +their patterns in goods of defective workmanship, shutting off their +credit or their supplies of materials, acquiring stock in competing +companies, malicious suits, infringement of patents, intimidation by +threats of business injury or of scandalous exposures, operation of +bogus independent companies. + +§ 16. #Growing conception of fair competition.# Any industrial trust +that was able to gain domination and monopoly power only by the use of +such practices, or any part of them, can hardly be deemed the result +of a "natural evolution." If "artificial" means the use of artifices +surely this development deserves the adjective. Yet even if not +natural, this development may be thought to be "inevitable," human +nature being as it is. But the bald fact is that while the great trust +movement was in progress no effort worthy of the name was being made +to enforce even the then existing laws and to oppose this artificial +development. The same allegation of inevitableness was once commonly +made of discriminatory railroad rates and rebates, evils which have +been in large part remedied only since the period 1903-1906, when at +last intelligent action was taken. + +To those that came to see the problem in this light, acceptance +of industrial monopoly with its complex task of fixing by public +commission the prices on innumerable kinds and qualities of goods +seemed at least premature. Rather, the first step toward a solution +seemed to be the vigorous prevention of unfair practices, and the +next step a positive regularizing of "fair competition."[19] The +fundamental idea in this is the enforcement of a common market price +(plus freights) at any one time to all the customers of an enterprise. +By this plan potential competition would become actual, and small +enterprises that were efficient might compete successfully within +their own fields with large enterprises that maintained prices above +a true competitive level. Even general lowering of prices by a large +enterprise with evident purpose of killing off smaller competitors is +unfair competition under this conception. It was for years recognized +that the realization of this policy required legislation regarding +uniform prices and the creation of a commission for the administration +of the law. + +§ 17. #The trust issues in 1912#. The campaign of 1912 presented in an +interesting manner the three policies above outlined. The +Republican party led by President Taft stood for the policy of +monopoly-prosecuted; its program was the vigorous enforcement of the +Sherman law. The Progressive party, led by Mr. Roosevelt, stood in the +main for the policy of "monopoly-accepted-and-regulated"; its program +called for minimizing prosecution and for developing a system of +regulation of trust-prices. The Democratic party, led by Mr. Wilson, +stood for the policy of competition-maintained-and-regulated, and the +problem was to find means to strengthen and regularize the forces of +competition. + +In practice these programs doubtless would be less divergent than they +appear. All alike proposed the retention of the Sherman law. The +two proposals to go further were presented as mutually exclusive +alternatives, whereas they necessarily must supplement each other in +some degree. The Progressives did not expect all industries to become +monopolies, and the Democrats tacitly conceded to monopoly-accepted +the large field of transportation and local utilities it already had +occupied. But there was a real difference in the angle of approach and +a real difference in emphasis. The Democratic program (the somewhat +unclearly) showed greater distrust of monopoly and greater faith in +the possibilities of creating fair conditions of competition (which +never had fully prevailed) in which efficiency would be able to prove +its merits and monopoly would work its own undoing. It was the more +logical for the country to give this policy at least a trial before +adopting irrevocably the policy of general industrial monopoly. +In either case competition actual or potential is the fundamental +principle by which prices have to be regulated. Where competition is +enforced it is by applying some general rules that create a general +market price instead of discriminatory prices, but the fixing of the +price is left to the competitors. Where monopoly is accepted prices +must be fixed with reference to an estimated competitive standard, +that which under hypothetically free conditions would just suffice to +attract and retain private enterprise and capital. + +§ 18. #Anti-trust legislation of 1914#. The anti-trust legislation +of 1914, passed by the Democratic party to carry out its program, is +embodied in two acts: the Clayton Act, laying down new rules; and +the Federal Trade Commission Act, mainly to provide an agency with +administrative and quasi-judicial functions to deal with unfair +practices. This displaced the Bureau of Corporations, established in +1903. The Clayton Act forbids discrimination where the effect may be +to lessen competition, or tend to create a monopoly. Due allowance may +be made for difference in the cost of selling or transportation, but +a difference is not required in such cases. It forbids contracts +to prevent dealers from handling other brands. It forbids corporate +ownership of stock in a competing corporation, forbids interlocking +directorates in large banks and in other competing corporations, +with capital, surplus and undivided profits aggregating more than +$1,000,000. The Trade Commission Act in addition to its administrative +provisions for investigation, reports, and readjustment of the +business of companies upon request of the courts, declares that +"unfair methods of competition in commerce" are unlawful, and both +empowers and directs the Commission to prevent their use (banks and +common carriers subject to other acts being excepted). + +These acts are too new to have been given a fair test. They have, +however, given evidence of exercising at once an influence upon +the situation. They are imperfect in some details that will require +amendment; but they mark the beginning of a new policy toward +industrial monopoly, the results of which will be watched with the +deepest interest. + + +[Footnote 1: See Vol. I, especially pp. 74 and 75.] + +[Footnote 2: See Vol. I, pp 59, 68, 70-71] + +[Footnote 3: See Vol. I, pp. 66, 67.] + +[Footnote 4: 77 Miss., 476. Cited by Bruce Wyman, "Control of the +Market," p. 137.] + +[Footnote 5: 19 R.I., 255.] + +[Footnote 6: 115 Ga., 429.] + +[Footnote 7: Mogul Steamship Company v. McGregor (L.R. 23 Q.B.D. +598).] + +[Footnote 8: Bruce Wyman, "Control of the Market," p. 22. In 1914 (216 +Fed. 971), a federal court granted an injunction restraining the use +of fighting ships by a combination, and in 1915 (220 Fed 235), +the court indicated a willingness to grant a similar injunction if +necessary. Similarly "fighting brands" of goods have been recently +prohibited.] + +[Footnote 9: See below, sec. 15.] + +[Footnote 10: Averrill v. Southern Railway (75 Fed. Rep. 736).] + +[Footnote 11: 107 Minn. 145.] + +[Footnote 12: Arnott v. Pittston and Elmira Coal Co., 68 N.Y. 558 +(1877).] + +[Footnote 13: See ch. 27, sec. 16.] + +[Footnote 14: At the same time the rights of injured individuals +are better safeguarded by sec. 7 of the Sherman law, permitting the +recovery of threefold damages and attorney's fees.] + +[Footnote 15: See ch. 28, sec. 9.] + +[Footnote 16: See further, ch. 30, secs. 5-9.] + +[Footnote 17: See ch. 27, sec. 15, on state commissions.] + +[Footnote 18: A few among the most important sources are the Report +of the Industrial Commission, 1898-1901, 19 volumes; reports of the +Bureau of Corporations on the petroleum and tobacco industries; U.S. +Supreme Court decisions, e.g., the Addystone Pipe case (175 U.S. 211), +given in Ripley, Trusts, Pools, and Corporations, p. 86; the Standard +Oil case (221 U.S. 1), and the Tobacco Trust case (221 U.S. 106); and +the very comprehensive volume on "Trust Laws and Unfair Competition," +by Joseph E. Davies, Commissioner of Corporations, Washington, 1916.] + +[Footnote 19: John B. Clark, the distinguished professor of economics +in Columbia University, has been the foremost and clearest exponent of +this idea, in his "The Control of Trusts," 1901, 2d ed., 1912, and in +other works.] + + + + +CHAPTER 30 + +PUBLIC OWNERSHIP + + § 1. Waves of opinion as to public ownership. § 2. Primary functions + of government favoring public ownership. § 3. Economic influences + favoring public ownership. § 4. Forms of municipal ownership. § 5. + Localized production favoring monopoly. § 6. Economies of large + production favoring monopoly, § 7. Uniformity of products favoring + monopoly. § 8. Franchises favoring monopoly. § 9. Various policies + toward local public service industries. § 10. State ownership of various + kinds. § 11. National ownership. § 12. Economic basis of public + ownership. + + +§ 1. #Waves of opinion as to public ownership.# Opinion and practice +in the matter of the public ownership of wealth and the direct +management of enterprises has moved in waves. In feudal times, when +government was practically identical with the personal ruler, and +the private "domains" of the lord or king were the sole source of +his public revenues,[1] holdings of this kind were very large. Their +public nature came to be more fully recognized, but they did not yield +large revenues, and gradually were in large part sold or given away to +private owners. This was particularly true in England, and in a less +degree on the continent of Europe. The conviction grew that the state, +or government, was an inefficient enterpriser, and that the sound +public policy was to foster private industry and obtain public +revenues by taxation. The ideal was embodied in the _laissez-faire_ +philosophy that government should confine itself exclusively to the +most essential political functions, leaving the economic functions +absolutely alone. It should keep the peace, prevent men from beating +and robbing each other, and preserve the personal liberty of the +citizen.[2] Thus, it was believed, all of the economic needs would be +provided for by competition, in the best way humanly possible, in the +quantities and at the rate needed. This policy attained its maximum +influence in the first half of the nineteenth century in England, and +in America probably just before the Civil War, in the decade of the +fifties. + +§ 2. #Primary functions of government favoring public ownership#. Some +public ownership, however, is necessary for the exercise even of +the primary political functions of the state. Civilized government +requires the use of numerous material agents. Buildings for +legislative and executive offices, custom-houses, post-offices, +lighthouses, can be rented of private citizens, as post-offices +usually are in small places; but it is obviously economical and +convenient in large cities for the government to own the public +buildings. Government can reduce to a minimum its direct employment +of officials by "farming out" the taxes, as all countries once did +to some extent, and as France continued to do up to the French +Revolution. It is now the general policy for government to own or +control its essential agencies, but this does not involve in every +case the employment of day-labor direct as in cleaning the streets or +collecting garbage. The more simple political functions shade off into +the economic. To coinage usually are added the issue of legal-tender +notes and certain banking functions: the post carries packages, +transmits money, and in most countries now performs the function of +a savings-bank for small amounts. The social and industrial functions +undertaken by public agencies have steadily increased since the +middle of the nineteenth century, and the sphere of the state has been +enlarging.[3] The question ever open is as to the proper limits to +this development. + +§ 3. #Economic influences favoring public ownership#. In some cases +private ownership is difficult because of the excessive cost of +collecting for the service. The cost of maintaining toll houses on a +turnpike sometimes exceeds the amount collected. Collection in +other cases, as for the service of lighthouses to passing ships, is +impossible. Public industry may secure, through the economy of large +production, a cheaper and more efficient service, the benefits and +costs being diffused throughout the community. The benefits of the +work of experiment-stations for agriculture are felt immediately by +the farmers, but are diffused to all citizens. A manufacturer able to +keep his method secret, or to retain his advantages for a time, can +afford to undertake experiments in his factory, but the farmer seldom +can. The public ownership of parks for the use of all gives a maximum +of economy in the production of the most essential goods,--fresh air, +sunshine, natural beauty, and playgrounds in the midst of crowded +populations. Municipal ownership of waterworks is an extension of the +same idea. Not only because large amounts of water are used by the +public, but because cheap, pure, abundant water is an essential +condition to good citizenship, speculation should in every possible +way be eliminated from this industry. + +The assumption is made in the _laissez-faire_ doctrine that the +interest of the public harmonizes with that of the individual. But +this proves often not to be the case. For example, the forest has an +immediate value to its owners and to the consumers of lumber, and it +has also a diffused utility in its influence on industry, on climate, +on navigation, on water-power and on floods. Yet, as the private +owner, unless a great land monopolist, does not control enough of the +forest to appreciably affect any of these things, and could rarely +sell them even if he could affect them, he will cut down the +tree whenever he can gain by doing so. In this situation either +governmental control or governmental ownership of forests is +essential. + +Each kind of political unit, or subdivision of government, develops +characteristic kinds of public ownership and industry. Federal states +consist of three main groups of political units: national, provincial, +and local. Provincial units are the largest subdivisions, as the +American "states," or commonwealths, the German states, and the +provinces in other countries. The term local political unit is more +complex and may mean county, township, village, city, or school or +sanitary district; but most of what is to be said of local ownership +refers to cities or to incorporated villages. + +§ 4. #Forms of municipal ownership#. Local political units acquire +ownership only in local industries and in wealth used locally by the +citizens. Nearly all parks and recreation grounds are owned by cities. +As population has become more dense, private yards of any extent +have become impossible, in cities, for all but the wealthy. Public +ownership of parks insures a "breathing place" and recreation grounds +to the common man in the most economical way. Of late the movement for +large and small public parks and playgrounds has gone on rapidly in +American cities. Related to parks are public baths, public libraries, +art collections, museums, zoological gardens, etc. Some have seen +danger in this policy, but the public sees no such danger so long +as the things supplied gratify the higher tastes--as art, music, +literature, and social recreation. These give no encouragement to +the increase of improvident families and to the breaking down of +independent character. The means of local communication--streets, +roads, bridges--were once owned largely by private citizens. Here and +there still are found toll roads and toll bridges built under charters +granted a century ago, but tolls on public thoroughfares are for the +most part abolished. A public market, where the producer from the +farm and the city consumer can meet, is an old institution. About two +thirds of the cities of 30,000 population or more have public markets +or scales, and fully one third have public markets of importance. New +York City has six large retail and wholesale markets, for selling meat +and farm produce, in which rents or fees are charged, and several open +markets. There has recently been a large movement in this direction. + +The providing of apparatus for extinguishing fires is always a public +duty; the conveyance of waste water is increasingly a public function. +The supply of pure water for domestic and business uses, for fire +protection and for street cleaning, while often a private enterprise +in villages, and sometimes in large cities, is increasingly undertaken +by public agencies. Most of the largest cities now own their own water +supply systems. Public ownership of gas and electric lighting is less +common, as the utility supplied is not so essential and the industry +is somewhat less subject to monopoly; but the difference is one of +degree only. Street railroads are often under public ownership in +Europe; but there have thus far been few cases of the kind in the +United States and Canada.[4] + +§ 5. #Localized production favoring monopoly#. A number of these +enterprises have characteristics in common which appear to make +inevitable their drift into monopolistic control. Waterworks, gas, +electric lighting, street railways, telephone systems, are among +these. However fierce may be the competition for a time, sooner or +later either one company drives out the other or buys it up, or both +come to an agreement by which the public is made to pay higher prices. + +A feature favoring the growth of monopoly when such industries are +left to private enterprise is the need to produce and supply the +commodity or service at a given locality. While two street railways +can compete on neighboring streets, it is physically impossible for +two or more to compete on the same street. Two systems of water-mains +or gas-mains can be put down, as sometimes is done, but this is not +only a great economic waste, but the tearing up of the streets is an +intolerable public nuisance. This difficulty is less marked in the +case of telephones and electric lighting, and some persons still cling +to faith in competition to regulate the rates in those industries; but +faith in competition between water companies and between gas companies +has been given up by nearly all persons now, as it was long since by +students of the subject. + +§ 6. #Economies of large production favoring monopoly#. A second +feature favoring monopoly in such industries is the marked advantage +of large production in them. These industries are usually spoken of as +"industries of increasing returns." This advantage is enjoyed in +some degree by every enterprise, but it is gradually neutralized and +limited. The need to extend an expensive physical plant to every point +where customers are to be served, and the very much smaller cost +per unit of delivering large amounts of water, gas, electricity, and +transportation, on the same street, offers a greater inducement +for one competitor to crowd out or buy out the other at a more than +liberal price. Even then, larger net dividends and correspondingly +larger capitalization are secured than were before possible to both +companies combined. + +§ 7. #Uniformity of products favoring monopoly#. A third feature +favoring monopoly is uniformity in the quality of the furnished. It is +a general truth that competition is most persistent where there is the +greatest range of choice open to the customer, and consequently the +most individual treatment required of the enterpriser. An artist, +even a storekeeper, attracts about him a body of patrons who like his +product (for the merchant's manner and method of dealing are a part +of the quality of his goods), and who cannot be tempted away by slight +differences in price. Rival companies in the stage of competition are +seen to claim superiority for their particular goods and to improve +their service in every way possible. A new telephone company, entering +where a monopoly has held the field, works at once a wonderful +betterment in rates, courtesy, and service. But as the product of all +competitors attains the highest technical standard possible at the +time, the rivalry is reduced to one of price, and it is usually a +"fight to the finish." + +§ 8. #Franchises favoring monopoly#. A fourth feature favoring +monopoly in these enterprises is the necessity of making permanent and +exceptional use of the public streets and alleys. If this right were +granted by a general law to every citizen, this feature would be +sufficiently implied in the foregoing discussion. As it would be +intolerable to allow private interests to use public property in +whatever way they wished, the legislative body makes special grants in +such cases in view of the circumstances. Not only is the legislature +(or council, or county board of commissioners, etc.) led by the +economic difficulties to withhold a charter from a second company, but +it may be corruptly influenced by the company already established. The +knowledge of the opposition to be encountered in getting a franchise +must keep competitors out, even tho monopoly prices are maintained. + +In view of these several features, which are so closely related that +they form a common character, more or less fully shared by various +industries, and especially in view of the necessity for the formal +granting to them of peculiar privileges in the form of a public +franchise, the public, in order to protect the general interest, is +forced to undertake an exceptional control of these industries. + +§ 9. #Various policies toward local public service industries#. +Several courses are open to the public, acting in its political +capacity, to retain those monopolistic advantages for the general +welfare. (a) It may do nothing, trusting vainly to competition to +regulate the rate, or consciously leaving the result to be worked out +by the monopoly principle; this is what in most cases has been done in +the past in America. (b) It may attempt, in granting the franchise, +to fix near cost the charge for the service or product, so that the +franchise will be worth little as private property. (c) It may leave +the rate to be fixed by the monopoly principle, but charge for the +franchise so much that the value of the monopoly is appropriated into +the public treasury. (d) It may have public officials carry on the +business, either selling the product at cost or making monopoly +profits that go into the public treasury. Various combinations of +these plans are followed in practice, the most common plan being the +fixing of maximum rates which, with improved methods, generally become +ineffective. It is difficult to fix a uniform rate that is equitable, +because conditions change, and, further, because a uniform rate must +be applied to all parts of the town, altho the cost of service varies +greatly. It is difficult because of the limited number of competent +bidders, to sell the franchise for what it is worth. There remains the +policy of public ownership to secure the profits of monopoly to the +public, either directly or in a diffused manner. There is no doubt +that the general trend of municipal policy everywhere is toward public +ownership of this type of local public service industries. + +§ 10. #State ownership of various kinds#. The movement toward public +ownership by the American states has been much less marked than that +by the municipalities. The commonwealths have retired from some fields +where once they were engaged in industry. Students of American history +know that between the years 1830 and 1840 some states engaged largely, +even wildly, in canal building, railroad construction, banking and in +other enterprises. The undertaking of these industries was determined +often by political and by selfish local interests, and their operation +often was wasteful. A few enterprises succeeded, the most notable of +these being the Erie Canal in New York. The unsuccessful ones remained +worthless property in the hands of the state or were sold to private +companies, as in the case of the Pennsylvania Railroad. This reckless +state enterprise was a bitter lesson in public ownership, and +continued for three quarters of a century to have such an effect on +public opinion, that few proposals for public ownership could have a +fair hearing in America, But railroads and canals are publicly owned, +and more or less successfully operated, by many foreign states, as in +Prussia and other German states, in Switzerland, and in the new states +of Australia, and this policy is rapidly extending to other countries +and to varied industries. + +There has been recently a greatly increased interest in forestry +shown by the American states. This is especially likely to be a state +enterprise wherever the forest tracts are entirely within the limits +of the state, as is the case in New York and Pennsylvania which +have been foremost in this work. At present at least 32 states have +forestry departments. Most of the forests in Germany are either +communal or state-owned. The schools, a great industry for turning +out a product of public utility, are largely conducted by the American +states and by local units rather than by the nation or by private +enterprise. The state encourages researches in the arts and sciences, +and gives technical training. A variety of minor enterprises have been +undertaken by states to supply salt, phosphate, banking facilities, +even some manufactures. One after another the states are adopting the +"state use" system of labor in the prisons and public institutions, +engaging in agriculture and manufacturing on a large scale, and +using the products, amounting to millions of dollars annually, almost +entirely for public purposes. + +§ 11. #National ownership#. The national governments everywhere appear +to be enlarging the field of their ownership. This policy has its +roots far in the past. Some industries grow out of the political needs +of government. Established as a means of communication with military +outposts, the post became a convenient means of communication +for merchants and other citizens and grew into a great economic +institution. In most countries the telegraph is publicly owned and +has been annexed to the post, to which it is very closely related in +purpose. National ownership of railroads is the rule, and our policy +of private ownership the great exception in the world to-day. +Many persons, even some in railroad circles, believe that national +ownership of railroads is sure to develop out of our present policy of +regulation. + +The national improvements connected with rivers and harbors were first +political--that is, they were for the use of the government's navy; +they became, secondly, commercial--for the free use of all citizens +engaged in trade; and they continue to unite these two characters. +Forestry is most largely undertaken in this country by the national +government, partly because some forest areas in the West extend over +state boundaries, and largely because large tracts of public forest +lands were still unsold at the time public attention was attracted +to the subject. Since 1890, the policy of reserving great areas for +forests, and picturesque districts for national parks, has developed +greatly in the United States. The national forest area contained +in the various forests in 20 states (not including Alaska and Porto +Rico), now covers about 225,000 square miles, equal in area to five +states of the size of Pennsylvania. There are, besides, fourteen large +national parks, ranging in size from a few hundred acres up to over +2,140,000 acres (the area of the Yellowstone National Park), and +aggregating 4,600,000 acres, nearly the size of Massachusetts or of +New Jersey, besides numerous other national reservations for monuments +and antiquities. + +In some countries mines are thought to be peculiarly fitted for +national ownership and control. In the German Empire the several +states own coal, salt, and other mines. Coinage and banking are +everywhere looked upon as functions of sovereignty, and yet it is no +more necessary for a nation to own its own mint in order to control +the monetary system than for it to print the banknotes in order to +regulate their issue. The American government has its own printing +office. The fish commission, and the various branches of the +department, coöperate with private industry in many ways. This brief +survey suggests that the industries undertaken by government are both +varied in nature and large in extent, altho small in proportion to the +mass of private industry. + +§ 12. #Economic basis of public ownership#. The question as to the +proper limits of public ownership is one most actively debated. The +movement is progressing in accordance with the principle that public +ownership is economically justified wherever it secures a product +or service of widespread use that would otherwise be impossible, or +insures the public a better quality or a lower price. The question of +public ownership is not exclusively an economic question. There +are incidental problems, such as its effects on enterprise and on +political integrity, with which it is not possible here to deal. In +the main, however, public ownership is simply a business policy which +must be justified by its economic results. In the case of a general +social benefit not to be secured without public ownership (as popular +education or the climatic effect of forests), the only question +to answer is whether the utility is worth the cost. In the case of +industries already in private hands, as waterworks, gas and electric +lighting, there is needed, to make a wise decision possible, a +knowledge of the effect a change to public ownership will have upon +cost and service. If public officials can furnish some goods cheaper +than they are furnished by private enterprise, it is because of the +wide margin of monopoly profit, not because there is any magic in +public ownership. The same general items of cost must be met. The +first cost of the plant and the annual interest payments are much the +same. Experience shows that, because of political influence and of +public opinion, wages are likely to be higher under public ownership, +but salaries for management lower. Public collection of dues along +with taxes is an advantage not enjoyed by private companies. Several +public officials sometimes share the same office and thus reduce +expenses. In small towns the public electric lighting and waterworks +have been operated more economically under one roof. Some items of +cost may be less under public management, but on the whole, public +industry probably has no advantage in these respects. Public industry +does not have to meet the costs of lobbying and blackmail which are +often forced upon private companies. But the greatest source of saving +in public ownership is the value of monopoly privileges that, under +private management, go into private pockets. + +The temptation of political corruption may be more insistent when a +large force of men is constantly employed, and when large supplies are +constantly purchased, by public officials, but the temptation is not +so strong or so centralized as it is in the granting of franchises to +wealthy corporations. Public industry is weakened by the absence of +certain motives to excellence that are present in private business. +The income of public officials not being dependent on the economy of +management, the spur and motives of competitive industry are lacking. +No social discovery has made individual honesty and civic virtue +useless to good government. + +The decision in any specific case is one dependent on local +conditions, and the exact limits of public ownership are not fixed. +Industry is changing so rapidly that new adjustments are made every +year. The main outlines of public ownership, however, are now in large +part determined. Some industries do well, others ill, under public +management, and between these lie many debatable cases. Waterworks and +probably electric lighting, because of the comparative simplicity of +their operation, are more suitable for public ownership than are gas +works. No absolute line divides the one group from the other. But +whatever the changes, the fact can not be ignored that the increase +of public ownership is altering in manifold ways the organization +of industry, and is reacting upon the production of wealth, and the +distribution of incomes. + + +[Footnote 1: See above, ch. 16, sec. 5.] + +[Footnote 2: See above, ch. 16, sec. 2, on the police function.] + +[Footnote 3: See ch. 16, secs. 3 and 4.] + +[Footnote 4: See above, ch. 16, sec. 5, statistics of receipts from +public service enterprises.] + + + + +CHAPTER 31 + +SOME ASPECTS OF SOCIALISM + + § 1. The distribution of incomes. § 2. Distribution by force and by + status. § 3. Social effects of the right to transmit property. § 4. + Effects of the right to inherit property. § 5. Broader social effects + of inheritance. § 6. Limitations upon intestate inheritance. § 7. Some + merits of competition. § 8. Wide acceptance of competition. § 9. + "Economic harmonies" and discords. § 10. Competition modified by + charitable distribution. § 11. Competition modified by authoritative + distribution. § 12. Meanings of socialism. § 13. Philosophic socialism. + § 14. Socialism in action. § 15. Origin of the radical socialist party. + § 16. The two pillars of "scientific" socialism. § 17. Aspects of the + materialistic philosophy of history. § 18. Utopian nature of "scientific" + socialism. § 19. Its unreal and negative character. § 20. Revisionism and + opportunism in the socialist party. § 21. Alluring claims of + party-socialism. § 22. Growth and nature of the socialist vote. § 23. + Economic legislation and the political parties. + + +§ 1. #The distribution of incomes#. The great economic progress of the +past two centuries has been mainly in lines of technical production. +The developing natural sciences and mechanic arts have given men a +marvelously increased control over forces and materials. This has +multiplied the quantities of goods of most kinds at the disposal of +men, collectively considered. All men, with rare exceptions, have +been gainers; but the increased production has been very unequally +distributed among the members of the community. More and more +insistently the plea and the demand have been made for better methods +of distribution that will give to the masses of the people a larger +share of the goods produced. Production is largely a problem of the +technical arts; distribution is a problem of social economy. + +Two aspects of distribution may be distinguished: functional +distribution is the attribution of value (yields) to wealth and labor +considered impersonally, as groups of productive agents; and personal +distribution is the actual movement of incomes into the control of +persons.[1] Personal incomes, whether monetary, real, or psychic, +are the sum of a number of elements. Some parts are due to services +performed by the person himself. When one combs his own hair he +is performing for himself a service that is a part of his income. +Benjamin Franklin said it was better to teach a boy to shave himself +than to give him a thousand dollars with which to pay barbers for a +life-time. Other parts of income are the uses and fruits of legally +controlled wealth; chance finds, as gifts of value or lost and +abandoned goods; goods assigned to one by authority; wealth inherited; +illegal gains by robbery; goods secured on credit; gifts either +of things or of services. The many methods by which incomes are +distributed to the persons making up a society may be grouped in the +following five general classes: force, status, charity, competition, +and authority. These will be discussed in due order. + +§ 2. #Distribution by force and by status.# Distribution by force is +the most primitive mode of distribution. The stronger takes from the +weaker. Forceful distribution still persists in the form of crime, +and if we include fraud within the term it still affects an enormous +amount of income. The lawless take whatever they can, and the +supporters and officers of the law do what they can to check the acts. +Slavery is distribution by force, as is the levying of war indemnities +from a conquered people. + +Distribution may be by status, or set rules and customs. In this case +men receive incomes that are independent of their efforts and outside +of their control. Distribution by status is guided neither by the +personal merit of the recipients nor by the value of their direct +services, but the merits and acts of men not living. Feudal society +was built on status. Men were born to certain privileges and +positions; they inherited property which could neither be bought +nor sold; they followed trades which could rarely be entered by any +outside of favored families. Caste in India and in other Oriental +countries regulates a large part of the life of the people. + +This method still prevails to a greater extent in our society than is +usually recognized.[2] By public opinion and by prejudice, status is +still maintained in respect to the choice of occupations even where +the law has formally abolished it, as is seen in modern race problems, +in western countries to-day inheritance of property is the main legal +form of status and it shades off into other forms of distribution. +Private property must find its justification in social expediency.[3] +There is no feature of it that is more questioned than is the right of +inheritance. + +§ 3. #Social effects of the right to transmit property.# The right +to transmit property by inheritance or by bequest may be judged with +reference to its effects upon the giver, upon the receiver, and upon +society at large. It is well to take these three points of view. +The right to dispose of property either during life or at death has +undoubtedly in many ways a good effect upon the character of men. +It stimulates the husband and father to provide for his wife and +children, and spurs others to continued economic activity. There is +a joy in giving, a joy in the power to bestow one's wealth upon those +one loves, or as one pleases. Much of the existing wealth probably +never would have been created if men had not had this right. But there +is a limit to the working of this motive, and other motives often are +more effective. Many a man after gaining a competence continues to +work for love of wealth and power in his own lifetime, as the miser +continues to toil for love of gold. When men without families die +wealthy, when men not having the slightest interest in their nearest +relatives labor till their dying days to amass wealth, it is evident +that the right to bequeath property has little to do with their +efforts. Love of accumulation and love of power in these cases supply +the motives. A more limited liberty to dispose of property at death +might still suffice, therefore, to call out the greater part of the +efforts now made to accumulate property. + +§ 4. #Effects of the right to inherit property#. That the effects upon +the receiver of the property are good is somewhat more doubtful. It is +true that children reared in families of large incomes would be great +sufferers if plunged into poverty at the death of their parents. There +is much social justification for permitting families to maintain +an accustomed standard of comfort. Few would deny that provision by +parents to provide education and opportunity for their children is +commendable and desirable. But the evil effects of waiting for dead +men's shoes are proverbial. Many a boy's greatest curse has been his +father's fortune. Many a man of native ability waits idly for fortune +to come and lets opportunities for self-help slip by unheeded. The +world often exclaims over the failure of the sons of noted men to +achieve great things, for, despite confusing evidence, men still +have faith in biologic heredity. A too easy fortune saps ambition and +relaxes energy; and thus rich men's sons, if not most carefully and +wisely trained, are often made paupers in spirit, while the self-made +fathers think their boys have better opportunities than they +themselves enjoyed. The greater social loss is not the dissipated +fortunes, but the ruined characters. Andrew Carnegie said that it +would be a good thing if every boy had to start in poverty and make +his own way. Cecil Rhodes recorded in his will his contempt for the +idle, expectant heir. + +§ 5. #Broader social effects of inheritance#. Inheritance has good +effects for the community insofar as it helps to secure efficient +management of wealth. If the son or relative has been in business with +the deceased, there is a reason that he should inherit the property, +and his succession to it makes the least disturbance to existing +business conditions. This consideration, however, has less weight as +the corporate form of organization becomes well nigh universal in +"big business." Every profligate son, every incompetent heir, is +an argument against the inheritance of property. It is to society's +interest that no able-bodied member should stand idle. Every child +should have presented to him the motive to use his powers in useful +ways. Moreover, many feel that the great fortunes now accumulating +through successive generations in the hands of a few families are a +danger to our free society, even if these fortunes should continue to +be well administered. There is a widespread feeling that the heredity +of great wealth is, like the heredity of political power, out of +harmony with the democratic spirit. Democracy wishes to see men and +individuals put to the test, not profiting forever by the deeds of +their forebears. This feeling is shared by those who cannot be charged +with radical prejudices. It was startling when a conservative body +of lawyers meeting in their state association in Illinois, passed +a resolution favoring moderate limits to inherited fortunes. Almost +every year sees bills of this purport introduced in the legislatures +and in Congress. Probably no one of many current radical proposals +is more widely favored than this, among men of otherwise conservative +social views. Tho sum most often mentioned as the proper limit is +$1,000,000, but in every case it is a sum larger than the fortune of +the person speaking.[4] + +§ 6. #Limitations upon intestate inheritance#. A proposal less crude +and with strong reasons of social expediency in its favor is to +limit the right of intestate inheritance to persons that have been +in essential economic and social relations with the deceased. The +foregoing considerations show that the case for the right of gift in +the lifetime of the giver is strongest; that for the right of bequest +comes next. The man who has acquired wealth may usually be trusted to +decide who bear to him close social or personal relations, and to say +whose lives have in a measure furnished the motives of his activity. +But the right of intestate inheritance by distant relatives is one +that stands on weak social foundations. It is a survival from more +patriarchal conditions when, in the large family, or clan, the bond +of unity was very strong. A truer test to-day of the proper limits for +intestate inheritance is whether the wish to provide for these heirs +has furnished the motive for the producing and preserving of the +wealth. The claims of those nearest in blood and closest in personal +relations are strongest. Family affection and friendship form the +strongest of social ties, and it is socially expedient to cultivate +them. Motives for abstinence and industry must be strengthened. But +the same test shows that the zealous regard of the American law for +the rights of distant kinsmen in foreign lands, or in distant quarters +of this country, is irrational, and is unjust to the community where +the fortune was made. Public opinion tends strongly toward this idea. + +Property rights as they exist are clearly seen not to be a product of +pure reason. They are the result of social evolution, of historical +accidents, of class legislation, and in many cases, of selfish +interests. Changing social conditions and ideas are bringing many +changes in law, and further changes must be expected to come, which +will reduce the influence of inheritance of property in fostering +status in distribution. Especially important are the increasing +application of the progressive principle to incomes and +inheritance,[5] and the development of insurance to put family savings +into the form of terminable annuities instead of capital sums.[6] + +§ 7. #Some merits of competition#. The dominant method of distribution +to-day is that of competition.[7] This is not a mere accident, but +is a resultant of unending experimentation with different methods of +distribution carried on since the beginning of human society. A method +of distribution had to be found and retained that would work under +the conditions of human nature at each stage of social progress; and +competition, however imperfectly, has worked. It is evident from the +voices of praise and of blame that competition has its good and its +bad aspects. Let us observe first the good ones. Competition acts to +distribute the working force over the field of industry wherever it +is most needed. The remarkable (tho far from perfect) adjustment +of industry to the needs of each neighborhood is brought about by +individual motives, not by centralized authority. Wherever consumers +settle, stores are started and factories are built. Wherever work is +to be done, men come in about the right number to do it. It is not +mere chance that produces this result. The available skill is adjusted +to varying needs by the delicate measurement of the market rate of +wages. Two-sided competition gives a definite rule of price--the only +definite impersonal rule. The theoretical competitive price is the +standard to which things tend constantly to adjust themselves in an +open market.[8] + +Competition is an essentially economic method as contrasted with the +legal and personal methods above and later described, because it +is impersonal and reducible to a rule of value. Distribution under +competition is made, not with reference to abstract ethical principles +or to personal affection, but to the value of the product. Each worker +strives to do what will bring him the largest return, and the price +others pay expresses their estimates of the service in that market. +Each seeking his own interest is led to make himself more valuable to +others. In most cases and in large measure, competition stimulates men +to sacrifice, to invention, to preparation; thus is zeal animated and +are efforts sustained. In the economic realm, as is now seen to be the +case in the biologic realm, competition of some effective kind is +an indispensable condition not only of progress but of life without +degeneration. Monopoly, as we have noted, never has ceased to +rest under the ban of Anglo-Saxon law, and therefore to exemplify +compulsory, as opposed to competitive distribution. A striking feature +of the competitive method is its decentralization. Each helps to value +the economic services of each. If one pays more for the services of +the singer than for those of the cook, it is not because one would +rather listen to the singing than to eat when starving, but because by +apportioning one's income one can get the singing and the eating too. +In the existing circumstances, the singer's services seem to the music +lover to be worth paying for, and he backs his opinion with his money. +So each is measuring the services of all others, and all are valuing +the services of each. It is distribution by valuation, and it is +valuation by democracy. + +§ 8. #Wide acceptance of competition.# On purely abstract and _a +priori_ grounds competition cannot be accorded an ethical sanction, as +is sometimes assumed. But because of the qualities above outlined, and +because it meets in large measure the pragmatic tests, the competitive +rule of distribution appeals to all men (even to those who denounce +it) as having in many of its applications a moral character, as +compared with the other possible methods of distribution. Indeed, +the competitive rule is the only rule that does not involve either +personal and arbitrary judgment (force, charity, and authority) or +status. Even such measure of justification as is found in status (as +in property and inheritance laws) is traceable, in the long run, to +competition. The case for a limited application of status is based +upon its results in stimulating motives of effort and accumulation.[9] +When the rule of authority is applied to-day in the large field of +public regulation where _actual_ competition has become impossible, +almost the only guiding rule is _hypothetical_ competition. The +just rate is felt to be that which in the long run _would be_ just +sufficient to afford "normal" incomes to labor and to capital, to +call forth the necessary effort, skill, judgment, and forethought, +if competition _were_ at work, as it is not.[10] Only this rule +of hypothetical competition redeems these public rates from +arbitrariness, favoritism, and force. + +§ 9. #"Economic harmonies" and discords.# Every truth in political +philosophy finds some exaggerated expression. Competition, as +compared with status and custom, has some notable merits; and when the +eighteenth century was throwing off some of the burdens inherited from +the more static Middle Ages, competition appeared to be a panacea for +all the ills of society.[11] The belief in the benefits of competition +and the virtues of economic freedom found its extremist expression +in the first half of the nineteenth century in the doctrine of "the +economic harmonies." According to this, if men are left entirely free +to do as their interests dictate, the highest efficiency and best +results for all will follow; the economic interests of all men are in +harmony. Corresponding with this doctrine is the economic policy of +extreme _laissez faire._ + +But experience has shown that the economic interests of the +individuals in a community are only partly very rarely are they +wholly, in harmony. There are three species of competition in every +market: that between sellers, that between buyers, and that between +sellers on the one hand and buyers on the other.[12] If at any point +free competition is hindered, even the disciple of economic harmony +must, from the very nature of his doctrine, expect a discordant +result. In reality competition is rarely quite complete on both sides, +and when it is not the weak usually suffer. Men do not start with fair +opportunities. All that they may be entitled to have under competition +may be so little that social sympathy seeks to better the results; +hence poor relief, public and private. Society as a whole has an +interest in the outcome of the individual's economic struggle. +It cannot see men starving or driven into crime. Moreover, when +competition is the rule of valuation, it, like all valuations, +partakes of the quality of those choosing--wise or foolish, good or +evil.[13] And tho competition is the rule of democracy in economics, +yet democracy cannot permit the economic vote of a vicious or of +a foolish group to stand, where the goods, services, and prices +resulting offend the prevailing public judgment and social conscience. + +§ 10. #Competition modified by charitable distribution.# In practice +the competitive method of distribution always has been modified or +supplemented in varying degrees by the other methods. Important among +these is charitable distribution. Charitable is here used in its +original sense, as synonymous with benevolence and affection. First is +parental love, the root and type of all the forms of charity. There is +a complete lack of economic equivalence in the relation of parent and +child in early years. The helpless infant does nothing for the parent, +the parent gives all and does all for the child. Gradually, however, +the balance is regained; as the years go on, not only do children +repay in affection but in many cases they repay in material ways. +Especially in the factory districts and on the farm the child sooner +or later begins to reestablish the balance, becomes a worker, and +contributes to the family income as much as the cost of his support, +and finally more. A student of modern English town life has traced the +curve of poverty traversed by the average poor family as the children +are first an economic burden, and later an aid to their parents. In +the middle, or propertied, classes the children do not for many years +cease to be a financial burden to their parents, and in most eases the +economic balance is never reestablished. It is not to the parents, but +to the succeeding generation, that the debt is tardily paid. + +Friendship widens the range of generosity and multiplies the mass of +gifts. Broad sentiments of humanity lead to gifts outside the range of +personal affection and personal interest, to the beggar on the street, +to institutions devoted to charity. In New York state alone a sum of +more than $20,000,000 a year is expended by institutional charities. +About $512,000,000 in public benefactions were given in the United +States by private donors in the year 1915, and in this respect that +year was not exceptional. An enormous and increasing body of property +is thus being year by year socialized, largely through bequests +from persons without direct heirs. Great public subscriptions to +the sufferers from great disasters, such as the Irish and the Indian +famines, the Chicago fire, the Galveston flood, the San Francisco +earthquake, the great European war, bespeak a widening generosity. +Religion impels to the building of churches, to the support of +priests, missions, and manifold religious undertakings. Charity in +this connection is the expression of a sentiment that varies from +the most intense personal, affection to the broadest and most general +humanitarian sentiment. + +§ 11. #Competition modified by authoritative distribution.# Authority +is, after force, the oldest and was the earliest widely operative +method of distribution. It shades into force, status, and charity in +manifold ways, but it is essentially the assignment of a common, or +social, income to individuals by some person or persons chosen, or +accepted, by the society to perform this function. Thus it may be +distinguished from force, which takes for itself what belongs to +another; and from charity, which gives to another what belongs to +one's self; and from status, which transmits claims to income from one +generation to another by a fixed impersonal rule, not by a personal +judgment in the particular case. + +Authoritative distribution is the dominant method in patriarchal +tribes, in communal societies, and in monastic and other religious +orders. Each person works at what he is commanded to do, and some one +in authority (patriarch, head of the community, father of the monastic +order) portions out the tasks and the rewards. In the family this rule +largely prevails, and even after the children have come to years of +discretion they not infrequently accept, from habit or affection, the +will of the parents, and give up their entire wages to receive back +a portion. The method of charitable distribution while the child is +young gradually changes to authoritative distribution after the child +becomes a worker. The untrained and indocile youth, however, is made +the subject of compulsory distribution. + +The collection and distribution of taxes is by public authority. No +attempt is made to give back an exact equivalent to each taxpayer. The +money is taken and spent by authority. The new forms, or at least the +new extensions, of taxation, especially of incomes and inheritances +at progressive rates, are very important examples of authoritative +distribution.[14] The courts sometimes find themselves obliged to +apply the method of authoritative distribution, altho they do it +unwillingly. They try to confine their efforts to interpreting the +contracts men have voluntarily entered into, and they avoid, so far +as possible, the making of contracts or the fixing of rates. +Authoritative distribution is exemplified in the work of many +commissions appointed by law to fix rates or settle disputes, such as +boards of conciliation and arbitration and railway commissions. + +§ 12. #Meanings of socialism.# Our reason for leaving to the last the +discussion of _authority_ as a method of distribution is not that it +appeared last in historical development, but that it now is the most +strongly advocated as an alternative of competition. One of the most +striking developments of opinion in the nineteenth century was that +favoring an increasing use of authority in distribution. This was +meant not merely to supplement and modify competition, but to displace +it completely, or (in the more moderate program) in large part. This +opinion, or plan, has appeared under a variety of names, the main ones +being communism, collectivism, social-democracy, and socialism, of +which the last name has just now the greatest vogue. Socialism is +a word of manifold meanings no one of which is generally accepted. +Discussion is therefore often a Babel of tongues. + +Socialism designates (1) a social[15] philosophy (2) a mode of social +action, (3) a particular political party. There is thus philosophic, +active, and partisan socialism. Each of these may be taken either in +an absolute or in a more or less relative sense. The first meaning +is the most fundamental, the second less so, and the last the least +fundamental, but just now the most frequently used. + +§ 13. #Philosophic socialism.# As a philosophy socialism is related +to social just as individualism is related to individual. Socialism +is faith in the group motive and group action rather than in +self-interest and competitive action. Instead of social philosophy we +may say social faith, or social ideals. This faith may be absolute, +or radical, to the rejection of all economic competition; or it may +be moderate, and leave more or less place for self-interest and +competition. Every man of conscience and of ideals has moods that +are socialistic (in this sense) and dreams of a world without toil, +competition, or poverty. + +This social philosophy has taken form as "Christian Socialism" among +men of strong religious natures, in various religious denominations. +Great secular dreamers--Plato in his "Republic," Sir Thomas More, in +his "Utopia," Edward Bellamy, in "Looking Backward," William Morris, +in "News from Nowhere," and others--have painted beautiful pictures of +ideal economic states from which all of the great evils and problems +of our society have been banished. + +§ 14. #Socialism in action.# Active socialism is group action in +economic affairs. This may be by private voluntary groups, as a club, +church, or trade union, or by a public group, or political unit of +government, which has therefore a compulsory character. The radical +kind of active socialism would be the ownership by government of all +the means of production and the conduct of all business, assigning +men, by authority, to particular work and granting them such incomes +as the established authority thought they deserved. This kind exists +nowhere. A moderate kind of active socialism is represented by each +separate case of public ownership or industry. Even public regulation +by authority, of the many kinds described in this volume, is touched +with a quality of active socialism. In this sense there can be more or +less of active socialism in a community; a state may be more or less +socialized in its economic aspects. An English Chancellor of the +Exchequer declared in the last decade of the nineteenth century, "We +are all socialists now." The ever-increasing sphere of the state[16] +gives to that statement to-day a larger, fuller meaning than when it +was uttered. + +Socialism in action is of course always the expression of a more or +less socialistic philosophy shared by a majority of the people. This +great recent movement of socialization in industry is the expression +not of a radical but of a moderate social philosophy. It does not look +to the abolition, but only to the modification and limitation in +some directions, of private property and of competitive industry. The +spirit of this movement is opportunist, or experimental. It is ready +to try public action, but recognizes that it has difficulties and +limitations. The ultra-radical and the ultra-conservative alike +declare that these measures "logically" lead on to the complete +destruction of private property. But men find that they can warm their +hands without being "logically" compelled to thrust them into +the fire, and that they can quench their thirst without a growing +resolution to drink the well dry. When this governmental activity has +proceeded somewhat extensively and systematically in cities, as in +Great Britain, it is called municipal socialism; and in states, as in +Germany, it is called state socialism. + +§ 15. #Origin of the radical socialist party.# Socialism in the +partizan sense is an actual political organization. Both in Europe +and in America such organizations have been designated as +"social-democratic," "socialist labor," or "labor" parties. Socialism +in this sense of a party organization, or movement, is very different +from a social philosophy. In its partizan phase socialism exhibits all +of the baffling variability and elusiveness that it does in its other +aspects. However, in its printed program the socialist party sets +forth both a socialist philosophy and an ideal of active socialism in +their most radical forms. + +Modern political socialism traces its origin directly to the most +radical of German social philosophers, Marx, Engels, and Lassalle. +Karl Marx (1818-1883), preeminently the philosophic leader of the +movement, sought to give a solider foundation of reason to the +somewhat romantic socialist philosophy current in his day. His own +doctrine, first set forth connectedly[17] in the Communist Manifesto +in 1848, he called Communism. This has come to be called by his +followers, "scientific socialism." "Scientific" was meant to emphasize +the contrast with "Utopian" socialism, as Marx and Engels somewhat +scornfully characterized the older communist philosophy, romances of +the ideal state, and attempts to found and conduct small communistic +states. + +§ 16. #The two pillars of "scientific" socialism.# Scientific +communism was to be based upon two immovable pillars. The one was +"the labor theory of value," by which all profits and incomes +from investment were shown to be robbery of the wage-workers.[18] +"Capital," that is, the ownership of the means of production, was +declared to be the instrument of this "exploitation." The other +foundation stone was "the materialistic philosophy of history," that +is, the explanation of all the intellectual, cultural, and political +changes of mankind from the side of the material economic conditions +as causes. As Engels expressed it, "The pervading thought ... that the +economic production with the social organization of each historical +epoch necessarily resulting therefrom forms the basis of the political +and intellectual history of this epoch." This doctrine denies that, +in an equally valid sense, biological changes in brain, and cultural +changes in science, arts, and education, cause the mechanical +inventions and improved processes and thus alter the form bf economic +production. + +§ 17. #Aspects of the materialistic philosophy of history#. Marx's +general formula of economic materialism had three minor propositions +or corollaries: (a) The doctrine of the _class conflict_; all history +is a record of the class struggle between those who have property, +the ruling classes within the nations, and those who have not, the +oppressed working class, (a conception of history blind to most of the +great international conflicts). The class conflict was declared to +be more sharply marked and bitter than ever before; "the entire human +society more and more divides itself into two great hostile camps, +into two great conflicting classes, _bourgeoisie_ and proletariate." +(b) The doctrine of _increasing misery_; the conditions before +described must cause the steadily increasing degradation of the +masses. (c) The _catastrophic theory_; the final and inevitable result +of this movement must be a revolution, when the downtrodden workers +will throw off their chains and expropriate the expropriators. There +is no doubt that Marx, when he first formulated this philosophy, +believed that such a revolution, most violent in nature, would occur +within a few years. + +§ 18. #Utopian nature of "scientific" socialism#. The term +"scientific" set in contrast with "utopian" was meant to imply that +the doctrine of Marx was not "utopian" (a word which had come to mean +fanciful and impracticable). Marx had a contempt for the romances +of the ideal state and for what he deemed to be the unfounded +speculations of earlier prophets of communism. But utopian (from +_utopia_, Greek for no place) means nonexistent, and Marxian socialism +surely was that. "Experimental" or "actually at work" would have +been a more logical contrast with "utopian." Marx and his followers +likewise had a contempt for the communistic experiments, or +settlements and colonies, which by the scores had been started and had +failed, bringing discredit upon all communistic proposals. The beauty +of "scientific" socialism was that it never could be tried on a small +scale--or tried at all until a whole nation adopted it. + +The old time "scientific" socialist had a lofty scorn for any less +dogmatic philosophy than his own or for any less sweeping social +change than that he expected. Moderate social reform to him was but +temporizing; indeed, it was evil, inasmuch as it helped to postpone +the inevitable, but in the end, beneficent catastrophe of the +social revolution. A step-by-step movement toward socialism, state +socialism,[19] even of a pretty sweeping character, was, to the +old-time Marxians, not really socialism at all. A valid reason for +this attitude was found in the extremely limited manhood suffrage +and in the aristocratic class government of most European countries, +especially of Germany; so that, as the party socialists saw it, +multiplying state enterprises but increased the power of the ruling, +and eventually of the militarist, class. The social-democratic leaders +felt that until they themselves were in power, the growth of "state +socialism" would be a calamity for the nation. The events of 1914 may +make our judgment tolerant toward their feeling. + +§ 19. #Its unreal and negative character.# The so-called "scientific" +socialism had, therefore, a peculiarly unscientific spirit; for, in a +modern sense, science implies a patient search for truth, not a +sudden revelation; a constant testing of opinions by observation +and experiment, not a dogmatic conviction that refuses the test of +reality. "Scientific" socialists talked much (and still talk much) of +the "evolution" of social institutions; but they refused to admit the +essential condition for institutional evolution, the competitive trial +on a small scale, of a new form of economic organization to prove its +fitness to survive. Indeed, it had been tried on a small scale many +times, and had always failed in a brief time. + +Lincoln said that a man's legs ought to be long enough to reach to the +ground; but "scientific" socialism was not built on that plan. To be +sure it contained many elements of truth, but these were so distorted +that the result was a caricature of history, of philosophy, of +economics, and of prophecy. The most important influence of radical +socialism has been exerted through negative criticism. It has +performed the function of a party in opposition, relentlessly hunting +out and pointing out the defects of existing institutions, arousing +the smugly contented, and, by its very recklessness and bitterness, +inspiring at times a wholesome fear of more revolutionary evils. This +has been a real service to the cause of moderate and constructive +reform. + +§ 20. #Revisionism and opportunism in the socialist party#. Most +men have always agreed in an adverse judgment of the claims of +"scientific" socialism. The criticisms have been admitted in part even +by the intellectual leaders among the Social-democrats. They lost some +of their fantastic illusions, they tempered some of their exaggerated +claims of oracular inspiration. "Revisionism," the socialist higher +criticism, became influential in the party. Whenever the party gained +any success at the polls, the socialists in public office and the +party leaders found it necessary to "do something" immediately. +The rank and file might be willing to talk of the millennium, but +preferred to take it in instalments instead of waiting for it to come +some centuries after they were dead. And so the socialist party, as +fast as it gained any practical power, became "opportunist" and +worked for moderate practical reforms. The leaders did this with many +misgivings lest the masses might become so reconciled to the present +order that they would refuse to rise in revolt. In that case the +revolution never could happen (altho it was inevitable). + +As the party socialists did more to improve the present, they talked +less of the distant future state. They ceased their criticisms of +"mere temporizing" "_bourgeois_" reforms, and began to claim these as +the achievements of the socialist party. They began to write of the +remarkable growth of social legislation in Europe and America in the +past half century under such titles of "socialism in practice" and +"socialists at work." This was despite the fact that these reforms +were all brought about by governments in which the socialist party had +no part whatever or was a well-nigh insignificant minority. This bald +sophistry, or self-deception, was easily possible by confusing the +word "socialist" as relating to the abstract principle of social +action, with socialist as applied to their own party organization. It +is as if the Republican party in the United States were to claim +as its own all the works of the republican spirit and principles of +government in the world from the party's organization to the present +time. + +§ 21. #Alluring claims of party socialism.# In thus changing the +emphasis of its claims, the socialist party has been somewhat put to +it to retain any clear distinction between itself and other parties of +social reform. It has done this however by continuing to proclaim the +_ultimate_ desirability of reorganizing all society without leaving +any productive wealth in private hands. It has had no misgivings +prompted by the experience of the world. Its case continues to be far +the strongest in its negative aspect, the exposure of the evils in +present society. To many natures the claims of the socialist party +have all the allurements of patent medicine advertisements. These +describe the symptoms so exactly and promise so positively to cure +the disease, that they are irresistible--especially when the regular +physicians keep insisting that the only way to get well is to take +baths and exercise, and stop the use of whisky and tobacco. + +Those attracted to the socialist party by its sweeping claims are of +two main types. The one is the low-paid industrial wage-worker; the +other is the sympathetic person of education or of wealth (or of +both), who has become suddenly aroused to the misery in our industrial +order. To both of these types, feeling intensely on the subject, +the socialist party appeals as the only party with promises sweeping +enough to be attractive. The one becomes the proletarian, the +other the intellectual, the one becomes the workshop, the other the +parlor-socialist. Many of the latter type are persons overburdened +either with unearned inherited wealth or with an undigested education. +Many of them, having enjoyed for a time the interesting experience of +radical thought and of bohemianism, come later to more moderate social +opinions. + +§ 22. #Growth and nature of the socialist vote.# In 1912 the socialist +party in the United States polled 900,000 votes in the presidential +election. The socialist parties in the various lands have almost +steadily grown, and now cast votes numbering in the aggregate six +to ten million (as variously estimated, the name socialist being +elastic). The socialist parties may be expected to continue +growing. They will ultimately gather within their folds most of +the ultra-discontented, and others that are not able to find an +alternative economic philosophy and a plan that inspire their hopes. +But the socialist party vote is made up of men of many shades +of opinion, a large number of whom hold only the mildest sort +of socialistic philosophy. Not many of the more than 3,000,000 +social-democratic voters in Germany before the war were members of the +regular party organization; but they supported the party as the +one unequivocal way to declare themselves against militarism and +undemocratic class-government. In the United States only about one +tenth of the socialistic party voters have been enrolled as members of +the party. + +§ 23. #Economic legislation and the political parties.# This floating +socialist vote is now so large that it is eagerly sought by candidates +of the older parties. These independent voters care little for the +radical and distant tenets of the socialist party leaders, and these, +to attract wider support, are forced to place increasing stress upon +immediate and moderate reforms. On the other hand, men of larger +qualities of leadership in the older parties are constantly adopting +and advancing pending measures of social reform. Where this is not +done the socialist party tends more quickly to develop into the one +powerful party of protest and of popular aspiration, receiving support +from many elements of the middle and small propertied classes and from +non-radical wageworkers. This movement from both sides is leaving less +noticeable the contrast between the socialist party and other parties +claiming to be "progressive" or "forward looking." The strongest +allies of the more radical communistic faction of the socialist party +are those members of the conservative parties who fail to recognize +the need of humane legislation, who irritate by their unsympathetic +utterances, and who unduly postpone by their powerful opposition the +gradual and healthful unfolding of the social spirit, energy, and +capacity of the nation. The greatest problem of social and economic +legislation for the next generation is to determine how far, and how, +the principle of authority may wisely be substituted for the principle +of competition in distribution. + + +[Footnote 1: Distribution as a problem of incomes is not to be +confused with distribution of physical goods by transportation (as +on the railroads) or by commercial agencies transferring goods from +producer to consumer (as in coöperative distribution). Functional +distribution is the prime subject of the theory of value in Vol. I +(e.g., usance, value of labor, time-preference, profits), a study +of which is prerequisite to an intelligent study of the problems of +personal distribution.] + +[Footnote 2: See Vol. I, pp. 190, 223; and above, ch. 2, secs. 11-13.] + +[Footnote 3: See Vol. I, pp. 248-255, 297-298, 406, 408, 415-418, +480-481, 483-484: also Vol. II, pp. 22-23, 146-148, 161-162, 178-180, +283, and various passages in the chapters of this Part.] + +[Footnote 4: See above, ch. 2, sec. 7, on limitations upon bequest and +inheritance.] + +[Footnote 5: See ch. 18.] + +[Footnote 6: See ch. 12, sec. 14.] + +[Footnote 7: See ch. 2, sec. 10.] + +[Footnote 8: See Vol. I, pp. 54 and 66; also pp. 504 507 in an organic +theory of value.] + +[Footnote 9: See above, sec. 2, note 3.] + +[Footnote 10: Compare, e.g., portions of chs. 9, 15, 20, 21, 27; and +29, see. 17.] + +[Footnote 11: See ch. 2, sees. 11-13.] + +[Footnote 12: See Vol. I, p. 75.] + +[Footnote 13: See, e.g., Vol. I, pp. 25, 71, 205, 479, 509, 511, 513.] + +[Footnote 14: See above, ch. 18.] + +[Footnote 15: See Vol. I, p. 6, on "social" and the social sciences.] + +[Footnote 16: See e.g., ch. 9, secs. 2, 10; ch. 11, secs. 7, 8; ch. +16, secs. 3, 4, 12; chs. 18, 21, 22, 23, 27, 29, and 30.] + +[Footnote 17: See Vol. I, p. 502, on communism and value theory.] + +[Footnote 18: See Vol. I, pp. 210, 228, 502 on the labor-theory of +value.] + +[Footnote 19: See above, sec. 14.] + + + + +INDEX + +Accident insurance, +Agricultural credit, +Agricultural, decay, + economics, problems of, + prices, fall of, +Agricultural, and rural population, +Agriculture and crises, +Agriculture, exhaustion of the soil, + medieval, + number in, + the new, +Aldrich report, + Senator, + plan, +American Federation of Labor, +Appreciation and interest, +Arbitration, voluntary, + compulsory, +Assessment insurance, +Assessment of taxes, +Authoritative distribution, + + +B + +Balance of merchandise, +Balance of trade argument, +Bank, deposits as investments, + notes, + restriction act, +Banking, in the U.S., before 1914, +Banks, functions of, + in U.S., + taxes on, +Bellamy, Edward, +Bills of exchange, +Bimetallism, +Bonds, taxation of, +Bowley, statistician, +Boycott, +Building and loan associations, +Business cycle, + +C + +California Fruit Exchange, +Canadian Industrial Disputes Act, +Canals, +Capital, +Capitalistic monopoly, +Charitable distribution, +Capitalization theory of rises, +Charity, and control of vice, +Child-labor, +Christian socialism, +City growth, +Clark, John B., +Clay, Henry, +Clayton Act, + and farmers, +Cleveland, Grover, +Closed shop, see Open shop +Coal, +Coinage on governmental account, +Collective bargaining, +Combination, +Combinations, industrial, +Common law, on monopoly, +Comparative advantages, doctrine of, +Compensated gold dollar, +Compensation, for accidents, +Competition among employers, + among workers, + of railroads, + and monopoly, + as regulative principle, + merits of, + see also Monopoly +Competitive system, +Compulsory insurance, + economy of, +Consolidation, of railroads, +Consumers' League, +Contributory principle in insurance, +Coöperation, producers', + consumers', + among farmers, +Corporation taxation, + difficulty of, +Corporations, +Costs of production, and the tariff, +Crises, and industrial depressions, + and unemployment, +Custom, + + +D + +Davies, Joseph E., +Deferred payments, standard of, +Deposits, bank, +Debts, public, +Dingley Act, +Discrimination, railroad, +Displacement theory of immigration, +Distribution of incomes, +Doctrine of comparative advantages, +Dollar, +Dynamic conditions, + + +E + +Economic, harmonies, + problems, + system, the present, +Emerson's premium plan, +Employers, and immigration, +Employment offices, +Engels, Friederich, +Erdman act, +Eugenics, + + +F + +Factory conditions, +Fair competition, + see also Unfair practices +Fairchild, H.P., +Farm, stock, + raw materials, + and factory, + loans, +Farmer's income, + life, +Farming, commercial, + capitalistic, + diversified, + intensive, +Farms, area, + woodlots, + equipment, + in U.S., + size of, + and railroads, +Federal Industrial Commission, +Federal legislation against monopoly, +Federal Reserve Act, +Federal Rural Credits Act, +Federal taxation, +Federal Trade Commission Act, +Fiat money, +Finance, public, +Food prices, + supply, +Foreign, banking, + exchange, + trade, +Forestry, +Forests, +Fractional coins, +Franchises, railroad, + for public utilities, +Free trade, + see also Protective tariff + + +G + +Gambling, uneconomic character of, +Gantt's premium plan, +Gardner Land Bank Act, +Garfield, James A., +Ghent, unemployment insurance, +General property tax, see Property +George, Henry, +Glass-Owen bill, +Glut theories of crises, +Gold-exchange standard, +Gold, production, + standard, defectiveness of, +Gold-using countries, +Goldenweiser, E.A., +Governmental aid to railroads, +Graduated taxation, +Graduation principle, +Greenbacks, +Gresham's law, + + +H + +Hadley, A.T., +Halsey's premium plan, +Hamilton, Alexander, +Hancock, Gen. Winfield Scott, +Harrison, Benjamin, +Hayes, Rutherford B., +Home market argument, +Housing problem, +Hours and wages, public regulation of, + + +I + +Immigrants, and organized labor, +Immigration, and low wages, + and population, + economic aspects of, + and wages, + and farming, +Imports into the U.S. chart, +Income, taxation, federal, + taxes, +Independent treasury, +Index numbers, chart, +Industrial revenues of government, + remuneration, methods of, + monopoly, problem of, + trust, nature of growth, + depressions, see Crises +Infant industry argument, +Inheritance, + taxes, + limitations of, +Interest rate, and deferred payments, + and prices, + in crises, +Insurance, principles of, + companies, taxes on, + against unemployment, +Internal revenue, +International exchange, equation of, +International trade, +Interstate Commerce Act, +Invalidity pensions, +Investment banking, + + +J + +Jackson, Andrew, +Jenks, J.W., +Justice in taxation, + + +K + +Kemmerer, E.W., +Knights of Labor, + + +L + +Labor, legislation, + and social legislation, + exchanges, see Employment offices +Laissez-faire, +Land, taxation, reform of, + banks, +Large production, in public utilities, +Large industry, +Lassalle, Ferdinand, +Leclaire, profit sharing, +Legal tender, +Loans, governmental, +Lump of labor notion, + + +M + +McKinley Act, +McKinley, William, +Market, public, +Materialistic philosophy, +Marx, Karl, +Mediation, +Mercantilism, +Merchandise, imports and exports, +Militarism, and population, +Military power, maximum, +Mill, J.S., +Minimum wage, +Mitchell, Wesley C., +Monetary economy, + system, + theory of crises, +Money, nature, use, and coinage, + value of, + quantity theory, + per capita circulation, + fiduciary, + commodity, +Monopolistic nature of protection, +Monopoly, and labor organization, + in railroads, + industrial, + prices, + public policy in respect to, + in public utilities, +Moody, John, +Moral judgments of monopoly, +More, Sir Thomas, +Morris, William, +Mortality table for insurance, +Mortgage taxation, +Municipal ownership, + + +N + +National banks, + ownership, +National Monetary Commission, +Negro problem, +Natural agents, and monopoly, +Newlands act, + + +O + +Old-age pensions, +Open shop, +Opportunism, +Organized labor, + and legislation, +Ownership of farms, + + +P + +Paper money, +Par of exchange, +Paradox of value, +Payne-Aldrich tariff, +Personal taxes, +Picketing, +Piece work, +Plato, +Police state, +Political, money, + aspects of labor, + aspect of railroads, +Population, agricultural and rural, + and immigration, +Postal savings, +Power, +Precious metals as money, +Premium plans, +Price, standard, + common market, +Prices, general level, + changes in, + rising, + and international trade, + and monopoly, +Profit sharing, +Profits from monopoly, +Progressive taxes, see graduation, +Promoters of monopoly, +Property, private, + taxes on, + tax on, + concept, +Property tax, general, +Protection, "true principle" of, +Protective, tariff, policy of, + tariffs, prevalence of, + railroad rates, +Public finance, + view of trade unions, + and labor legislation, + inspection, + ownership, +Public utility commissions, +Public utilities, monopolistic nature of, + + +Q + +Quantity theory of money, + + +R + +Race problems, +Railroad mileage, + building, + problem, + commissions, +Resources, material, + of the nation, +Reserve, cities, + plan of insurance, +Reserves, bank, + against notes, + against deposits, +Restraint of trade, +Revenue tariff, +Revisionism, +Ricardo, David, +Rich man's panic, +Ripley, W.Z., +Roads, +Roberts, Peter, +Roosevelt, Theodore, +Root, Elihu, +Rowan's premium plan, +Rural, definition, + exodus, + + +S + +Saturation point of money, +Saving, and investment, +Savings, banks, + deposits, + insurance assets as, +"Scientific" socialism, +Seasonal fluctuations, and unemployment, +Seigniorage, + charge, +Seligman, E.R.A., +Sherman Anti-trust law, +Shifting and incidence, + of insurance premiums, +Shorter working day, +Sickness, insurance against, +Single tax, +Smith Adam, +Social, legislation, + protective policy of immigration, + agricultural policy, + effects of inheritance, +Social insurance, + by trade unions, +Social utility, +Social welfare, in taxation, + and shorter working day, +Socialism, some aspects of, + meanings of, + philosophic, + active, + Marxian, + political, + "scientific", +Socialist, party, + vote, +Standard money, + defined, + see also Deferred payments, +State, sphere of, + insurance, + ownership, +Status, +Strike, right to, +Strikes, + + +T + +Tabular standard, +Taft, William Howard, +Tariff, changes and crises, + and wages, + and unemployment, + reductions, harm of, + board, a permanent, + history, American, + rates, + for revenue, + "true principle" of, + "competitive principle" of, + and business depressions, +Task work, +Taxation, objects and principles of, + revenues from, + forms of, + as a public question, + separation of, + system of, +Taxes, effect upon property valuations, + property and corporation, +Taylor's premium plan, +Tenancy on farms, +Tilden, Samuel J., +Time work, +Trade education, +Trade unions, + see also Organized labor, +Transportation, + taxes on, +Trant, on trade unions, +Trust company, +Trust, definition, + see Monopoly, +Two-profits argument, + + +U + +Underwood tariff, +Unemployment, + in crises, + insurance, +Unfair practices, +Usance of wealth, + of labor, +Usury laws, +Utility, + + +V + +Van Hise, C.R., + + +W + +Wage contract, limitation of, +Wage-system, + growth of, + practicability of, +Wages, and tariff, + and general prices, +general, and organization, + particular, and organization, + maladjustment of, and unemployment, + and immigration, see Immigration, + see also Hours and wages, +Walker, Francis A., +Walker tariff, +Washington, Booker T., +Wealth, + the nation's, + taxation of, +"Wealth of Nations", +Weir's premium plan, +Wild-cat banking, +Wilson tariff act, +Wilson, Woodrow, +Wolman, L., +Women, working day for, +Wyman, Bruce, + + + + + + + + + +End of Project Gutenberg's Modern Economic Problems, by Frank Albert Fetter + +*** END OF THE PROJECT GUTENBERG EBOOK 12217 *** diff --git a/LICENSE.txt b/LICENSE.txt new file mode 100644 index 0000000..6312041 --- /dev/null +++ b/LICENSE.txt @@ -0,0 +1,11 @@ +This eBook, including all associated images, markup, improvements, +metadata, and any other content or labor, has been confirmed to be +in the PUBLIC DOMAIN IN THE UNITED STATES. + +Procedures for determining public domain status are described in +the "Copyright How-To" at https://www.gutenberg.org. + +No investigation has been made concerning possible copyrights in +jurisdictions other than the United States. 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You may copy it, give it away or +re-use it under the terms of the Project Gutenberg License included +with this eBook or online at www.gutenberg.org + + +Title: Modern Economic Problems + Economics Vol. II + +Author: Frank Albert Fetter + +Release Date: April 30, 2004 [EBook #12217] + +Language: English + +Character set encoding: ISO-8859-1 + +*** START OF THIS PROJECT GUTENBERG EBOOK MODERN ECONOMIC PROBLEMS *** + + + + +Produced by Juliet Sutherland, Keren Vergon, Leah Moser and the +Online Distributed Proofreading Team. + + + + + + +Economics--Volume II + +MODERN ECONOMIC PROBLEMS + +BY + +FRANK A. FETTER, PH.D., LL.D. + +PROFESSOR OF ECONOMICS, PRINCETON UNIVERSITY + +1916 + + + + + TO + THE MOTHER + WITH A YOUTHFUL HEART AND + SYMPATHETIC INTEREST + IN ALL THINGS HUMAN + + + + +TABLE OF CONTENTS + + +PART I. RESOURCES AND ECONOMIC ORGANIZATION. + + 1. Material resources of the nation + + 2. The present economic system + + +PART II. MONEY AND PRICES. + + 3. Nature, use, and coinage of money + + 4. The value of money + + 5. Fiduciary money, metal and paper + + 6. The standard of deferred payments + + +PART III. BANKING AND INSURANCE. + + 7. The functions of banks + + 8. Banking in the United States before 1914 + + 9. The Federal Reserve Act + + 10. Crises and industrial depressions + + 11. Institutions for saving and investment + + 12. Principles of insurance + + +PART IV. TARIFF AND TAXATION. + + 13. International trade + + 14. The policy of a protective tariff + + 15. American tariff history + + 16. Objects and principles of taxation + + 17. Property and corporation taxes + + 18. Personal taxes + + +PART V. PROBLEMS OF THE WAGE SYSTEM. + + 19. Methods of industrial remuneration + + 20. Organized labor + + 21. Public regulation of hours and wages + + 22. Other protective labor and social legislation + + 23. Social insurance + + 24. Population and immigration + + +PART VI. PROBLEMS OF INDUSTRIAL ORGANIZATION. + + 25. Agricultural and rural population + + 26. Problems of agricultural economics + + 27. The railroad problem + + 28. The problem of industrial monopoly + + 29. Public policy in respect to monopoly + + 30. Public ownership + + 31. Some aspects of socialism + + Index + + + + +FOREWORD + + +The present volume deals with various practical problems in economics, +as a volume published a year earlier dealt with the broader economic +principles of value and distribution. To the student beginning +economics and to the general reader the study of principles is likely +to appear more difficult than does that of concrete questions. In +fact, the difficulty of the latter, tho less obvious, is equally +great. The study of principles makes demands upon thought that are +open and unmistakable; its conclusions, drawn in the cold light of +reason, are uncolored by feeling, and are acceptable of all men so +long as the precise application that may justly be made of them is +not foreseen. But conclusions regarding practical questions of public +policy, tho they may appear to be simple, usually are biased and +complicated by assumptions, prejudices, selfish interests, and +feelings, deep-rooted and often unsuspected. + +No practical problem in the field of economics can be solved as if +it were solely and purely an economic problem. It is always in some +measure also a political, moral, and social problem. The task of the +economist "as such" is the analysis of the economic valuation-aspects +of these problems. We may recall Francis A. Walker's comparison of the +economist's task with that of the chemist, which task, in a certain +case, was to analyze the contents of a vial of prussic acid, not to +give advice as to the use to make of it. Accordingly, in the following +pages, the author has endeavored primarily to develop the economic +aspects of each problem, and has repeatedly given warning when the +discussion or the conclusions began to transcend strict economic +limits. In many questions feeling is nine-tenths of reason. If the +reader has different social sympathies he may prefer to draw different +conclusions from the economic analysis. + +The outlook and sympathies that are expressed or tacitly assumed +throughout this work are not so much those personal to the author as +they are those of our present day American democratic society, +taken at about its center of gravity. When the people generally feel +differently as to the ends to be attained, a different public policy +must be formulated, tho the economic analysis may not need to be +changed. Therefore, in some cases, the author has discussed merely the +economic aspect, or has referred to the general principles treated in +volume one, and has purposely refrained from expressing his personal +judgment as to "the best" policy for the moment. + +The present volume was planned some years ago as a revision of a part +of the author's earlier text, "The Principles of Economics" (1904). +The intervening years have, however, been so replete with notable +economic and social legislation and have witnessed the growth of a +wider public interest in so many economic subjects, that both in +range and in treatment this work necessarily grew to be more than +a revision. Except in a few chapters, occasional sentences and +paragraphs are all of the specific features of the older text that +remain. Suggestive of the rapid changes occurring in the economic +field is the fact that a number of statements made in the manuscript a +few months or a few weeks ago had to be amended in the proof sheets to +accord with recent events. + +The author's debt for information, inspiration, and assistance in +various phases of the work is a large one. The debt is owing to +many,--authors, colleagues, and students. A few of the sources that +have been drawn upon will be indicated in a pamphlet following the +plan of the "Manual of References and Exercises in Economics," already +published for use in connection with Volume I; but the limits of space +will prevent a complete enumeration. I wish, however, in particular, +to acknowledge gratefully the aid and friendly criticisms given in +connection with the chapters on money and banking, on labor problems, +and on the principles of insurance, respectively, by my colleagues, +E.W. Kemmerer, D.A. McCabe, and N. Carothers. + +In completing, at least provisionally, the present work, the author +cherishes the hope that it will be of assistance not only to teachers +and to students in American colleges, but also to citizen-readers +seeking to gain a better and a non-partisan insight into the great +economic problems now claiming the nation's conscience and thought. + +F.A.F. + +Princeton, N.J., October, 1916. + + + + + +MODERN ECONOMIC PROBLEMS + +PART I RESOURCES AND ECONOMIC ORGANIZATION + + + + +CHAPTER I + +MATERIAL RESOURCES OF THE NATION + + § 1. Politico-economic problems. § 2. American economic problems + in the past. § 3. Present-day problems: main subjects. § 4. Attempts + to summarize the nation's wealth. § 5. Average wealth and the problem + of distribution. § 6. Changes in the price-standard. § 7. A sum of + capital, not of wealth. § 8. Sources of food supply. § 9. The sources + of heat, light, and power. § 10. Transportation agencies. § 11. Raw + materials for clothing, shelter, machinery, etc. + + +§ 1. #Politico-economic problems.# The word "problem" is often on our +tongues. Life itself is and always has been a problem. In every time +and place in the world there have been questions of industrial +policy that challenged men for an answer, and new and puzzling social +problems that called for a solution. And yet, when institutions, +beliefs, and industrial processes were changing slowly from one +generation to another and men's lives were ruled by tradition, +authority, and custom, few problems of social organization forced +themselves upon attention, and the immediate struggle for existence +absorbed the energies and the interests of men. But our time of rapid +change seems to be peculiarly the age of problems. The movement of +the world has been more rapid in the last century than ever before--in +population, in natural science, in invention, in the changes of +political and economic institutions; in intellectual, religious, +moral, and social opinions and beliefs. + +Some human problems are for the individual to solve, as, whether it is +better to go to school or to go to work, to choose this occupation or +that, to emigrate or to stay at home. Other problems of wider bearing +concern the whole family group; others, still wider, concern the local +community, the state, or the nation. In each of these there are more +or less mingled economic, political and ethical aspects. Economics +in the broad sense includes the problems of individual economy, of +domestic economy, of corporate economy, and of national economy. In +this volume, however, we are to approach the subject from the public +point of view, to consider primarily the problems of "political +economy," considering the private, domestic, and corporate problems +only insomuch as they are connected with those of the nation or of +the community as a whole. Our field comprises the problems of national +wealth and of communal welfare. + +What then are our politico-economic problems in America? They are +problems that are economic in nature because they concern the way that +wealth shall be used and that citizens are enabled to make a living; +but that are likewise political, because they can be solved only +collectively by political action. + +§ 2. #American economic problems in the past.# With the first +settlements of colonists on this continent politico-economic problems +appeared. Take, for example, the land policy. Each group of colonists +and each proprietary landholder had to adopt some method of land +tenure whether by free grant or by sale of separate holdings or by +leasing to settlers. In one way and another these questions were +answered, but rapidly changing conditions soon forced upon men the +reconsideration of the problem as the old solution ceased to be +satisfactory. + +In large part our political history is but the reflection of the +economic motives and economic changes in the national life. Thus +the American Revolution arose out of resistance to England's trade +regulations, commercial restrictions, and attempted taxation of the +colonies. The War of 1812 was brought on by interference with American +commerce on the high seas. The Mexican War was the result of the +colonization of Texan territory by American settlers and the desire +of powerful interests to extend the area of land open to slavery. The +Civil War arose more immediately out of a difference of opinion as to +the rights of states to be supreme in certain fields of legislation, +but back of this political issue was the economic problem of +slave labor. Illustrations of this kind, which may be indefinitely +multiplied, do not prove that the material, economic changes are the +cause of all other changes, political, scientific, and ethical; for in +many cases the economic changes themselves appear to be the results +of changes of the other kinds. There is a constant action and reaction +between economic forces and other forces and interests in human +society, and the needs of economic adjustment are constantly changing +in nature. + +§ 3. #Present-day problems: main subjects#. The particular economic +problems in America at this time are determined by the whole complex +economic and social situation. Two main factors in this may be +distinguished: the objective and the subjective, or the material +environment and the population composing the nation. The one is what +we have, the other is what we are, as a people. These factors are +closely related; for what we are as a people (our tastes, interests, +capacities, achievements) depends largely on what we have, and what we +have (our wealth and incomes) depends largely on what we are. We may +consider the following phases; the first two of the objective factor, +and the last two of the subjective factor. + +(a) The basic material resources, consisting of the materials of the +earth's surface and the natural climatic conditions which together +provide the physical conditions necessary for human existence, and +which furnish the stuff out of which men can create new forms of +wealth. + +(b) The industrial equipment, consisting of all those artificial +adaptations and improvements of the original resources by which men +fit nature better to do their will. These two (a and b) become +more and more difficult to distinguish in settled and civilized +communities, and become blended into one mass of valuable objects, the +wealth of the nation. + +(c) The social system under which men live together, make use of +wealth and of their own services, and exchange economic goods. + +(d) The people, considered with reference to their number, race, +intelligence, education, and moral, political, and economic capacity. + +The particular economic problems which are presented to each +generation of our people are the resultant of all these factors taken +together. A change in any one of them alters to some extent the +nature of the problem. The problems change, for example, (a) with the +discovery or the exhaustion (or the increase or decrease) of any +kind of basic material resources; (b) with the multiplication or +the improvement of tools and machinery or the invention of better +industrial equipment; (c) with changes in the ideals, education, and +capacities of any portion of the people whether or not due to changes +in the race composition of the population; (d) with the increase or +decrease of the total number of people, and the consequent shift in +the relation of population to resources. Many examples of such changes +may be found in American history, and some knowledge of them is +necessary for an appreciation of the genesis and true relation of our +present-day problems. + +§ 4. #Attempts to summarize the nation's wealth.# If we seek to +compare the material resources of the nation at one period in our +history with those at another period, we find that it is impossible +to find a single satisfactory expression for them. Let us examine +the figures for the (so-called) "wealth of the people of the United +States",[1] as it has been calculated by the census officials. + + Average + total per capita + Population. "wealth." wealth. + + 1850 23,200,000 $7,136,000,000[a] $308 + 1860 31,400,000 16,160,000,000[a] 514 + 1870 38,600,000 24,055,000,000[a b] 624 + 1880 50,200,000 43,642,000,000 870 + 1890 62,900,000 65,037,000,000 1,036 + 1900 76,000,000 88,517,000,000 1,165 + 1904 82,500,000 107,104,000,000 1,318 + 1912 95,400,000 187,739,000,000 1,965 + + [Footnote a: Taxable only; all other figures include exempt.] + + [Footnote b: Estimated on a gold basis.] + +A detailed comparison of the classes of concrete things making up the +totals is possible only in the last three sets of figures (1900 to +1912), and they are here given (omitting 000,000). + + 1900. 1904. 1912. + 1. Real property (excepting + some items below) 52,538 62,331 110,700 + 2. Irrigation enterprises [a] [a] 360 + 3. Agricultural equipment + (livestock, tools, etc.) 3,822 4,919 7,706 + 4. Manufacturing equipment 2,541 3,298 6,069 + 5. Transportation agencies 11,249 14,434 22,360 + 6. Telegraph and telephones 612 813 1,304 + 7. Waterworks (privately owned) 263 275 290 + 8. Electric lighting plants 403 563 2,099 + 9. Products (still in trade)[b] 8,294 10,212 21,577 + 10. Direct goods in use[c] 6,880 8,250 12,758 + 11. Gold and silver 1,677 1,999 2,617 + + [Footnote a: No figures for these years.] + + [Footnote b: The main items are agricultural and mining products and + imported merchandise.] + + [Footnote c: The main items are clothing, personal adornment, furniture, + and carriages.] + +§ 5. #Average wealth and the problem of distribution#. The foregoing +figures make a most satisfactory showing, and appear to indicate +that mere economic problems are rapidly being solved by the growth +of national wealth. But unfortunately these figures have little +significance in connection with such an inquiry, if indeed they are +not badly misleading. + +In the first place, the final figures of "per capita wealth" are +merely averages; a per capita increase, therefore, may appear when +total wealth increases, altho the total may be due to the growth of +comparatively few very large fortunes. The fact is evident that vast +numbers of individuals and families are nearly propertyless and in +so far as this is true there is involved one of the greatest of our +socio-economic problems, that of the distribution of wealth and income +among the people. The more unequal the distribution, the greater, in +all likelihood, is the discontent; and the greater the effort of many +men to find some methods by which greater equality may be attained. + +§ 6. #Changes in the price-standard#. These figures, moreover, are +expressed in terms of the monetary price-unit, in dollars of the +gold standard, and therefore the increasing total figure (and +correspondingly, the increasing per capita) may be but the reflection +of a change in the value of the monetary unit. It is well known that +the gold dollar has now less purchasing power than in 1880, and less +also than at any intervening time.[2] To the extent that this is true +the increase in the figures of wealth (total and per capita) is only +nominal and does not indicate increase in the quantity and betterment +in the quality of real wealth. This fact is so evident that it would +seem unnecessary to call attention to it, if it were not constantly +overlooked in citing these figures. + +§ 7. #A sum of capital, not of wealth#. Consider further, that the +figures here given for wealth really express but the sum of capitals +of the individuals (or private corporations) of the nation. These +do not constitute a sum of social wealth in any proper sense of the +term.[3] Arithmetically it is a fallacious kind of a total, for the +sum of the individual capitals contains some items that should +be canceled to find the sum of wealth. Moreover, capital is an +acquisitive concept. It is an expression of the value of a man's +possessions, and not of the utility[4] of them. It measures intensity +of desire for goods and not necessarily the degree of welfare. Such a +total, therefore, embodies the difficulties of the paradox of value; +in some cases increased value reflects a growing scarcity and not +greater abundance.[5] + +For example, between 1900 and 1915, with the growth of population, the +total number of improved acres in farms in the United States increased +but little, and the per capita number diminished. At least in part +as a result of this fact, the prices of nearly all kinds of food rose +rapidly, as did also the price of farm land. The prices (and estimated +values) of farm lands are the expression of the individual capitals, +which formed each year an increasing statistical total of so-called +wealth. The people had less land per capita, and were poorer per +capita as respects this item of landed-wealth, had less meat per +capita, and had to give more labor in exchange for food, at the same +time that the statistical per capita of land values increased. + +So it may be as respects forests, coal, cotton, and eventually iron, +copper, and many other things. When forests were plentiful, lumber and +fire wood were free goods in many neighborhoods. Forests entered into +the total of national "wealth" in 1850 and 1860 at a comparatively +small sum. But in 1910 when the forests had been half used up they +appeared as a greater total and probably as a greater per capita +item of "wealth" than in 1850. The figures reflect changes in the +paradoxical section of the scale of values, and express scarcity +rather than wealth. + +Altho the wealth of a nation may not be expressed as a single sum of +values that accurately reflects the weal-bringing things composing its +environment, some conception of the situation is to be gained by an +enumeration of goods in their kinds and quantities and by studying +their relations to the life of the people. Objects of wealth may be +grouped in various ways. The following may serve our purpose of a +general survey of our present resources. + +§ 8. #Sources of food supply#. The land area of the country in 1910 +was about 1,900,000,000 acres, of which 879,000,000 acres were in +farms, this being 46 per cent of the total area. A very small part +of the remainder is used for residential and commercial purposes, +the rest being barren mountains, deserts, swamps, and forests. Of the +total in farms a little more than one-half was improved, 478,000,000 +acres altogether, a per capita average of 5.2 acres; and a little +less than one-half was unimproved, 400,000,000 acres altogether, a +per capita average of 4.3 acres. The improved land produced not merely +food but many kinds of materials, such as cotton, wool, hides, +and lumber, while much of the unimproved land was either in farm +wood-lots, or in rough range pasture. Of course the kinds and amounts +of produce per acre vary with the climate, particularly with sunshine +and rainfall; possibly the proportion of the area of the United States +that is true desert and infertile mountain land is greater than that +of any other equal area in the temperate zones. The actual productive +capacity per acre of the lands of America cannot be expressed in a +very helpful way as a general average per acre, but each area must be +carefully studied in respect to its climate, rainfall, and possibility +of irrigation and drainage. It is evident that a very large number of +economic problems must arise in connection with the land supply +for food: such as problems of land-ownership, taxation, irrigation, +drainage, forestry, and encouragement or limitation of population. We +are just beginning to awaken to the needs in this direction. + +The rivers, lakes, and ocean waters near our coasts are other great +sources of food, but no statistics are available to show adequately +their yield. Few of them are in private possession and they do not +appear at all in a total of "capitals," yet they are more important to +the nation than a large part of the land area. They are only beginning +to be developed artificially by the propagation of oysters, clams, and +fish. The development of a proper policy in this matter is one of our +economic problems. + +There were in 1910 (mostly on farms) about 64,000,000 beef and dairy +cattle, 60,000,000 swine, 56,000,000 sheep and goats, and there were +raised in the one year nearly 500,000,000 fowls of all kinds. + +§ 9. #The sources of heat, light, and power#. The law of the +conservation of energy expresses the fundamental likeness of heat, +light, and power. The principal sources from which man derives these +agencies are coal and falling waters, tho wood is of importance as +fuel in some localities. About 500,000 square miles of land (about 13 +per cent of the area of the country) are underlaid with coal. These +deposits are widely distributed, so that nearly every part of the +country is within 500 miles of a mine. The enormous deposits if used +at the present amounts per year would last probably 2,000 to 4,000 +years, but if used at the present increasing rate (doubling the +product every ten years) they would, it has been estimated, last but +150 years. What shall be the actual rate as between these extremes +is a question whose answer depends on our economic legislation as +to ownership, exploitation, prices, use, and substitution. This is +another of our important socio-economic problems. + +The one great available substitute for coal as a source of heat and +light and power is water power. It is estimated that in 1908 but +5,400,000 horse power was being developed from water falls, whereas +about 37,000,000 primary horse power[6] was available; but, by +the storage of flood waters so as to equalize the flow, at least +100,000,000 horse power, and possibly double that amount, could be +developed. As it requires ten tons of coal to develop one horse power +a year in a steam engine by present methods, there is here a potential +substitute for coal equal to two to four times our present annual use +of coal (about 500,000,000 tons in 1912). + +But this does not mean that it would be economical, at present costs +of mining coal and of building reservoirs, to make this substitution +now. To determine when, how far, and by what methods to develop this +water power from lakes and rivers for the use of the people and to +make this substitution, is another of our great economic problems. + +Petroleum and natural gas, of which our original reservoirs were +perhaps the richest in the world, are being rapidly exhausted. These +may be merely mentioned as being related to coal in the source +of their supply, in the nature of their uses, and in the economic +problems to which they give rise. + +§ 10. #Transportation agencies#. First to mention among the means of +transportation are the navigable waters--oceans, lakes, rivers, and +canals, with the necessary equipment of dredged inlets, harbors, +docks, locks, and lighthouses. Few of these appear in the total of +"capitals," for they are not in private possession. Yet a good system +of natural waterways may be greater wealth to one nation than costly +additional railroads are to another. Good natural harbors on the +waterways leading out to the oceans are a most important kind +of national wealth, as are the navigable great lakes within the +boundaries or on the borders of a country. Just in proportion as these +natural means of transportation are lacking, is the need to build +costly artificial means of transportation. + +Both in natural and in artificial means of transportation, America +is well provided. The straight coast line is 5700 miles long, and the +line following indentations of the coast is about 64,000 miles. The +Great Lakes with a straight shore line of 2760 miles are the most +important inland waterways in the world. The 295 navigable rivers in +the country have a length of 26,400 miles of navigable water. About +2000 miles of canals are still in operation. On the waterways some +27,000 American vessels are in use, with a capacity of 8,000,000 gross +tons.[7] + +There are about 250,000 route miles of steam railroads, or with +additional tracks, yard tracks, and sidings, a total of about 370,000 +miles. On these are over 63,000 locomotives, 52,000 passenger cars, +and 2,400,000 freight and company cars. Besides these are 45,000 track +miles of electric railways and nearly 100,000 cars. These railroads +include an enormous aggregate of works and structures in the form of +tunnels, cuts, banks, bridges, stations, and shops. + +There are in the country (1914) about 2,228,000 miles of public +roads, of which 10 per cent are "surfaced" roads. No figures are now +available of the number of wagons, horses, automobiles, and +other vehicles in use on the roads and streets for purposes of +transportation. + +Many of our economic problems are presented by these transportation +agencies, from the question of opening a new dirt road in a rural +township to that of building an inter-oceanic canal, from the question +whether to have free public roads or toll roads to that of regulating +the railroad rates on the whole railroad system of the country. + +§ 11. #Raw materials for clothing, shelter, machinery, etc.# The farm +lands supply, besides food, a large part of the raw materials for many +other goods, such materials as cotton, flax, wool, hides, feathers, +lumber, and firewood. The farm woodlots compose about 200,000,000 +acres, and the large forests, public and private, about 350,000,000 +acres, a total of about one-fourth the area of the country in +forests, containing about one-half of the lumber that the country once +possessed. The economic problem of a sound forestry policy is one of +the largest we have to solve. + +The most important other sources of raw materials for industry are +the mineral deposits in the earth's surface.[8] This country is stored +more bountifully, probably, than is any other country, with the metal +ores of iron, copper, lead, zinc, gold, and silver. Aluminum is the +most abundant metal, composing about 8 per cent of the crust of the +earth, but by present methods it can be extracted only at considerable +cost from certain compounds that are limited in amount. The details as +to our metal stores are too complex for fuller treatment here, and may +be found in treatises on economic geology or on industrial geography. +The determination of wise policies as to the use of these stores +involves many economic problems, private and public. + +Another great class of material wealth is in the form of tools, +machinery, and other agencies for carrying on the industrial +processes of farming and of manufacturing. These are sometimes called +instrumental goods, or the industrial equipment. Still another class +consists of the great mass of completed direct goods, such as houses +to live in, libraries, museums, school buildings, theaters, all kinds +of buildings and equipment for pleasure and entertainment, parks, and +pleasure resorts in mountains, at lakes or sea shore. The possession +and use of these forms of wealth give rise to some economic problems +of public ownership and to others connected with the institution of +private property in general, as sketched in the following chapter. + + +[Footnote 1: It is to be observed that these figures appear under +the general title of Part I, "Estimated valuation of national wealth: +1850-1912," and the tables are spoken of (volume on Wealth, Debt, and +Taxation, p. 20) as "estimates of the aggregate wealth of the nation +as prepared by the United States censuses," but the tables themselves +are described (pp. 23-25) as the "estimated true valuation of all +property," this phrase being used as equivalent to "wealth." For the +definitions of wealth and property see Vol. I, pp. 264-265.] + +[Footnote 2: This change will be described below in ch. 6, in treating +of the standard of deferred payments.] + +[Footnote 3: See Vol. I, pp. 265, 278, 508 for the distinction between +wealth and capital.] + +[Footnote 4: See Vol. I, p. 25, for the definition of utility.] + +[Footnote 5: See Vol. I, p. 510 on the paradox of value.] + +[Footnote 6: That is, "the amount which can be developed upon the +basis of the flowage of the streams for a period of two weeks in which +the flow is the least," all the rest being allowed to escape unused. +Van Hise, "Conservation of Natural Resources," p. 119.] + +[Footnote 7: These and other figures in this section relate to the +year 1913.] + +[Footnote 8: Coal has been mentioned above, sec. 9.] + + + + +CHAPTER 2 + +THE PRESENT ECONOMIC SYSTEM + + § 1. The place of private property. § 2. Nature of property. § 3. + Relation of wealth, property, and capital. § 4. Some theories of + private property. § 5. Origin vs. justification. § 6. Limitations of + private property. § 7. Limitations of bequest and inheritance. § 8. + Social expediency of private property. § 9. The monetary economy. + § 10. The competitive system. § 11. Limitation of competition by + custom. § 12. Effect of modern forces upon custom. § 13. Adam + Smith's influence. § 14. The wage-system. + + +§ 1. #The place of private property#. Of fully equal importance with +material wealth in determining the economic power of a people is the +_social system_ under which the nation lives. This is the term applied +to the whole complex of institutions and arrangements in which and +by which people live together in society. It is the embodiment of the +opinions, ideas, and habits of life inherited by each generation from +its forbears. It is, indeed, a people's whole state of civilization +with its political, economic, intellectual, scientific, religious, and +esthetic aspects. + +The most important economic aspect of the existing system is, broadly +speaking, the institution of private property. So closely connected +with this that they are hardly more than different phases of the same +thing, are the use of money (the monetary economy), the wage system, +and competition as a mode of distribution. "The institution of private +property" is the general expression for the way in which men in the +modern state make use of their own energies and of material wealth +within the nation. Nearly all the total of the things mentioned in the +table in Chapter 2, section 4, are owned by private citizens.[1] We +live in a régime of private property, and all our economic problems +are affected by that fact. The determination of the exact boundaries +of private property makes up a large part of the politico-economic +problems which the people in each generation have to solve. A large +share, possibly, in a certain sense, every one of the economic +problems that are discussed involve change, limitation, definition, +or, more radically, abolition of present laws of property. Broadly +understood, as above, therefore, determination of the nature of +private property is _the essential_ economic problem. + +§ 2. #Nature of property#. Property means ownership, and "ownership" +is the abstract noun expressing the quality of possessing a +thing. Correspondingly, "owner" is the Anglo-Saxon equivalent of +"proprietor." Property thus, fundamentally, means not an object held, +or possessed, but the right in or belonging to a person to control +something that he owns. Ownership is a legal right to control under +certain conditions.[2] Physical, possession of an object is not +necessarily ownership. + +There are different kinds of ownership. It may be private, as that +of individuals, families, partnerships, or corporations; or it may be +public, as that of nations, states, counties, cities and towns, owning +such things as public buildings, parks, highways, the Adirondack +forest-reserve, or the Erie Canal. These two kinds are equally +effective as against the claims of outsiders, but the rights of those +inside the circle of ownership differ. For example, the rights of one +shareholder against another, or the rights of one member of a family +as against another, are not the same as the rights against outsiders. +Private property is the characteristic feature of our present +industrial society, but it exists side by side with public property +and with many intermediate grades between private and common property. + +Tho property meant originally and essentially the intangible right to +a thing, the word came to be applied also to the object of the right. +This is done both in common speech and in judicial decisions, with +inevitable ambiguity. This may be readily seen by trying to substitute +the word ownership for property, a thing quite simple in some cases +but impossible in others. One would not point to a house and say, +"This is my ownership," but either, "This is my property," or "I +exercise ownership over it." It is well recognized that a man may have +a property right in this abstract sense in or over his own services, +as to practise a trade or in the "good will" of a business or in +an intangible patent or a copyright, quite as well as in a material +object. + +§ 3. #Relation of wealth, property, and capital#. A failure to see +this distinction and to keep it clearly in mind has led to confusion, +even on the part of legislatures, learned judges, and able economists. +If property is said to be (for example) a house and lot and at +the same time the right to that house and lot, then there are two +properties at once for each economic good, viz.: the object itself and +the right to it.[3] + +This difficulty could be avoided by the consistent definition and use +of terms. A material economic object is a good, is a form of wealth. +The usance of wealth and the service of laborers at the moment +rendered constitute forms of income. The right of ownership, i.e., the +right to control, use, or direct the use of wealth and services, is +property, which is therefore the right to receive incomes. The value +of the incomes of an individual constitute his capital. Goods, rights +to goods, value of rights to goods: these three things are clearly +distinguishable. + +§ 4. #Some theories of private property#. Various theories have been +framed to explain the origin and to justify the existence of private +property. The occupation theory is that property is based upon +the priority of claim of one who finds wealth without an owner and +appropriates it. This is not an explanation of the property rights +that are arising every moment, nor does it give a logical reason for +the continuance of ancient property rights. It is a statement applying +to a case that has rarely happened, the settlement of an unoccupied +territory. + +More adequate to explain many cases is the conquest theory, that +property is based on force; for nearly all lands to-day are occupied +by the descendants of conquering invaders who took the lands and +natural resources from the former inhabitants, who in turn had taken +them from other occupants, many centuries before. The conquest theory +applies, for example, to the invasion of the Roman provinces by +barbarian tribes who divided the country and developed the feudal +system based on land tenure. But it hardly applies to present-day +happenings, and at its best it cannot, to modern minds, "justify" +present property rights. + +The labor theory, meeting some queries where others fail, is that +ownership is based on the act of production. It is declared that +every man has a right to that to which his brain and his muscle +have imparted value. It is evident that this test leaves without +explanation or justification a great number of things that do exist +and have existed as property. Usually the basis of the labor theory +of property is declared to be each individual's natural right to the +results of his own labor, which claim is assumed to be an ultimate, +undebatable, axiomatic fact. However, that type of natural-right +doctrine, which makes no appeal to experience and results, is now +quite discredited in political science. + +Another form of natural-rights theory is that property is necessary +for the realization of the dignity of human nature and every +individual has the natural right to self-realization. This theory +is, in a way, based on an appeal to experience, as to the effect of +property on human character, and it has the virtue of expressing one +of the ideals of modern democracy. Altho, in common with various other +"natural-rights" theories, it must be deemed too absolute and too +individualistic, it contains a far-reaching truth, of which due +account must be taken in our social philosophy. + +The legal theory is that property exists because the law says it +shall. This expresses a truth, but is no more than a truism. The law +determines the limits of property, but what determines the limits of +the law? What practical or social justification is there for passing +and continuing such law? The legal theory does not contain a final +explanation. Each of these theories has its defects, but each points +to some fact important and significant, at certain times and places, +in the explanation of this widespread institution. + +§ 5. #Origin vs. justification#. The question of the origin is not the +same as that of the present justification of the existing system of +private property. The institution of private property has evolved +under diverse conditions. In early societies individual property +rights were not very clearly marked. Every tribe asserted against +other tribes, and tried to uphold by war, its claims upon its +customary hunting grounds; but the claims of the individual hunters +on land within the tribe did not often come into conflict. Private +property at the outset was in personal possessions, ornaments, +weapons, utensils, which were very meager in that primitive society +in which it was the custom "to go calling with a club instead of a +card-case." Only later came individual property in land. A few years +ago it was generally believed that the organization of the old German +tribes was politically an almost perfect democracy, and economically +a communism in which all had equal claims upon the land. To-day this +opinion is very seriously questioned. It seems probable that there was +a goodly measure of communism in the control and use of lands (tho not +in other things), but this was largely confined to an oligarchy of the +favored; whereas the masses lived in subjection, cut off from all but +a meager share in the common lands. However that may have been, strong +forces within historic times have put an end to the common ownership +and tillage of land as it existed among the peasants of Europe. That +system was shown by experience to be wasteful. Competition tended to +bring the economic agents into more efficient hands, and the movement +was furthered by many acts of injustice and violence on the part of +those in power. + +Inquiries into the origin and development of any social institution +are interesting and helpful in forming an estimate of its present +significance, but the problems of the past are not those of to-day. +Whether or not the ancient beginning of property in Europe was in +violence and evil has but a remote bearing on the question as to the +present working of it. Social conditions and needs have not changed +more than have the forms and limits of property itself. Each +generation has its own problems to solve, and ignoring for the most +part the evils of the distant past, each generation must test existing +institutions by their present results. + +§ 6. #Limitations of private property#. It is well, in discussing +private property, to rid the mind at once of the idea that it is an +absolute and unchanging thing. Few realize the manifold ways in which +property rights are limited. Unmodified private control of property is +unknown; the public makes many reservations in its own interest. There +is, first, a whole set of limitations to prevent nuisances. An owner +in many situations is not free to build a slaughter-house or to start +a glue-factory on his land. Property is governed by general public +utility, and anything that threatens to become a nuisance or a danger +may be excluded. Under the right of "eminent domain," the state or the +railroad takes the old homestead from the owner who would live and die +there. + +Altho pecuniary damages are paid to him, this is a limitation of his +property rights. Rights of way on property exist either by contract +or by prescription permitting its public use. Most important of all +limitations is the right of taxation, by which society takes more or +less of private incomes for purposes of which the individual owners +may not approve. + +The law enforces a multitude of private claims by some persons against +others. A variety of rights called easements or servitudes may attach +to private property, modifying its exclusive use. Leases for any +period are a limitation of the owner's control. Both the holder of +the lease and the owner of the property have certain rights before the +law. The lender of money secured by mortgage has a legally recognized +and enforceable interest in the mortgaged wealth. Property is left in +trust for the benefit of persons or of institutions or of the public, +and is administered by trustees who are strictly bound to execute the +terms of their instructions. Contracts of many sorts are entered +into by owners, limiting their control in manifold ways, and the +law enforces these contracts. These all form a complex of equitable +claims, which together equal in value one undivided property right, +which in turn equals the value of the wealth.[4] + +§ 7. #Limitations of bequest and inheritance#. The term bequest +implies a will, usually a written will in which the person, in +anticipation of death, expresses his wishes as to the disposition of +his property. It is said sometimes that bequest is a "logical" result +of private property, but the law does not treat it as such. The +right of bequest, or of gift at death, is limited in various ways +in different countries. In countries where hereditary aristocracies +exist, primogeniture is in some cases required by law, in others +so strongly favored by public opinion that it is practically always +followed. Custom limits bequests in England to members of the family, +and wills given outside the family are rare, and are almost always +broken in the courts. John Stuart Mill contrasted this with the +practice in America, frequent even in his day and still more frequent +now, of rich men giving for public purposes. In France the right of +bequest outside the family is legally limited; only the share of one +child can be willed away by the father, and the rest must be equally +divided among the children. Settlements and _fidei commissa_ are +limited in many countries, because of the recognized social evils +resulting from the tying up of estates for generations. Throughout the +history of England, Parliament has given attention to the question of +mortmain, which chiefly concerned the drifting of great estates into +the hands of the church or of corporations, as the result of bequests +by the pious. In England, of late (and to a less extent in this +country), the policy of permitting unlimited endowments to charitable +institutions has been seriously questioned, and by legislation some +of the old endowments have been diverted from their original purposes +when these have ceased to be of social utility. Inheritance, in +contrast with bequest, usually means succession to the property of +one who has died intestate, that is, has made no will. The law of +inheritance likewise varies greatly with time and place. + +§ 8. #Social expediency of private property#. In the light of present +political philosophy the explanation and justification of private +property must be on grounds of social expediency. This is a broad +explanation and it has the fault of a broad explanation, that it needs +to be further explained. Under it can be brought the many varying +conditions. Even if private property works hardship to individuals in +many cases, yet it may be justified if, on the whole, it is best for +the progress of society. Laws must be judged by their average working, +not by exceptional cases. In general, the system of private property +must be judged by this test: Does it further the welfare of the nation +better than would any alternative plan for the control of economic +wealth? The question is not whether it is faultless, for no human +institution is so. Nor must it be assumed that the rule of property +needs to be uniform in respect to all kinds of wealth. There are +many kinds of property, and the test may be applied separately to the +different forms and to the varying degrees of property rights. The +varied and often strict limitations of property mentioned above are +all determined by some thought, wise or foolish, of social expediency. +Different parts of wealth may be treated in different ways: there may +be private property in wagons, and public property in roads; private +property in houses, and public property in forests; private property +in automobiles, and public property in railway carriages. But any rule +of property, like any other workable human law, must be applicable to +all individuals that meet the conditions. + +The very acceptance of the theory of social expediency implies the +need of frequent readjustment of the institution of private property. +The essential thought in the various attacks on the institution of +property is that, because it either causes or makes possible the +inequality of incomes, it is not socially expedient. Private property, +as it is found to-day, is complicated by many historical accidents. +Survivals of ancient injustice and relics of feudal institutions that +rest on no vital reason remain in our new country as well as in the +older ones. The limits of property in many respects are determined not +according to the logic of expediency, but by the social inertia which +often governs successive generations. + +The question is raised in many minds: If private property is not an +absolute right, what shall be its limits? What changes should be made +in it? These questions put the greatest economico-political problem of +our day, one that contains within it, indeed, many minor problems. A +number of these will receive attention in the following pages. + +§ 9. #The monetary economy#. So greatly does the use of money +facilitate the transfer, buying, and selling of private property and +so closely are property and pecuniary trade connected in practice and +in the thoughts of men, that every radical proposal to abolish private +property has included a plan to do away with money also. But money and +private property are not essentially and logically bound up together, +for a certain measure of private property always has been found where +money was little or not at all used. True, if there were absolutely no +private property, there would be little use for money, altho it might +still be used as a form of counter by the communistic state. We have +already seen[5] how a monetary unit comes into use, and we shall treat +more fully of the nature of money in later chapters. We may note here +merely that the use of money is an outstanding feature of the present +economic system and gives rise to many of the problems of political +economy. + +§ 10. #The competitive system#. The existing system is likewise +characterized by competition[6] in the buying and selling of wealth +and of the usances and services of economic agents. By competition we +mean here the condition of political freedom on the part of each man +to trade his property (goods, uses, or services) as he chooses, and +this combined with the disposition on his part to get what he +values most highly for himself and his family. Whenever any one else +(official or citizen) forbids and prevents a man from getting all he +can, in so far competition is limited. Whenever any one is deterred by +fear of, or by affection for, some other trader, from getting all he +can, in so far competition is limited. Whenever any one conspires with +another trader to act together with him to withdraw or to alter his +bid, in so far competition is limited. Private property and economic +competition do not merely happen to exist side by side, forming more +or less favored conditions each for the other; they are essentially +connected.[7] + +It is not our task at this point to present the advantages and +disadvantages of competition, but merely to indicate its important +place in the actual economic world. Like private property, competition +is not the universal feature of our present system, but it is the most +general and characteristic method of valuation, of price fixing, and +of trade. + +§ 11. #Limitation of competition by custom.#[8] The relatively large +influence of competition in present society appears more plainly in +comparing the present system with that of an earlier state of society +or with that of a present savage tribe. A member of the lowest human +societies is subject to law; tho he is a savage he is not "untutored." +On the contrary he is bound in many ways to follow customary lines +of conduct, and a large part of his time is given to learning the +traditions and then to observing the ceremonials of the tribe. +Primitive customs always take on a religious sanction, and every +member of the tribe is piously bound to do as his fathers have done +and as his neighbors are doing. This limitation applies to the choice +of food to eat, clothes to wear, time to hunt, plant, and harvest, +weapons and tools to use, where and how to trade, how much to give or +take, and to countless other details of economic choice. So, in early +society, economic relations were complex and but slowly changing from +generation to generation. Custom, rather than competition, ruled in +manifold ways the economic actions of men. + +Custom continued to rule a large share of the individual life of the +peoples of northern Europe through barbarian and feudal times. Its +force has gradually decreased, but even yet is not entirely set aside. +Political and economic interests were not clearly distinct in the +Middle Ages. Land was the all-important kind of wealth. Military +and other public services were performed by the higher landlords (as +vassals of their overlords) who in this way paid at the same time what +we to-day would call rent and taxes. The landlord in turn received +from his underlings services and goods in kind (food and supplies) and +so (in modern eyes) was both a collector of taxes and a receiver of +rent. The rent, however, was not a competitive price, but consisted +of the dues and services which the forefathers had been accustomed to +pay. In many ways also in the towns, close organizations of craftsmen +and of merchants regulated prices and kept others out of their +industries. Industrial privilege pervaded the life of that time. + +Yet through all the Middle Ages ran the forces of competition. The +inefficiency of customary services and the high prices charged +by selfish privilege were constant invitations to men to become +competitors. Men strove to break over the barriers of custom and of +prejudice. Their efforts to attain freedom to compete was the vital +force of the time. The industrial history of the Middle Ages was +largely the story of the struggle of the forces of competition against +the bonds of custom and privilege. + +§ 12. #Effect of modern forces upon custom#. The industrial events +following the discovery of America strengthened the forces making for +economic freedom. Discoveries in the Western hemisphere opened up a +wide field for the adventure and enterprise of Europe. Commerce is the +strongest enemy of custom, and new opportunities gave a rude shock to +the conservatism both of the manor and of the village. With the rapid +growth of industry and manufactures, old methods broke down. In an +open market custom declines; it flourishes best in sheltered places. +Further, the movement of thought in the Reformation, and the spirit +of the times which expressed the principle of personal liberty +and allowed the individual to follow his own opinions and take the +consequences, were favorable to competition. Despite these facts, the +restraints of the national governments on trade continued great, +in some respects increasing during the seventeenth and eighteenth +centuries, in France, Holland, and England. The regulation before +attempted by towns and villages was employed on a larger scale by +national governments with their industrial systems. The colonies in +America were used for the economic ends of the "mother country" +and for the selfish interests of the home merchants in Europe. The +American Revolution was one of the bitter fruits of the English policy +of trade restriction. + +§ 13. #Adam Smith's influence#. "The Wealth of Nations," the first +great work on political economy, was published in the year 1776. That +was the "psychological moment" for its appearance, as public thought +was so prepared for it that it had its maximum possible influence. +The year of the American Declaration of Independence gave the most +striking object lesson on the evils of a selfish colonial policy that +interfered on a grand scale with economic freedom. The old customs had +become ill fitted to life, ill adapted to the rapid industrial changes +that were going on. What was needed in many directions, both +in politics and in industry, was merely negative action by the +government, the repeal of the old laws, the overthrow of old abuses. +The French Revolution, following a few years later, emphasized this +thought in the political field. The philosophers of the time believed +in a "natural law" in industry and politics. The reformers of the +time wished to throw off the trammels of the past and to give men +opportunity to exert themselves "naturally." In America the old abuses +never had taken deep root, as the conditions of a new continent were +not favorable to monopoly and privilege. Altho the movement for the +repeal of medieval laws has continued in Europe from 1776 till the +present time, yet custom still is stronger to-day in Europe than +in America. Serfdom was not abolished until the first half of the +nineteenth century in Austria and southeastern Europe, and not until +the last half in Russia. Many economic and cultured forces furthered +this movement, but the most powerful intellectual force in its favor +was the work of Adam Smith. So strong an impression did Smith's book +make, that in the minds of men "free trade" became almost identical +in thought with political economy, whereas that was but the temporary +economic problem of the eighteenth century. + +Many men then thought that in "free and unlimited competition" had +been found a solution of all economic problems for all time. But soon, +it was apparent that it was no such simple and absolute solution. +Indeed many of the present economic problems--in one sense all of +them--center around this one: to determine the proper forms and limits +of competition. The varied aspects that this problem takes will appear +in every portion of the following pages. + +§ 14. #The wage-system.# Viewed in another aspect the present economic +and social order is called the wage-system.[9] The wage-contract, like +the use of money, is not essential to the existence of a system of +private property. Communities such as the American colonies and as +many of the newly settled states, may consist almost entirely of +self-employed owners of land. Bulgaria, before the Balkan wars called +the peasant state, presented this organization (tho of course with +some wage-payment), as did also its neighbor Serbia. But given the +institution of private property with competition (freedom to buy +and sell), let manufactures and commerce develop to any extent, +and inequalities of fortunes increase while an increasing number of +persons work for wages. It is noteworthy that as this goes on (as +it has done in America at an increasing rate since the middle of the +nineteenth century) it is the agricultural and rural hand industries +that continue to be mainly worked by owner-managers and workers, +while it is the manufacturing, transporting, and large commercial +enterprises in which the labor is done for wages. The acceptance of +the wage-system thus far has been the inevitable price to be paid +for manufacturing and industrial development; and one of our economic +problems is to determine whether this must continue, and if so, +whether in the same measure as in the past. + + +[Footnote 1: The exceptions are probably unstated amounts of exempt +real estate (owned by municipalities, state, and nation), some of the +irrigation plants, part of the canals, and that part of the gold and +silver which is in the public treasury.] + +[Footnote 2: See Vol. I, pp. 264-267. The law makes between property +rights and equitable rights some subtle distinctions, which have their +reason in the history, if not in the logic, of the law but which are +not essential to economic discussion. In some states this distinction +has been in large measure abolished. What interests us are the rights +(claims) that men have to the control of wealth and services, whether +by technical law these are called legal or equitable, and this right +is what is meant by "property" in our discussion of it.] + +[Footnote: 3 This confusion has had important practical consequences +in the field of taxation. See Vol. I, pp. 265-267, and below, ch. 17.] + +[Footnote 4: These claims mutually delimit each other (whether they be +called equitable claims, or liens, or property rights), and wealth +is not multiplied by multiplying the claims, as is unfortunately +sometimes assumed to be the case. See above, sec. 3.] + +[Footnote 5: See Vol. I, p. 51.] + +[Footnote 6: See Vol. I, p. 73.] + +[Footnote 7: This will appear in comparing the competitive method of +distribution with other methods in ch. 31.] + +[Footnote 8: See Vol. I, p. 143, on medieval land tenures; p. 158, on +customary rents; p. 190, on the effect of caste.] + +[Footnote 9: See Vol. I, p. 227.] + + + + +PART II + + +MONEY AND PRICES + + + + +CHAPTER 3 + +NATURE, USE, AND COINAGE OF MONEY + + § 1. Origin of money. § 2. Qualities of the original money-goods. + § 3. Industrial changes and the forms of money. § 4. The precious + metals as money. § 5. Gold-using countries. § 6. Varying extent of + the use of money. § 7. Money defined and reviewed. § 8. Metal money + without or with coinage. § 9. Technical features of coinage. § 10. + Seigniorage defined. + + +§ 1. #Origin of money#. Everywhere in the world where the beginnings +of regular trade have appeared, some one of the articles of trade soon +has come to be taken by many traders who did not expect to keep or use +it themselves, but to pass it along in another trade.[1] This made it +money, for money is whatever comes to be used as a general price-good. +The character of a _general_ price good clearly distinguishes money +from goods bought and sold by a particular class of merchants, such +as grain, cattle, etc., to be sold again. It is only in so far as a +particular good comes to be taken by persons not specially dealing in +it, taken for the purpose of using it as a price-good to get something +else which they desire, that a thing has the character of money. The +thing called money thus is a durative good passing from hand to hand +in a community, and completing its use in turn to each possessor of it +only as he parts with it. + +The use of money is of such social importance, that it would be +impossible for modern industrial society to exist without it. The +discussion of money touches many interests, it raises many questions +of a political and of an ethical nature. There are perhaps more +popular errors on this than on any other one subject in economics, but +the general principles of money are as fully understood and as firmly +established as are any parts of economics. + +§ 2. #Qualities of the original money-good#. The selection of any +money-commodity has not been mere chance, but has been the result of +that object being better fitted than others to serve as a medium of +exchange. The main qualities that affected the selection of primitive +form of money were as follows: 1. Marketability (or saleability); that +is, it must be easy to sell. The first forms of money had to be things +which every one desired at some time and many people desired at any +time. That was the essential quality that made any one ready to take +it even when he did not wish to use it himself. Many kinds of food and +of clothing are very generally desired goods. But few of these classes +of goods have in a high measure certain other important qualities, now +to be named. + +2. Transportability; that is, the money material must be easy to +carry, it must have a large value in small bulk and weight. To carry +a bag of wheat on one's back a few miles requires as great an effort +ordinarily as does the raising of the wheat, and the cost of carriage +for fifty miles even by wagon will often equal the whole value of the +wheat. Cattle, while not comparatively very valuable in proportion to +weight, and not possessing the other qualities of money in the highest +degree, have the advantage that they can be made to carry themselves +long distances, and therefore they have been much used as money in +simpler economic conditions. + +3. Cognizability; that is, the money-good must be easy to know, and +to judge as to quality. If expert knowledge or special apparatus are +needed to test it in order to avoid counterfeits, few could be ready +to take it and trading would be a costly process. + +4. Durability; that is, the money-good must be easy to keep without +much loss in amount or in quality, perhaps for long periods, until it +can be passed on in trade. Few kinds of food answer very well to this +last requirement, being organic and perishable. But all four qualities +above named were pretty well embodied in primitive times in rock salt, +in rare flints and bits of copper suitable for tools and weapons, +in furs in northern countries, and in many articles of personal +adornment, such as beads, feathers, jewels, and metal ornaments. + +5. Divisibility; that is, the quality in the monetary material that +permits it to be divided easily into smaller amounts and then to be +united again into larger masses at little cost and without loss in +amount or in quality. This quality is present only when the material +is quite homogeneous throughout the whole mass, a condition fulfilled +more completely by the metals than by any other goods. This quality +makes it possible to put the governmental stamp upon the money +material, and to produce pieces, some of which are exact duplicates +and some exact multiples, of others. In this manner pieces of money +are provided suitable for transactions of different magnitudes, down +to small fractional amounts. A monetary system of this kind aids +greatly the development of the sense and habit of exact estimation of +price. + +§ 3. #Industrial changes and the forms of money#. The money use, as +has just been shown, is a resultant of a number of different motives +in men. The changing material and industrial conditions of society +change the kind of money that is used. Things that have the highest +claim to fitness for money with a people at one stage of development +have a low claim at another. The final choice of the money-good +depends on the resultant of all the advantages. Shells are used for +ornament in poor communities but cease to be so used in a higher state +of advancement, and thus their saleability ceases. Furs cease to be +generally marketable in northern climes, when the fur-bearing animals +are nearly killed off and the fur trade declines. When tobacco was the +great staple of export from Virginia, everybody was willing to take +it, and its market price was known by all. It served well then as the +chief money, but, as it ceased to be the almost exclusive product +of the province, it lost the knowableness and marketability it had +before. In agricultural and pastoral communities where every one had +a share in the pasture, cattle were a fairly convenient form of money, +but in the city trade of to-day their use as money is impossible. +Thus, in a sense, different commodities compete, each trying to prove +its fitness to be a medium of trade; but only one, or two, or three at +the most, can at one time hold such a place. + +While industrial changes and conditions affect the choice of money, in +turn money reacts upon the other industrial conditions. If a new and +more convenient material is found or the value of the money metal +changes to a degree that affects the generalness of its use, industry +is greatly affected. The discovery of mines in America brought into +Europe in the sixteenth century a great supply of the precious metals, +and this change in the use of money reacted powerfully upon industry. +Money, being itself one of the most important of the industrial +conditions, is affected by and in turn affects all others. + +§ 4. #The precious metals as money#. Certain of the metals early began +to show their superior fitness to perform the monetary function. The +metals first used as money were copper, bronze (an alloy of copper +with nickel), and iron. These were truly precious metals in +early times for they were found only in small quantities in a few +localities. They, therefore, were widely sought and highly valued as +ornaments and for use as tools and weapons. But as the great ancient +nations emerged into history, these materials were already being +displaced in large measure. Their value fell greatly as a result of +greater production due to somewhat regular mining. As wealth grew, as +trade increased, as the use of money developed, as commerce extended +to more distant lands, the heavier, less precious metals failed +to serve the growing monetary need, especially in the larger +transactions. Silver and gold, step by step, often making little +progress in a century, became the staple and dominant forms of money +in the world, while copper and nickel still continued to be used for +the smaller monetary pieces. Every community has witnessed some stages +of this evolution. In this contest silver had proved itself a few +centuries ago to be on the whole the fittest medium of exchange for +most purposes, though gold was at the same time in use in larger +transactions and in international trade. + +§ 5. #Gold-using countries#. At the beginning of the nineteenth +century nations were divided, in accordance with the metals they used +as standards, into two great groups, silver- and gold-using. Since +that time, and more rapidly after 1850, gold has displaced silver as +the standard money. In a higher degree than any other one material, +gold has the qualities of a good standard for rich and industrially +developed communities. England for a long period practically has had +gold as its standard money; the United States since 1834 (except for +the period of paper money from 1862 to 1879); France since about 1879, +having shifted gradually from silver, after 1855, under the working +of the bimetallic law; Germany since 1873; and Japan since the later +nineties. Other countries have been striving to attain it. Since +about 1890 some states (including Mexico) and some of the colonial +possessions of the great nations (including India and the Philippines) +have adopted the plan of "the gold-exchange standard." By this plan +gold is the standard price unit, while silver continues to be used +all but exclusively as the material in circulation, its amount being +controlled and its value regulated on principles to be explained below +under coinage, seigniorage, and foreign exchange. There are now left +but a few silver-standard countries, the most important being China. +There are, however, numerous countries, notably in South America and +Central America, which have fiduciary paper-money standards.[2] + +§ 6.# Varying extent of the use of money#. Trade by the use of money +at no time has become the exclusive method. Barter still lingers +to-day.[3] The extent to which, on an average, money is used in +different parts of the world differs widely. The use of money in +Siberia is less than in European Russia, and its use is less there +than in western Europe. The use of money as compared with barter is +generally much greater in the cities than in the rural districts. In +the cities of Mexico not only money, but banks and credit agencies are +in general use; whereas the rural districts are more backward and make +far more use of barter than is the case in the United States. At the +ports in the cities of China, India, and South America the use of +money may be very like that in European cities; but go a little way +into the interior of these countries and conditions as to the use of +money change greatly. + +However, the comparative per capita amounts of money (in terms of +American dollars) in circulation in different countries is far +from being a true index of their industrial development or of their +commercial activity. Indeed, beyond a certain point the larger average +amount of money in circulation in a country may indicate backwardness +in the development of banks and other credit agencies rather than +greater amount of wealth or of business. Notice, for example, the +medium position of the great commercial countries, Germany and the +United Kingdom, as compared with other countries above and below them +in the following list. + +PER CAPITA CIRCULATION OF MONEY IN LEADING COUNTRIES DECEMBER 31, +1912. + + France..................$48.91 America (U.S.)..........$32.98 + + Australia............... 38.45 Portugal................ 29.46 + + Canada.................. 33.57 Netherlands............. 26.86 + + Switzerland............. 24.32 Mexico.................. 9.17 + + Germany................. 21.36 Finland................. 8.38 + + United Kingdom.......... 21.21 Chile................... 8.24 + + Spain................... 19.96 Turkey.................. 7.09 + + Brazil.................. 18.79 Russia.................. 6.45 + + Denmark................. 17.73 Japan................... 5.68 + + Belgium................. 15.83 Bulgaria................ 5.57 + + Austria-Hungary......... 14.68 Serbia.................. 5.49 + + Rumania................. 13.24 Venezuela............... 5.51 + + Italy................... 13.09 India (British)......... 5.19 + + South Africa............ 12.93 Ecuador................. 4.62 + + Norway.................. 12.50 Peru.................... 3.17 + + Sweden.................. 11.59 Colombia................ 2.32 + + Greece.................. 11.02 Paraguay................ .57 + +7. #Money defined and reviewed#. Money may be defined as a material +means of payment and medium of trade, generally accepted as the +price-good and passing from hand to hand. The definition contains +several ideas. The words "generally accepted" imply that money has a +peculiar social character, is not an ordinary good. As a price-good, +money itself must be a thing having value, otherwise it could not be +accepted. Trade means the taking and giving of things of value. Money +is, therefore, not merely an order for goods, as a card or paper +requesting payment; it is itself a thing of value (tho this value may +be due partly or solely to its possessing the money function). Such +things as a telegram when transferring an order for the payment of +money, as the spoken word, and as a mere promise to pay, are not +money. Even checks and drafts are merely substitutes for money. Money +passes from hand to hand, is a thing that can be handled, and is or +can be bodily transported. + +The application of the definition is not always easy, for money shades +off into other things that serve the same purpose and are related in +nature. In many problems money appears to be at the same time like +and unlike other things of value, and just wherein lies the difference +often is difficult to determine. Even special students differ as to +the border-line of the concept, but as to the general nature of money +there is essential agreement. + +8.# Metal money without or with coinage#. In antiquity the metals +were used as money in bulk; that is, the amount was weighed at each +transaction and the quality was tested whenever there was doubt.[4] +In countries industrially backward, payments are still made in this +manner. For some time after the discovery of gold in California, gold +dust was roughly measured out on the thumb-nail. In shipments of gold +to-day by bankers to settle international balances, metal may be in +the form of bars that bear the mark of some well-known banking house. +In all of the cases of this kind the gold is money in fact, but not by +virtue of any act of government. The metal is simply a valuable good, +the receiver of which values it according to its weight and fineness. +This is true even when the government mint, for a small charge, tests +and stamps the bars at the request of citizens. + +Very early it became the practice of governments to shape and stamp +pieces of metal to be used as money, so as to indicate their weight +and fineness. The act of shaping and marking metal for this purpose is +called coinage.[5] The coinage by government had notable advantages in +giving to the monetary units uniformity of size, fineness, and value, +with the stamp that was readily recognized. But in its simplest form +coinage in no way changed the value of the money, and any other mark +equally plain put upon it would have served equally well, if only it +had carried with it equal assurance of the quality and weight of the +metal. + +9. #Technical features of coinage#. For each kind of metal money there +is an established _ratio of fineness_ for the more precious material, +which is mixed with baser metals used as alloys. In the United States +all gold and silver coins are made nine-tenths fine; in Great Britain, +eleven-twelfths. The established weight of the gold dollar in the +United States is 25.8 grains of standard gold which contain 23.22 +grains of fine gold. The _limit of tolerance_ is the variation either +above or below the standard weight or fineness that a coin is allowed +to have when it leaves the mint. This is different for each of the +principal coins, being about one-fifth of one per cent on a gold +eagle. The _par of exchange_ between standard coins of different +countries is the expression of the ratio of fine metal in them. +Thus the par of exchange between the American dollar and the English +sovereign (the "pound") is 4.866; that is, that number of dollars +contains the same amount of fine gold as an English gold sovereign. +The embossed design is merely to make the coins easily recognizable +and difficult to counterfeit; and milled or lettered edges are to +prevent clipping and otherwise abstracting metal from the coins. + +10. #Seigniorage defined#. Coinage, as practised by early governments +and rulers, came to be a function of great importance politically as +well as economically. The right to issue money came to be one of +the most essential prerogatives of sovereignty. The prince, king, or +emperor stamped his own device or portrait upon the coin; hence the +term seigniorage from _seignior_ (meaning lord or ruler). Seigniorage +meant primarily the right the ruler, or the estate, has to charge +for coinage, and hence it has come to mean also the charge made for +coinage, and often, in a still broader sense, the profit made by the +government in issuing any kind of money with a value higher than that +of the materials (whether metal or paper) composing it. Coinage is +rarely without charge, and often has been a source of revenue to the +ruler. In antiquity and in the Middle Ages this right was frequently +exercised by princes for their selfish advantage to the injury and +unsettling of trade. This introduced a very great problem of value +into the use of money. + +The coinage is said to be _gratuitous_ when no charge is made for +coinage. Coinage is said to be _free_ if the subject or citizen +may take bullion to the mint whenever he pleases, paying the +usual seigniorage. Coinage is _limited_ if the government or ruler +determines when coinage is to take place. Thus, coinage may be both +free and gratuitous, when citizens are allowed to bring bullion +whenever they please and have it converted into coins without charge +or deduction. But coinage is free without being gratuitous when any +citizen may bring metal to the mint, whenever he chooses, to be coined +subject to the seigniorage charge. + + +[Footnote 1: See Vol. I, pp. 15-16 and 50-53 for an introductory +statement of the origin of money in connection with markets.] + +[Footnote 2: See ch. 5.] + +[Footnote 3: See Vol. I, p. 43, on the decline of barter.] + +[Footnote 4: "I will ... refine them as silver is refined, and will +try them as gold is tried." Zech. xiii, 9. "I bought the field ... +and weighed him the money, even seventeen shekels of silver. And I ... +weighed him the money in the balances." Jer. xxxii, 9, 10. A shekel +was 224 grains, troy weight, which is about equal to six-tenths of the +pure metal in a silver dollar to-day and worth now about twenty-four +cents in gold. At that time, however, the purchasing power of silver +was many times greater than it now is.] + +[Footnote 5: From the French _coin_, in turn from Latin _cuneus_, +wedge, suggestive either of an earlier wedge-shaped piece, or of a +wedge-shaped mark on the piece. The German word _Münze_ is from the +Latin _moneta_ (as is the English _mint_, the place where coins are +made), which meant money, that name being taken from the temple of +Juno, called _Moneta_, where coins were made.] + + + + +CHAPTER 4 + +THE VALUE OF MONEY + + § 1. Standard-commodity money. § 2. Alternative uses of the money-good. + § 3. Money as a valuable tool. § 4. Relative importance of + money. § 5. Concept of the individual monetary demand. § 6. Concept + of the community's monetary demand. § 7. The money-material in + its commodity uses. § 8. The general level of prices. § 9. Effect of + increasing gold production. § 10. The quantity theory of money. § 11. + Interpretation of the quantity theory. § 12. Practical application of + the quantity theory. + + +§ 1. #Standard-commodity money#. The actual money in use in almost +every country to-day consists of a wide and confusing variety: gold, +silver, nickel, copper, paper in various forms, issued by various +authorities under various conditions as to amount and as to +seigniorage. But among all the kinds, in each country some one kind +is found standing preëminent and in a peculiar position, as the +_standard_ money to which the value of all the other kinds of money is +in some manner adjusted. Usually this standard money is composed of +a material (gold or silver) which is a commodity; but there are +many examples of paper money being for the time the standard. The +difficulties of the money problem must be attacked at the point +of standard-commodity money, where it is nearest to ordinary value +problems and is less complicated than when the various other kinds of +money and the various money substitutes are included. + +We mean by standard money that kind, no matter what its form, which +serves in any country as the unit in which the value of other kinds of +money is expressed. The standard usually is a quantity of metal of a +certain weight and fineness, which, as a commodity, has a value also +in industrial uses. Coins of this standard are called full, or real, +money by some writers that deny the title of money to everything else. + +§ 2. #Alternative uses of the money-good.# Let us consider the +problem of money-value as it would present itself if only one kind of +commodity money were in use. This doubtless was in large measure, +if not entirely, the case for a time in early societies after one +material had proved itself to be the best suited for the purpose. The +history of many kinds of money may, we have seen, be traced back to +a point where they were not money, but commodities with a direct +value-in-use. Such were ornaments, shells, furs, feathers, salt, +cattle, fish, game, and tobacco. Each of these materials has, in each +situation, a value which is the reflection of its power to appeal +to choice. Now, if to the commodity-use is added the money-use, this +increases the demand for that good. No new theory is required to +explain the value of a commodity as it gradually acquires the added +use of a medium of trade. The money use is one that works no physical +or visible change in goods except a slight unavoidable abrasion, and +at any time a person receiving a piece of commodity money may retain +it for its use-value, as food, ornament, tool, or weapon, or may +retain it for a time and then spend it as money. This case of value is +no more difficult than that of anything else having two or more uses. +For example, cattle are used for milk, for meat, and as beasts of +burden. Each of these uses is logically independent as a cause +of value, yet all are mutually related, the value of cattle to a +particular person being determined by the consideration of all the +uses united into one scale of varying gratification. + +§ 3. #Money as a valuable tool.# Money is often, by a figure of +speech, called a tool. A tool is a piece of material taken into the +hand to apply force to other things, to shape them or move them. +Figuratively, this is what money does. A man takes it not to get +enjoyment out of it directly, but to apply force, to move something, +and that which he moves is the other commodity. Money thus (as money) +is always an indirect agent. Adam Smith aptly likened money to the +roads and wagons that transport goods, thus gratifying desires by +putting goods into more convenient places. The fundamental use that +money serves is to apportion one's income conveniently as it accrues +and as it is spent. The use of money increases the value of goods by +increasing the ease with which trade takes place. Like any tool or +agent, money is valued for what it does or helps to do. It enhances +the value of the goods that it buys and sells by dividing them into +quantities convenient for use and by making them available at +the right times. In the light of the principles of diminishing +gratification and of time-preference it is clear that the amounts in +which, and the times at which, goods are available have an essential +bearing on their values. Money is the most successful device ever +discovered for distributing the supplies of a journey along its +course, and the goods of daily need over a period of time. The use of +money as a storehouse of value by hoarding it is merely a more extreme +case of keeping income until a time when it will have a greater value +to the owner than it has in the present.[1] + +§ 4. #Relative importance of money.# Because money is the general +expression of purchasing power, and comes to symbolize all other +wealth, it often assumes undue and exaggerated importance in men's +eyes. Money is but one of many forms of wealth. It constitutes but a +small percentage of the total wealth of a country, and it is far from +being the most indispensable to human welfare. Yet its importance, +as a whole, in determining the form of industrial organization is +enormous. In a society without money, industrial processes would be +very different, and trade would be hampered in manifold ways. + +A poor community has little money because it cannot afford more; it +gets along with less money than is convenient just as it gets along +with fewer agents of every other kind that it could use. Pioneers in a +poor community where the average wealth is low cannot afford to keep +a large number of wagons, plows, good roads, or schoolhouses. If the +members of the community were wealthy enough each would have more +of these and of other things, and the sum total of money would be +greater. Great as is the convenience of money, poorer communities have +to do with little of it. It is, therefore, a confusion of cause and +effect when poor communities imagine that their poverty is due to lack +of money. + +§ 5. #Concept of the individual monetary demand.# Let us now seek +to get in mind the idea of an _individual monetary demand,_ as that +amount of money which at any time is required by an individual to make +his purchases in expending his income. Every man may be thought of +as having an average monetary demand, or his average individual cash +reserve, throughout a period. A man with a salary of $50 a month +paid monthly has ordinarily a maximum monetary demand of $50. If his +expenditures are made in two equal parts, the one on pay-day, the +other thirty days later, his average monetary demand during the month +is a little over $25. If most of his purchasing is done in the first +week of the month, his average monetary demand may be perhaps $10. +Many a workman purchases on credit, running accounts at the stores for +a month. Then on pay day he spends his entire month's wages the day +he receives it, and goes without money for the rest of the month. His +average monetary demand throughout the month would then be about +equal to one day's wages. Evidently any person's cash reserve may +be expressed as that proportion of his income that is to him of more +value retained in money form for any period than if at once expended. + +In this conception of the individual monetary demand, must, however, +be included not merely the demands of retail purchasers, made by +themselves, but also those of all agencies such as merchants, bankers, +and transportation companies, serving the needs of ultimate consumers +of goods. The use of money may be necessary several times before a +commodity completes its journey from producer to consumer. + +Of two persons whose expenditures of money are of the same kind and +made at the same rate, the one having the larger amount of purchases +to make has the larger monetary demand. But the amount of purchases +does not always vary directly with the amount of real income[2]; for +example, a farmer and a village mechanic may have at their disposal +incomes equal in the quantities of goods, such as food, fuel, +clothing, and house-uses (worth, let us say, $1000 for each), but the +farmer would be getting a larger part of his goods directly from his +farm and by his own labor, while the mechanic would be getting first +a money income to be expended afterward for food, clothing, and rent. +The mechanic would in this case have an average monetary demand much +larger than the farmer. + +We see thus that a person's monetary demand at any time is that amount +of money which rests in his possession as the necessary condition to +making his purchases as he desires. Individual monetary demand varies +in proportion directly to the delay, and inversely to the rapidity +with which the individual passes the money on; and directly to +the amount of the person's income that is received and expended in +monetary form. + +§ 6. #Concept of the community's monetary demand.# The monetary demand +of a community at a given time is the sum of the monetary demands of +the various individuals and enterprises. It is that stock of money +which is necessarily present to effect the exchanges of the community +in the prevailing manner at the existing price level. A single +dollar as it circulates helps to supply the monetary demand of many +individuals in turn: the more quickly each person spends the piece +of money he receives, the greater its rapidity of circulation. Let us +suppose that every piece of money passed from one person to another +once each day. Then a dollar would, in the course of a business year +(about 300 days), serve to buy (and at the same time to sell) $300 +worth of goods. If the average purchases of each individual amounted +to $1000 a year, the average monetary demand of each would be about +3-1/3 dollars. + +But every moment beyond the average time that any one kept money would +increase his monetary demand. If he delayed a day, a week, or a +month in spending the money, waiting until he could buy in some other +market, or until a better time to buy, he would thus increase insomuch +the amount of money needed to make the trade (on that scale of +prices). It requires more slow dollars than swift dollars to make a +given volume of purchases. + +Evidently the times of maximum monetary demand of the different +individuals do not coincide; rather they alternate with each other, +and the community's total monetary demand at a given time is a +composite of the many individual variations. The amount of money that +will remain in circulation in a community depends on several factors, +the chief among them being the amount of goods to exchange, the +methods of exchange, and the prevailing scale of prices. The amount +of goods to be exchanged may change even when the amount produced is +unaltered (e.g., a change from agricultural to industrial conditions). +The methods of exchange may alter so as to require either more money +(e.g., cash instead of credit business), or less money (e.g., use of +bank checks displacing use of money by individuals). Or, apart from +the other factors, the scale of prices may change as the conditions of +gold and silver production are altered. The interrelations of gold +and silver production, paper money issues, banking growth, and +money-inflow and outflow in foreign exchanges give rise to the most +interesting and important problems in the field of monetary theory. + +§ 7. #The money-material in its commodity uses#. We are now prepared +to take up the question: What determines the ratio at which money +exchanges for other goods? And, as money comes to be the unit in which +prices are generally expressed, the question becomes: What determines +the general level of monetary prices? We have this problem in its +simplest form in the case of a commodity-money such as gold. It may be +looked upon merely as so much precious metal. The problem of its value +as bullion is the same as that of the value of pig iron or of zinc, +of meat or of potatoes. There is here no special monetary problem. +The value of gold as bullion and its value as money are kept in +equilibrium by choice and by substitution. The several uses of gold +are constantly competing for it: its uses for rings, pens, ornaments, +championship cups, photography, dentistry, delicate instruments, and +as a circulating medium. If the metal becomes worth more in any one +use, its amount is increased there and is correspondingly diminished +in other uses.[3] + +When coinage is free and gratuitous[4] the standard money is a +commodity. Such coinage is essentially but the stamp and certificate +that the coin contains a certain weight and fineness of metal. Where +coinage is free and gratuitous each coin will be worth the same as the +bullion that is in it so far as the citizens exercise their choice. +They will not long keep uncoined metal in their possession when it is +worth more in the form of money, nor will they long keep money from +the melting-pot when it is worth more as bullion. Yet there may be +a slight disparity between the bullion value and the monetary value +before the metal is converted into coin or the coin melted down into +metal. + +This adjustment of the value of commodity-money to other things is +made also on the side of supply, in the use of labor and material +agents to produce the precious metals and to produce other things. +Gold-mining, for example, is one among various industries to which men +may apply their labor and their available material agents. Some mines +are superior, others medium, others marginal which it barely pays +to work. There is, therefore, a rise and fall of the margin of +gold production with changes in prices and changes in the cost of +production. Large new deposits of gold are discovered from time to +time and new methods of extracting gold are invented. If, when it +barely pays to work a mine, such changes occur, gold becomes worth +less, and the poorer mines eventually must go out of use. As gold +rises in value some abandoned mines again come into use. A similar +variation may be noted in the utilization of marginal land, marginal +factories, marginal forges, and marginal agents of every kind.[5] + +§ 8. #The general level of prices#. We come now to a more peculiar +aspect of the monetary value problem. In performing its function +as general medium of trade, money determines the general level +of monetary prices. We have the idea of a general level of prices +whenever we contrast the price ratio of money to other commodities at +one time with its ratio at another time. Now the monetary prices +of the various commodities are constantly changing, and in somewhat +different degrees, but on the average there may be a general trend +upward or downward, and this is called a change in the general scale +(or level) of prices, as contrasted with changes in the values of any +two commodities in terms of each other. The general price level will +be more fully discussed below (Chapter 6, section 3) in connection +with the method of measuring by index numbers its changes. This brief +explanation may, perhaps, be enough for our present purpose. Our +question now is: What is the effect of changes in the quantity of +money (considered apart from chance accompanying changes) upon the +general level of prices? + +§ 9. #Effect of increasing gold production#. Let us take a case where +gold is in general use as money, and where for some time there has +been no noticeable change in the amount of business, the methods of +trade, and the general scale of prices. What would happen when new +gold mines were found that were much easier to operate, and gold began +to be produced at a much more rapid rate than formerly? The amount +of gold as compared with other forms of wealth evidently would be +increased. What if all the increase went into the industrial arts? The +value of gold in its industrial uses would fall. Then a part of the +increase must be diverted to monetary uses. When any man, by reason of +the increasing gold supplies, gets a larger stock of money than he had +before, the proportion formerly existing between his use for money +and his monetary stock is altered. He has more money than meets his +monetary demand at the existing prices. As he seeks to reduce his +stock of money to due proportions by buying more goods, he thereby +distributes a part of the excess of money to others. This bids up the +prices of goods further until the total value of goods exchanged again +bears the same ratio as before to the average monetary demand of each +individual. + +Take an extreme case: if twice as many dollars get into circulation +in a community, either some few men may have far more dollars than +before, while others have nearly the same number; or every man may +have his due proportion of the new supplies, just twice as many as +before in proportion to his income. The latter result, "other things +being equal," is the logical one after equilibrium has been restored. +If prices of goods remained the same as before, there would be twice +as many pieces of money available to effect the same number of trades +at the same prices. There is no reason why each person should tie up +twice as large a proportion of his income in the form of money. If, +however, there is a concerted movement to spend the surplus money, +there results a general bidding down of the value of money, a general +bidding up of the prices of goods. At what point will this movement +stop? The rational conclusion must be that, other things being equal, +the new equilibrium will be established when the ratio between the +value of money and the price of the goods which each individual is +purchasing becomes the same as before. The money being doubled, prices +must be doubled, and likewise for any other change in quantity. + +§ 10. #The quantity theory of money.# This explanation of the effect +of changes in the quantity of money in a country upon prices (the +general scale of prices) is known as the quantity theory of money. +This theory has, for a century, been very generally accepted by +competent students of the money problem. It may be summed up thus: +other things being equal, the value of the monetary unit, expressed +in terms of all other commodities, falls as the quantity of money +increases, and _vice versa_. That is, prices rise and fall in +direct proportion to changes in the total quantity. This is a simple +explanation of a complex and difficult set of conditions. The phrase, +"other things being equal," betokens the statement of a tendency where +there are several factors. The quantity theory explains what happens +when there is a change in one of the factors--the number of pieces +of money. There are three large sets of facts to be brought into +relationship with each other in the quantity theory: (1) the amount +of business, or the number of trades effected; (2) the rapidity of +circulation, depending on the methods by which business is done; (3) +the amount of money available. According to the quantity theory we +must expect that, when conditions (1) and (2) remain fixed, the value +of money will vary inversely as its quantity. This quantity theory may +be expressed in the formula P = MR/N when P is the symbol for price, +or the general price level, N is (1) above, R is (2), and M is (3). +P, therefore, changes directly with either M or R, or inversely with +N.[6] + +§ 11. #Interpretation of the quantity theory.# The quantity theory +must be carefully interpreted to avoid various misunderstandings of it +that have appeared again and again in economic discussion. + +(1) It does not mean that the price level changes with the absolute +quantity of money, independently of growth of population and of the +corresponding growth in the volume of exchanges. + +(2) It is not a mere per capita rule to be applied at a certain moment +to different countries. For example, Mexico may have $9 per capita and +the United States $35, while average prices may not differ in anything +like that proportion. But in these two countries not only the amounts +of exchanges per capita but the methods of exchange and the rapidity +of the circulation of money differ greatly.[7] + +(3) It cannot be applied as a per capita rule to the same country +through a series of years, without taking account of the many changing +factors. It is estimated that in 1800 the money stock was about $5 +per capita in the United States, and in 1914 about $35[8], but average +prices have not necessarily changed in the same ratio. In a period of +years a country may change in a multitude of ways, in complexity of +industry, modes of exchange, transportation, wealth, and income. These +changes require, some larger, others smaller, per capita amounts +of money to maintain the same level of prices. For example, the +substitution of cash payments for book-credit in retail trade calls +for a larger per capita stock of money; whereas an increased use of +banks and checking accounts, by economizing the use of money, enables +a smaller amount of money to maintain the same level.[9] + +(4) Tho applied originally to standard money, the quantity theory +applies to all other kinds of money circulating side by side and at +a parity of value, so far as these fulfil the definition of money and +are not merely supplementary aids of money. These substitutes for, or +supplements to, money enable each dollar to do more work, to circulate +more rapidly. If the standard money alone were doubled in quantity, +while the various forms of fiduciary money (smaller coins, bank notes, +government notes) remained unchanged, the quantity of money as a whole +would not be doubled. Indeed, in such a case, the method of exchange +would be greatly altered. According to the quantity theory, therefore, +prices would not be expected to double. + +§ 12. #Practical application of the quantity theory#. Despite the +number of changing factors affecting the methods of exchange and +the amount of business, the quantity theory is a rule unable at any +moment. These various factors change slowly, and the quantity theory +answers the question: What general change occurs in prices as a result +of the increase or decrease of the money in a given community at a +given moment? Like the law of gravitation and the law of projectiles, +the theory must be interpreted with relation to actual conditions. + +The quantity theory makes intelligible the great and rapid changes in +prices which have followed sudden changes in the quantity of money. +Inductive demonstration of broadly stated economic principles is +usually difficult, but there have been many "monetary experiments" +to teach their lessons. Many inflations and contractions of the +circulating medium have occurred, now in a single country, again +in the whole world; and the local or general results have helped +to exemplify richly the working of the quantity principle. With the +scanty yield of silver and gold mines during the Middle Ages, prices +were low. After the discovery of America, especially in the sixteenth +century, quantities of silver flowed into Europe. The great rise of +prices that occurred was explained by the keenest thinkers of that day +along the essential lines of the quantity theory, tho there were many +monetary fallacies current at that time. The experience in England +during the Napoleonic wars, when the money of England was inflated (by +the forced issue of large amounts of bank notes) and prices rose above +those of the Continent, led to the modern formulation of the theory by +Ricardo and others about 1810. The discovery of gold in California +and Australia in 1848-50 greatly increased the gold supply, and gold +prices rose throughout the world. Between 1870 and 1890 the production +of gold fell off while its use as money increased greatly, and prices +fell. A great increase of gold production has occurred in the period +since 1890. In part the rising prices since 1897 are explicable as the +periodic upswing of confidence and credit, but in the main doubtless +they are due to the stimulus of increasing gold supplies.[10] These +are but a few of many instances in monetary history, which, taken +together, make an argument of probability in favor of the quantity +theory so strong as to constitute practically an inductive proof. + + +[Footnote 1: The old-fashioned miser, however, withdraws his hoarded +gold for the time from its usual monetary function as an indirect +agent and treats it as a direct good yielding to him psychic income by +its mere possession.] + +[Footnote 2: See on kinds of income, Vol. I, p. 26 ff.] + +[Footnote 3: See secs. 1 and 2 of this chapter; also Vol. 1, +especially pp. 31-38 and 353-355.] + +[Footnote 4: This means actually gratuitous, for any real difficulty +in getting metal to or from the mint operates as a cost in the +conversion of bullion into money, or _vice versa_; e.g., the gold may +be in Australia and the mint in London.] + +[Footnote 5: See Vol. I, pp. 138 ff. and 361 ff. + +FIG. 1. GOLD PRODUCTION OF THE WORLD, 1493-1914. + +The changes in gold production here shown have bearings not only +upon problems of money, but in some respects upon nearly every modern +economic problem. Compare in the present connection this figure with +Figure 3, in Chapter 6, Section 4, showing changes in index numbers of +prices. + +[Illustration: FIG. 1. GOLD PRODUCTION OF THE WORLD. 1493-1710. +AVERAGES FOR PERIODS BEFORE 1870]] + +[Footnote 6: This formula is presented by E.W. Kemmerer in "Money and +Prices" (2d ed., 1909), p. 15 ff.] + +[Footnote 7: See above, ch. 3, sec. 6, table.] + +[Footnote 8: + + PER CAPITA CIRCULATION OF MONEY (ESTIMATED) IN THE UNITED + STATES IN VARIOUS YEARS. + + 1800......$4.99 1850......$12.02 1890......$22.82 + 1810...... 7.60 1860...... 13.85 1900...... 26.93 + 1820...... 6.96 1870...... 17.51 1910...... 34.33 + 1830...... 6.78 1880...... 19.41 1915...... 35.44 + 1840......10.91 +] + +[Footnote 9: On the function of deposits, see below, ch. 7, sec. 11.] + +[Footnote 10: Consult Figure 1 in ch. 4 and Figure 2 in ch. 6 for the +graphic presentation of these and related facts.] + + + + +CHAPTER 5 + +FIDUCIARY MONEY, METAL AND PAPER + + § 1. Commodity and fiduciary defined. § 2. Present monetary system + of the United States. § 3. Saturation point of fractional money. § 4. + Light-weight fractional coins. § 5. Worn coins and Gresham's law. + § 6. A general seigniorage charge on standard money. § 7. Coinage on + governmental account. § 8. The gold-exchange standard. § 9. Nature + of governmental paper money. § 10. Irredeemable paper money. § 11. + Theories of political money. + + +§ 1. #Commodity and fiduciary defined#. The actual moneys in +circulation in every modern country consist of a wide variety of +pieces, differing in denomination, physical size, shape and materials, +mode of issue, source or authority of issue, and legal character. +Among these kinds, one is the standard and is a commodity-money.[1] In +such cases the coinage is free and nearly gratuitous, and the value +of the money is kept close to parity with its value as bullion by +changing bullion into coin, or coin back into bullion, whenever there +is an appreciable difference between the values in the two uses. This +adjustment is brought about by the free action of the people. The +government, having declared what is the standard money unit, and +having provided a mint to make coins, leaves it to citizens, acting +from the ordinary competitive motives, to decide when they will reduce +or increase the number of coins in circulation. + +The other kinds of money are not commodity-money and the materials of +which they are made, whatever they be, are not worth as much in any +other uses as they are in their present monetary form. Their value is +always referred to, and adjusted to, that of the commodity-money, so +long as any of it is in circulation. In contrast with commodity-money, +these other kinds may be called fiduciary money. By fiduciary money +we mean money that has not a commodity value equal to its money value, +but which is generally accepted because each receiver has faith that +others in turn will take it in the same way.[2] + +§ 2. #Present monetary system of the United States.# Here is given a +summary of the main features marking the present monetary system of +the United States (in 1915). + +Not all this variety is essential to an efficient monetary system and +several of the kinds survive as the result of historical accidents +(political and legislative). But all are now kept in accord with the +value of the gold coin which, it will be observed, is the only kind +the amount of which is not artificially limited. Silver dollars are +no longer coined, subsidiary silver and minor coins are issued only +in exchange for other money, as are gold and silver certificates in +exchange for gold or for silver, which they merely represent while in +circulation. + +§ 3. #Saturation point of fractional money.# Fiduciary money is that +on which regularly the issuer makes a seigniorage charge.[3] Let us +consider now the effect of seigniorage on the value of money. + +Fractional coins are those of smaller denominations than the standard +unit of money, as shillings and pence in England, and half dollars, +quarter dollars, dimes, nickels, and cents in America. Money to serve +well a variety of uses must be of different denominations, and "small +change" is necessary to make small purchases and for exact settlement +in larger payments that are not multiples of the standard unit. The +amount required (or most convenient to use) in each denomination +of fractional coins is thus a more or less certain portion of each +person's monetary demand, shaped by experience and fixed by habit. For +example, within certain elastic limits of convenience quarters may be +used for halves, and dimes for nickels (and _vice versa_); but each +person has a point of preference. The total demand for each kind of +change is the sum of the individual demands. This point where the +amount of coins of any denomination (in relation to the whole monetary +system) is most convenient may be called the saturation point of that +kind of small change, up to which point the people prefer a share +of their money in that form, and beyond which they will, if free +to choose, exchange that kind for other denominations (smaller or +larger). Each kind of money, as the cent, nickel, dime, has its own +peculiar demand and its saturation point. + + MONETARY SYSTEM OF THE UNITED STATES, 1915 + + Metals | Weight, grains | Fineness |Ratio to gold + 1. Gold coins | 25.8 | .90 | 100 + 2. Silver dollar | 412.5 | .90 | 15.988 to 1 + 3. Silver, subsidiary | 385.8 | .90 | 14.953 to 1 + 4. Nickel (5 cents) | 77.0 | .25 | ........... + 5. Copper (1 cent) | 48.0 | .95 | ........... + ---------------------------------------------------------------- + Metal |Limit of issue | Legal tender for|Receivable for + | | private debts |public dues + 1. Gold coins | Unlimited. | Unlimited. |For all + 2. Silver dollar |Ceased in 1905 | Unlimited. |For all + 3. Silver, | Needs of the | $10 |$10 + subsidiary | people | | + 4. Nickel (5 cts.) | Do. | 25 cts. |25 cts. + 5. Copper (1 ct.) | Do. | 25 cts. |25 cts. + | \ | + _Paper_ | | | + 6. Gold certificates|Unlimited in ex-| No |For all + |change for gold | | + 7. Silver |In exchange for | No |For all + certificates | silver $ | | + 8. US notes | No new issues. |Unlimited. |Except customs + 9. Treasury notes | No new issues. |Unlimited |For all + of 1890 | | | + 10. National bank |Capital of banks|No |Except customs + notes. | | | + 11. Federal reserve |Per cent. of |At banks of |For all + notes. | gold reserves |reserve system | + ---------------------------------------------------------------------- + Metal |Exchangeable at |Redeemable at |In circulation + |treasury for | treasury in |Oct 1, 1915 + 1. Gold coins |Gold certificates| |616,000,000 + |U.S., Treas., or | | + |Fed, res. notes | | + 2. Silver dollar |Silver | |65,000,000 + |certificates | | + 3. Silver, |Minor coins |Lawful money[a]| + subsidiary | |in sums or mul-|162,000,000 + | |tiples of $20 | + 4. Nickel | | Do. \ + > 62,000,000[d] + 5. Copper | | Do. / + + Paper | | | + 6. Gold certificates| Subsidiary and |Gold coin |1,172,000,000 + | minor coins | |[e] + 7. Silver | Silver and |Silver dollars | 482,000,000[f] + certificates | minor coins | | + 8. US notes | Subsidiary and |Gold | 337,000,000 + | minor coins | | + 9. Treasury notes of| Silver and |Gold | 2,200,000 + 1890 | minor coins | | + 10. National bank |Subsidiary silver|Lawful money[b]|761,000,000 + notes |and minor coins | | + 11. Federal reserve | Gold[c] |Gold[c] |133,000,000 + notes | | | + ------------------------------------------------------------------- + Total[g]...........................................3,792,200,000 + + [Footnote a: "Lawful money" includes gold coin, silver dollars, U.S. + notes, and Treasury notes.] + + [Footnote b: Redeemable also in lawful money at bank of issue.] + + [Footnote c: Redeemable also at Federal reserve banks in gold.] + + [Footnote d: Not usually included in the estimates of total money + in circulation.] + + [Footnote e: Represented dollar for dollar by gold kept in the U.S. + treasury.] + + [Footnote f: Represented dollar for dollar by silver kept in the U.S. + treasury.] + + [Footnote g: Besides, there were about $312,000,000 in the U.S. + Treasury not offset by outstanding paper. The total money stock (in + circulation and in the Treasury, eliminating certificates representing + gold and silver), was about $4,233,000,000, of which 70 per cent was + metal (largely represented in circulation by paper certificates) and + 30 per cent was paper. Of the 70 per cent 50 was gold, 18 was silver, + and 2 was copper and nickel.] + +§ 4. #Light-weight fractional coins.# The standard metal is usually +too valuable to be suitable for coins of the smaller denominations. +Therefore, when gold is the standard, copper, nickel, and silver +remain in restricted use. But when coins of these metals are issued +at weights corresponding with their bullion value, difficulties arise. +Not only are they too heavy for convenience, but with every slight +rise in their bullion value as compared with that of the standard +metal, they become worth more as bullion than as coin and begin to +disappear from circulation. This happened often throughout the Middle +Ages and until the nineteenth century. The attempt was generally made +to coin gold and silver at a ratio of weight corresponding exactly +to their market values at a given moment and, every time the market +conditions varied, the best full-weight coins of one of the two metals +were taken out of circulation. [4]The country thus suffered for lack +either of the larger gold coins or of fractional coins. At length, to +remedy this difficulty, fractional silver coins, often called +"token coins," were issued, in limited numbers, of less than full +proportionate weight and bullion value. + +This plan, having been partially tried, was generally adopted by the +United States in 1853 at a time when the silver dollar of 371.25 fine +grains was legally rated at the same value as the gold dollars of +23.22 grains, and was freely coined. The fractional coins were made +a little over 6 per cent lighter per dollar than the dollar coin; two +half-dollars or four quarters or ten dimes contained 93.52 cents worth +of silver. Since then silver bullion has become worth much less in +terms of gold, and for years past the bullion value of the silver in +a dollar of silver small change has been between 40 and 60 cents. Why +then has the fractional coinage a monetary value equal to the standard +money, dollar for dollar? + +The answer is, because it is artificially limited in quantity, so that +it does not pass the point of saturation in the field of its use. Its +value rests on its monetary use; it is fiduciary money, not commodity +money. It is limited simply by letting "the needs of the people" +determine its amount. This is done by issuing it only in exchange for +other money of the larger denominations, and by redeeming it in other +money on demand. Fractional coins are issued on the request of banks +in exchange for standard money. One needing "change" gets it at the +bank; when the bank finds its supply falling short it gets more from +the government mints. As business increased in 1898, the demand for +nickels, dimes, and quarters became unprecedented, and the mints +worked night and day to supply them. If these coins were made in +great quantities and forced into circulation by the government through +paying them out to creditors and officials, their quantity would +become excessive and they would fall in value (be at a discount) +compared with standard money. But as this is not done, and as, +moreover, they are redeemed on demand at the treasury (and practically +at every bank and post office) in other money, any slight tendency +to depreciation in any locality is at once corrected. As it is, the +government makes a seigniorage profit on the fiduciary coinage, as +shown in the following table. [5] The fractional coinage is maintained +at a parity with the standard money in accordance with the monopoly +principle, expressed in the limitation of the amount. + + _Receipts:_ + + Earnings (charges for refining, assaying, manufacture + for other countries, etc.)......................... $392,000 + Bullion recovered, by-products, old materials, etc... 143,000 + Profits on seigniorage, subsidiary silver............ 3,013,000 + Profits on seigniorage minor coinage and recoinage... 2,387,000 + ---------- + Total receipts.......................................$5,935,000 + + _Expenditures_: + All kinds............................................$1,138,000 + ---------- + Net revenues from mint service.....................$4,797,000 + +§ 5. #Worn coins and Gresham's law.# Coins may be light-weight as the +result of another cause--namely, the abrasion (wearing off) of the +coins in circulation. Nearly always when this has occurred the worn +coins have still been accepted as money,[6] and ordinarily without any +depreciation. That is to say, they have a value as money greater than +the value of the bullion that is in them. Everybody takes them without +hesitation as readily as if they were full weight. If, however, at +this point, new full-weight coins are put into circulation, these at +once disappear while the old ones remain in circulation--a fact that +has always been somewhat mystifying. + +In explanation of the phenomenon was formulated "Gresham's law" of +the circulation side by side of coins of different bullion value: bad +money drives out good money. Sir Thomas Gresham (whose name has but +recently been given to this so-called law), explained the principle +to Queen Elizabeth when counseling her regarding the recoinage of the +debased money of the realm as was done in 1560. He showed that when +old, worn coins were in circulation and the mint began putting out +full-weight coins, the old lighter ones remained as money, while the +new ones, being heavier, were picked out by jewelers and by those +needing to send money abroad. + +Gresham's law has a paradoxical wording and is frequently +misunderstood. "Bad" money means not counterfeit money, but merely +money that has not as great a bullion value compared with its money +value as some other kind of money then in circulation. But not every +piece of such money will drive out every piece of good money. The law +applies only under certain conditions, and within certain limitations. +The "good" will be driven out only if the total amount of money in +circulation is in excess of what would be needed if all were of full +weight and of best quality. Paradoxically speaking, if there is not +too much of the bad money, it is just as good as the good money. But +even if good money is driven out, it may not leave the country. It +may be hoarded, or be picked out by banks and savings-institutions to +retain as their reserves, or be melted for use in the arts. Gresham's +"law" becomes thus a practical precept. As applied to the plan of +recoinage it is: Withdraw the worn coins as rapidly (in equal numbers) +as you put new coins into circulation. + +The continued circulation of "bad" money along side of "good" money +(light-weight along side of full-weight coins), so long as the total +number of coins is not in excess of the money demand for full-weight +coins, is explained thus on just the same principle as is the +circulation at parity of a light-weight fractional coinage, in the +preceding section. + +§ 6. #A general seigniorage charge on standard money.# The fiduciary +coinage problem presents itself under a some-what different guise in +case a seigniorage charge is made on all coinage, even of that metal +used as the standard unit. In this case coinage is free but not +gratuitous. In this case no bullion is brought to the mint unless the +coined pieces the owners receive have a value equal to the bullion +value plus the seigniorage charge. The power to impose a seigniorage +charge is a monopoly power. Artificial limitation is present. +Evidently, the number of coins that can be issued without depreciation +is limited to that number which would circulate if they were made +full weight without a seigniorage charge.[7] This number of pieces of +full-weight metal is the saturation point of the money demand of the +country. If more than that could in any way be put into circulation it +would become worth less as money than as bullion, and would be melted +or exported. + +Assume that this full supply of money at a given moment is 100,000 +pieces or dollars; then consider the effect of imposing a seigniorage +charge of ten per cent on further coinage. The government alone having +the right of coinage, the need of money would give the circulating +medium a monopoly value. The value of the money would rise. When +it had risen until the coin would buy any more than one-ninth more +bullion than was in it, the citizens would begin to take metal to the +mint. After the ten per cent charge was taken out they would receive a +coin which, the containing one-tenth less bullion, would be worth +very nearly the same as the metal taken to the mint. No considerable +depreciation could take place unless the volume of business fell off +so that less money was needed than before. In that case there would +be no outlet for the excess of coins until they fell to their bullion +value, i.e., till they lost the entire value of the seigniorage, the +monopoly element in them. Melting or exporting them before that point +was reached would cause to the owner the loss of whatever element of +seigniorage value they contained. We thus have arrived at the general +principle of seigniorage: when the number of coins issued is limited +to the saturation point, a seigniorage charge does not reduce their +money value; they are worth more as money than as bullion. And this +holds good of a large seigniorage charge as well as of a small one, +even up to the extreme limit of a charge of 100 per cent. In this last +case the government would retain the whole of the bullion brought to +it and would give in return a piece of money made of material (metal +or paper) with a negligible value. + +§ 7. #Coinage on governmental account.# The fiduciary coinage problem +may be presented also when coinage is not free, and the times and +amount of coinage are determined by law or by legally authorized +officials. In this case the bullion must be obtained by purchase +in the open market (and paid for by some form of legal money, or by +bonds). Coinage is then said to be "on governmental account." + +Now, assuming that the normal money-demand (the volume of business, or +sum of exchanges) remains unchanged, let us consider what will result +if the government begins to issue money in this way, when, as in the +preceding case, 100,000 units of full-weight money are in circulation. +This action might be taken most simply by recoining all the +full-weight pieces that came into the treasury, making them contain +1/10 less precious metal, and paying out 1111 pieces for every 1000 +received. Every time this was done there would be an excess of 111 +pieces above the normal money-demand, and 111 full-weight pieces would +be exported or melted (Gresham's law). The process (in strict theory) +may be repeated 90 times, at which point 90,000 full-weight coins have +been received, 100,000 light-weight coins have been issued to take +their place and 10,000 full-weight coins have gone out of circulation. +The total seigniorage charge would be 1-10 of 90,000, or 9000 units. +No depreciation has taken place, and the pieces, by reason of their +limitation, bear a money value in excess of the bullion that is in +them. + +Now the government, with the next 1000 pieces collected by taxation, +could buy enough bullion (in the open market) to make another 1111. +The excess of 111 pieces could not now be promptly removed by the +melting down or exporting of 111 coins, for all those remaining in +circulation have a bullion value 1/10 below their money value. As this +process is repeated the excess must continue to grow from 100,000 to +111,111, and the value of the money piece in terms of bullion continue +to fall from 10 to 9. At this point the 111,111 pieces would contain +just the same amount of bullion and have just the same value as the +100,000 pieces did before. Thereafter no further profit would accrue +to the government from issuing coins of that weight. To make a further +profit it must again reduce the amount of pure metal in the coin. + +This process was often repeated in the Middle Ages. A ruler, either by +making a higher seigniorage charge or by coining on his own account, +debased the quality or reduced the weight of the money of his realm. +For a time the new coins, having the same monetary use, circulated at +par with the old coins. The ruler, pleased with this almost magical +power of getting a revenue with little trouble, continued to issue +coins until suddenly the heavier coins began to be exported or melted, +and the value of the other money fell, to the mystification alike of +the prince and of his people. The reason is now perfectly plain: the +number of coins was not kept within the proper limits and they went +down to their bullion value. The only way a further profit could be +made in this way was to debase the coin again. By successive steps the +coinage came to consist almost entirely of cheaper alloy. + +§ 8. #The gold-exchange standard.# In a number of silver-using +countries and colonial dependencies near the end of the nineteenth +century, the fluctuations of the value of silver in terms of gold was +a constant source of difficulty in the payment of foreign obligations +to gold standard countries. Yet there were strong reasons in the +habits of the people and in the industrial conditions of the country +to forbid the adoption of gold and the disuse of silver as the actual +money in circulation. The method adopted, that of the gold-exchange +standard, involved these features. + +(1) Closing the mints of the country to the free coinage of silver, as +was done most notably in India in 1893 and in Mexico in 1904. + +(2) Adoption of a fixed ratio of exchange between the silver coins in +circulation and some gold coin which is made the standard of value in +all transactions (as the dollar or the pound sterling), the money in +circulation thus being all or nearly all of a fiduciary nature. + +(3) Regulation and limitation of the amount of money in circulation so +that a fixed parity between it and gold may be maintained (a) by the +limited issue of coins only on governmental account, (b) by the sale, +at a fixed rate, of foreign exchange bills payable abroad in the +standard unit, the money paid for the bills being withheld from +circulation in a special reserve, (c) by the purchase of foreign bills +of exchange at a fixed rate, thus paying out and putting again into +circulation some of the fiduciary money in the special reserve. + +These monetary changes furnish numerous illustrations and +demonstrations of the quantity theory of money as applied to the +entire circulating medium of a country.[8] + +§9. #Nature of governmental paper money.# The problem of seigniorage +presents itself in its most extreme form when money is made of paper. +Paper money is issued either by a government or by a bank. We will +consider governmental notes here, reserving until Chapter 7 the case +of bank notes. + +The issue of paper money in some cases grew out of the practice of +debasing metal. However this may have been, governmental paper money +may be looked upon as money for which a seigniorage of one hundred per +cent is charged. The gain of seigniorage from paper money is greater +and is just as easily secured as that from coinage of metals. +Governmental paper money is called "political money," in contrast +with commodity money. However, all coins that contain an element of +seigniorage, or monopoly value, are to that degree "political money." +The typical paper money is irredeemable; that is, it cannot be turned +into bullion money on demand. It is simply put into circulation, +usually with the "legal-tender" quality. Money has the _legal-tender_ +quality (as the term is used in the United States) when, according to +law, it must be accepted by citizens as a legal discharge for debts +due them, unless otherwise provided in the contract. The prime purpose +of making money legal tender is to reduce the danger of dispute as to +payments; but another purpose often has been to force people to use a +depreciated money whether they would or not. The purpose of the issue +of political money is usually to gain the profit of seigniorage for +the public treasury, and often it has been the desperate expedient +of nearly bankrupt governments. Governmental paper money differs +from bank notes in that its value does not necessarily depend on the +promise of redemption by the issuer. It differs from promissory notes +and bonds in that its value is not based on the interest it yields, +but mainly on its monetary uses. The issue of paper money may save the +government the payment of interest on an equal amount of bonds. The +promise to receive paper in payment for taxes or for public lands may +help to maintain its value by reducing its quantity, but nothing short +of its prompt redemption in standard coins makes it truly redeemable. + +§ 10. #Irredeemable paper money.# The most notable examples of paper +money in the eighteenth century were the American colonial currencies, +the continental notes, and the French assignats. In all the American +colonies before the Revolution, notes or bills of credit were issued +which were in most cases legal tender. Parliament forbade the issues, +but to no effect. Without exception they were issued in large amounts +and without exception they depreciated. The continental notes were +issued by the Continental Congress in the first year of the war +(1775), and for the next five years. The object at first was to +anticipate taxes, and it was expected that the states would redeem and +destroy the notes, but this was not done. The notes passed at par for +a time, but depreciated rapidly as their number increased. It has been +estimated that the country had less than $10,000,000 of coin before +the war, and when, in 1780, over $200,000,000 of notes were in +circulation they were completely discredited: hence the phrase "not +worth a continental." Specie then quickly came back into use. A few +years later the leaders of the French Revolution, failing to learn the +lesson of the American experience, issued, on the security of land, +notes called assignats in such enormous quantities that they became +worth no more than the paper on which they were printed. The paper +money issued under the English bank restriction act of 1797-1820 is +especially notable because it gave rise to the controversy which did +much to develop the modern theory of the subject. Parliament forbade +the Bank of England to redeem its notes in coin because the government +wished to borrow the coin the bank held. The result was the issue of +a large amount of bank money not subject to the ordinary rule of +redemption on demand. It was virtually governmental paper money. The +notes depreciated and drove gold out of circulation, and it was not +until 1821 that specie payments were definitely resumed. + +The United States, under the Constitution, did not try legal-tender +paper money till 1862 when paper notes (called greenbacks, because of +the color of ink with which the reverse side was printed) were first +issued, later increased to a total of about $450,000,000. Other +interest-bearing notes were issued with the legal-tender quality and +circulated as money to some extent. Greenbacks depreciated in terms +of gold, and gold rose in price in terms of greenbacks until, in June, +1864, it sold at 280 a hundred. Fourteen years elapsed after the war +before these notes rose to par, in terms of gold (in December, 1878), +and they became legally redeemable in gold January 1, 1879. This was +called "the resumption of specie payments." + +Almost every nation has at some time issued political money. During +the Franco-Prussian War in 1870, France, through the medium of its +great state bank, made forced issues of notes of a political nature, +which only slightly depreciated. Many countries--Russia, Austria, +Portugal, Italy, and most of the South and Central American +republics--have had or still have depreciated paper currencies. + +At once, at the outbreak of the great war in 1914, the governments of +the warring nations began to exercise a strict control over the issue +of paper money, sought to gather into the public treasury all the +specie, and to give paper (either governmental notes or bank +notes) practically a forced circulation, making it almost the sole +circulating medium. The values of the paper moneys have fallen in all +the countries, especially in Germany and Russia. In such cases the +money partakes somewhat of the characters both of bank notes and of +political money. Resorted to in desperate extremities, political +money has usually proved to be a costly experiment. A result usually +unintended is the derangement of business and of the existing +distribution of incomes. The rapid and unpredictable changes in prices +gives opportunity for speculative profits, but injure legitimate +business. This incidental effect on debts and industry offers the main +motive to some citizens for advocating the issue of paper money. It +is peculiarly liable to be the subject of political intrigue and of +popular misunderstanding. It is this danger, more than anything else, +which makes political money in general a poor kind of money. + +§ 11. #Theories of political money.# There are two extreme views +regarding the nature of paper money, and a third which endeavors +to find the truth between these two. First is that of the +cost-of-production theorists, who declare that government is powerless +to influence value, or to impart value to paper by law. They deny that +there is any other basis for the value of money than the cost of the +material that is in it. Money made of paper, on a printing press, has +a cost almost negligibly small, and, therefore, they say it can have +no value. The facts that it does circulate and that it is treated as +if it had value are explained by the cost-of-production theorists as +follows: while the paper note is a mere promise to pay, with no value +in itself, it is accepted because of the hope of its redemption, just +as any private note. Depreciation, according to this view, is due +to loss of confidence; the rise toward par measures the hope of +repayment. + +Taking a very different view, the extreme fiat-theorists assert that +the government has unlimited power to maintain the value of paper +money by conferring upon it the legal-tender quality. The meaning of +_fiat_ is "let there be," and the fiat-money advocates believe that +the government has but to say, "Let there be money," to impart value +to a piece of paper. The typical fiat-money advocates in the United +States were the "Greenbackers," who wished to retain the greenbacks +issued in the Civil War and to increase the amount greatly. They saw +in paper money an unlimited source of income to the government. +They proposed the payment of the national debt, the support of the +government without taxes, and the loan of money without interest to +citizens. All might live in luxury if the extreme fiat-money theorists +could realize their dreams. The depreciation that has taken place +in nearly every case where government notes have been issued, the +fiat-theorists declare to be due to a mild enforcement of the law of +legal tender. To them the fact that paper money may circulate for +a time at par appears a reason why it always should. They do not +recognize that there is a saturation point in the use of money, and +that its use is still further limited by the fear of larger issues. + +The almost universally accepted opinion among economists rejects both +of these views, tho recognizing in each a certain limited aspect of +the truth. The cost-of-production view quite overlooks the features +in which paper money differs from ordinary credit paper. The value of +one's promises to pay depends on his reputation and his resources; the +resources constitute the basis of value. Bonds have value because they +yield interest and are payable at a definite time in standard money. +But paper money, lacking this basis for its value, has another basis +in its money use, in its power to buy goods. + +The theory of paper money here outlined makes the value of paper money +a special case of monopoly value. As the power of any private monopoly +over price is relative, not absolute, so is that of the government +over the value of political money. The money use is the source +of value of the paper notes. It is this which gives the economic +condition for value in paper money and strictly limits the power of +the government--a fact overlooked by the fiat-theorists. Business +conditions remaining unchanged, the limit of possible issue without +depreciation is the number of units in circulation before the paper +money was issued, the saturation point of full-weight and full-value +coins. Whenever governments have failed to stop at that point, +paper money has depreciated. But under wise and honest control and +regulation political paper money might serve the monetary function +very effectively. + + +[Footnote 1: The problem of a legally authorized double standard, +bimetallism, is treated in the next chapter. An irredeemable paper +money may be, for a time, the standard money.] + +[Footnote 2: The faith _(fides)_ is not always that the issuer of the +money (whether it be a bank or the government) will redeem the money +on demand at any future time; for fiduciary money may circulate while +irredeemable, that is, either carrying no promise of redemption in the +standard money or in fact not being redeemed. Yet undoubtedly actual +redemption on demand or a good prospect of future redemption is one +of the circumstances stimulating the faith and the readiness of each +person in turn to receive fiduciary money.] + +[Footnote 3: In the broad sense as above defined, ch. 3, sec. 10.] + +[Footnote 4: See next section on worn coins.] + +[Footnote 5: Receipts and Expenditures of Mint Service in 1914:] + +[Footnote 6: It makes no difference what may be deemed the cause of +their acceptance; whether it be habit, public opinion in business +circles, or the act of law making them a legal tender; the essential +thing is that they continue to be accepted as money.] + +[Footnote 7: In this and following numerical examples no account is +taken of the possibility that the standard metal may depreciate in the +world market in terms of all other goods as a result of its diminished +use as money in one or more countries. This properly belongs in a +complete theoretical treatment of the subject.] + +[Footnote 8: See "Modern Currency Reforms" (1916), by E.W. Kemmerer, +professor of Economics and Finance in Princeton University, for a +detailed treatment of this remarkable series of monetary changes, +probably unequaled in instructiveness to the student of monetary +theory.] + + + + +CHAPTER 6 + +THE STANDARD OF DEFERRED PAYMENTS + + § 1. Relative positions of gold and silver; historical. § 2. Gold + production, first half of nineteenth century. § 3. Concept of the general + price level. § 4. Index numbers. § 5. Gold production and monetary + legislation, 1850 to 1879. § 6. Definition of the standard of deferred + payments. § 7. Increasing importance of the standard. § 8. Fluctuating + standard and the interest-rate. § 9. Notable changes in prices. + § 10. Nature and object of bimetallism. § 11. The movement for + national bimetallism in America. § 12. Rising prices after 1896. § 13. + Defectiveness of the gold standard. § 14. Various ideal standards + suggested. § 15. The tabular standard. + + +§ 1. #Relative positions of gold and silver: historical.# It is not +possible within the limits of our space to enter here into the details +of the world's monetary history. It must suffice for our purpose to +sketch briefly the period preceding the nineteenth century. Both +gold and silver were used as moneys in Europe in the Middle Ages, tho +silver was much the more common. The two metals continued to be used +side by side in Europe and in the new settlements in America, silver +for the smaller and gold for many of the larger transactions. +Both were made legalized forms of money (and standards of deferred +payments) in units of specified weights and fineness, the weights +bearing a certain ratio to each other. Thus it was possible for a +debtor to discharge his obligations with that one of the two metals +that at the moment was the cheaper at the legal ratio. Fluctuations in +the prices of gold in terms of silver were at times such as to cause a +large part of the full-weight coins of one or the other metal to leave +circulation (in accordance with Gresham's law). So from time to time +the ratio was slightly changed by law in the various countries to +permit the circulation or to bring back the kind of money that had +been undervalued in terms of the other. But it is a very remarkable +fact that from the time of Xenophon until the discovery of America +(a period of nearly 2000 years), the market ratio of silver to +gold bullion in Europe remained pretty close to 10 to 1, being only +temporarily altered by sudden and unusual occurrences. From 1492 to +1660 the ratio changed to 15 to 1, where it remained with remarkable +stability until about the year 1800. At the establishment of the mint +of the United States in 1792 that ratio was found to exist. Men +had come to look upon the ratio of 15 to 1 as the natural order, +determined (it was sometimes said) providentially by the deposit of +the two metals in due proportion in the earth's surface. But as we +now see it, this in part was mere chance and in part was due to the +equalizing effect of the wide use of both metals so that the one could +be easily substituted for the other in case of a divergence of the +market ratio from the legal ratio as money. From the year 1500 until +1800 the Western hemisphere was the main source of the precious +metals, the alluvial deposits were widely scattered, were gradually +discovered, were usually found in small quantities, and were +extracted in primitive ways. The existing stock of precious metals, +gold and silver, more than other products of mine and field, is at any +time the accumulation of many years' production, and is changed very +little, proportionally, by a large change of output in any year or +short period. It changes in volume as does a glacier fed by the snows +of many years, not as does a river, filled by a single rainfall. For +a short time after the discovery of America (from 1493 to about 1544) +the average coining value[1] of the world's production of gold, +nearly all found in America, was about 1-1/2 times as great as that of +silver; but thereafter for three centuries from about 1545, the annual +value of silver produced was between 1-1/2 to 4 times as great as that +of gold, averaging about twice as great. Silver was the money chiefly +in use in the ordinary transactions in all of the principal countries +of the world. + +§ 2. #Gold production, first half of nineteenth century.# We have now +to note some great changes in the production of gold in the nineteenth +century, changes both absolute and relative to that of silver. The +market ratio of the two metals had been gradually changing before 1792 +and continued to change. Gold was slowly becoming more valuable in +terms of silver and the legal ratio of 15 to 1 in the United States +(at which both metals were admitted free to the mint) proved to have +undervalued gold. Gold largely left circulation and silver and bank +notes formed the greater part of our circulating medium. Then, in +1834, soon after the production of gold had begun to increase somewhat +more rapidly than that of silver, the legal ratio of the United States +was changed to 16 to 1. This brought a good deal of gold back into +circulation and gradually drove out most of the silver (the heavier +coins disappearing first). + +In the decade 1841-50 the average annual value of the gold production +had, for the first time since the early sixteenth century, exceeded +that of silver. Then, from 1848 to 1850, came the great gold +discoveries in California and in Australia. In 1851 the value of gold +produced was one and one-half times that of silver; in 1852 was three +times, and in 1853 four times as great; and then slowly declined, but +continued every year as late as 1870 to be over twice as great. +This caused the displacement of silver by gold and drove out a large +proportion of the silver coins of smaller denominations. This led to +the law of 1853, authorizing subsidiary coinage (on government account +only) of lighter weight.[2] Let us observe the effect on prices that +was brought about by the discoveries of 1848-49, and, first, we +must consider briefly the method of measuring and expressing general +changes in prices. + +§ 3. #Concept of the general price level.# The price of any good +is some other good or group of goods given for it in trade.[3] The +standard unit of money coming to be the most convenient expression for +price (whether or not money be actually passed from hand to hand in +that particular trade), prices usually are monetary prices, and +more specifically are prices in gold, or in silver, or in whatever +constitutes the standard money unit. But the price of each good is +a definite, separate fact, which expresses the ratio at which that +commodity is sold. The price of any particular kind of goods may +fluctuate in either direction as compared with the prices of other +goods at the same time. For example, iron and many other goods +may rise while wheat and many other goods fall in price. There is, +therefore, no such thing as an actual _general_ change in the prices +of goods in terms of money, but it may be seen that the prices of +large classes of goods, often of nearly all goods, change upward or +downward at the same time and in the same general direction. We +thus have need to distinguish between changes in the valuations of +particular kinds of goods in terms of each other and general changes +in the valuation of a number of different goods in terms of the +monetary unit. + +To get some idea of whether such a general trend occurs, the algebraic +sum of all the changes in the particular prices of a selected group +of goods may be taken, and for convenience this may be reduced to an +average price (by dividing the sum by the number of articles). Such +an average is called a general price and, when comparing it with +the general price of another time, we speak of changes up or down +in _general prices,_ or in the _general scale of prices,_ or in the +_price level._ + +When gold is the standard unit, its value is the converse of general +prices; as prices go up the value of gold goes down, and gold is said +to _depreciate_. As prices go down, the value of gold goes up and gold +is said to _appreciate_. Rising prices mean falling value of gold (and +at the same time falling purchasing power), and _vice versa._ + +[Illustration: FIG. 2. INDEX NUMBERS OF PRICES. The four series of +prices here shown begin at different periods; the American in 1840 +(Aldrich report 1840-1889 and Bureau of Labor from 1890 on); the +English in 1846; the German in 1851; the French in 1857. We have +adjusted each of these series to a base of the average prices for +1890-1899, in accord with the basic period used by the American Bureau +of Labor. + +The reader must be on his guard against misunderstanding the diagram. +It does not represent the heights of the prices of the different +countries compared with each other either at any one date or for the +entire period. For example, the heights of the lines at the year +1860, do not indicate that American prices were lowest and French the +highest at that date, or, indeed, tell anything whatever directly +on that point. The various series of prices are compared within +themselves, every year with the average of the prices for 1890-1899 in +each country, respectively. The only comparison allowable, therefore, +between the several lines, is that between the fluctuations, both as +to their times and as to their directions, both as to the larger tidal +movements and as to the lesser wave-like movements within the business +cycles. The Figure does indicate that both American and German prices +have risen somewhat as compared with the English and French prices, +since the period before 1860. + +This figure should be studied in connection with Figure 1, in ch. +4, sec. 9, on gold production. The Figures indicate that the rapidly +growing monetary use of gold offset a large part of the effects of +increasing gold production between 1840-1860 and 1884-1914. Between +1884 and 1896 prices actually continued to fall after gold production +had begun to climb. Likewise the growing monetary use of gold +accentuated strongly the effects, between 1873 and 1883 of a +comparatively small decrease in gold production.] + +§ 4. #Index numbers.# The process of calculating general prices and +changes in them has in it, inevitably, something of arbitrariness and +incompleteness. For not all prices can be included, but only those +of articles of somewhat standardized grades and those that are pretty +regularly sold in markets where prices are publicly quoted. Any list +of articles that can be selected is of unequal importance to different +persons and classes of persons, at different places, at different +times, and for different purposes. And yet the study of general prices +as shown by any broadly selected list reveals changes which in some +measure affect the interests of every member of the community. + +General prices are conveniently compared from one time to another +through the use of index numbers. An _index number_ of any article is +the per cent which its price at any certain date is of its price at +another date (or of the average for a series of prices) taken as a +base or standard. Thus if the average price of cotton in the base year +were 10 cents (taken as 100) and the price rose to 12 cents, the index +number would be 120. _A tabular index number_ is the per cent which +the price of a selected group of articles at any certain date is of +the price of the same group of articles at a date which has been taken +as the base.[4] + +The principal index numbers of the leading countries are here shown. +The fact that from 1862 to 1879 inclusive prices in the United States +were expressed in an irredeemable paper standard makes comparisons for +that period misleading. A better idea is obtained by using as the base +for each of the several series, the average of prices in each country +for the years 1890 to 1899. + +§ 5. #Gold production and monetary legislation, 1850 to 1879#. The +unprecedented increase in gold production between 1849 and 1853, and +the continuance of production in volume about four-fold as great as +that of the decade 1840-49 was reflected at once in a rise of prices. +This was a period of prosperity in business culminating in the +crisis of 1857 (felt more or less in all the leading countries). This +prosperity accelerated the effect of increasing quantities of the +standard money. Credit was stimulated and the rate of circulation and +the efficiency of money were increased. Prices rose to a temporary +maximum in 1857 and then fell as a great international financial +crisis occurred. The great new supplies of gold had been readily taken +("absorbed") into the monetary circulation of the world, to meet +the needs of rapidly growing commerce and industry. In the European +countries,[5] prices in terms of gold, tho fluctuating somewhat, kept +at about the same level from 1860 to 1870. The years 1871 and 1872 +were very prosperous and showed rapidly rising prices which reached a +maximum in 1873, when a financial panic occurred. + +In that very year, just as the gold production for the first time +since 1851 had fallen below $100,000,000, several notable changes in +monetary legislation were made which made gold more important in the +circulation of a number of countries. + +In 1873 Germany made gold the standard throughout the new German +Empire (having prepared the way by legislation in 1871 which made +gold a legal tender alongside of silver), and provided that silver was +thenceforth to be used only in the subsidiary coinage. The same year +Belgium, and the next year the other countries of the Latin Union +(France, Switzerland, and Italy) took steps which resulted in +demonetizing silver; that is, in limiting its coinage to governmental +account, and in making gold their one standard money. + +The United States at that time had neither gold nor silver regularly +in circulation (except in California), and there was a long-continued +discussion of "a return to specie payments," which meant the return +to a metallic standard, and the redemption of greenbacks on demand. +Meantime in 1873 a law was passed making the gold dollar "the unit of +value," and dropping out the standard silver dollar from the list of +coins authorized to be issued at the mint.[6] From 1873 until 1879, +prices (in greenbacks) were falling in this country very rapidly +because the country with the increase in population, wealth, and +business, was "growing up to" its unchanging currency supply. For a +like reason at the same time gold prices throughout the world were +falling. While this country was lowering its level of prices from an +inflated paper money to a gold commodity basis, the gold basis itself +was sinking to a lower level. The very demand of our treasury and +banks for gold caused the retention of our own gold product (which +between 1864 and 1876 had been nearly all exported) and required an +enormous net importation of gold between 1878 and 1888. This +reduced suddenly by one-half the amount available each year from our +production for the rest of the world. + +§ 6. #Definition of the standard of deferred payments.# These various +changes in the purchasing power of the standard money had great +effects upon industrial conditions. Particularly had they shifted the +positions and claims of debtors and creditors, because of the enormous +importance of money as "the standard of deferred payments," Let us now +get a more definite understanding of that term. + +As a medium of exchange, money comes to be the unit in which most +prices are expressed and compared; in other words, it becomes +the common denominator of prices.[7] This makes it also the most +convenient unit in which to express the amount of credit transactions +and of existing debts.[8] A credit transaction is a trade lengthened +in time; one party fulfils his part of the contract, the other party +promises to give an equivalent at a later date. The equivalent may be +in any kind of goods; for example, in barter one may part with a horse +on the promise of a cow to be received later; or a small horse on +the promise of a large one; or a flock of sheep on the promise of +its return at the end of the year with a part of the increase of the +flock. A simple standard in which to express the debt is the thing +borrowed, as horse, sheep, wheat, house. Again, the thing to which +the value of debts is referred may be a thing quite different from the +goods borrowed and, with the growth of the monetary economy and the +use of the interest contract, money comes more and more to be used as +the standard. At length the law declares that, in the absence of any +other agreement, the amount of a debt is to be payable in terms of the +unit of standard money, which thus is made legal tender as well as +the customary standard of deferred payments. A _standard of deferred +payments_ is the thing of value in which, by law or by contract, the +amount of a debt is expressed and payable. + +§ 7. # Increasing importance of the standard.# Until the use of money +develops, the use of credit is difficult and limited; it becomes +easy when the value of all things is expressed in terms of a common +circulating medium. It therefore generally is true that the importance +of money as the standard of deferred payments increases with the +use of money as a medium of trade. The volume of outstanding debts +expressed in terms of money now very greatly exceeds the total value +of the circulating medium. Changes in the general level of prices +have, therefore, great effects upon all existing debts. The value of +all debts changes in the same proportion as does that of the standard +unit of money; when this rises or falls in value, it means increase +or reduction, in the same ratio, of the purchasing power of every +creditor. It is as if he had in his possession metal dollars equal +in amount to the face of the debt, and they had changed by so much +in purchasing power. The debtor's interests in such changes are, of +course, just the reverse of the creditor's interests. + +Outstanding contract debts may be roughly divided into two classes: +short-time loans, running less than a year; and long-time loans, +running for a year or more.[9] Fluctuations are rarely rapid and great +enough to affect appreciably the debtors and creditors in the case +of short-time loans. The results are appreciable in the case of loans +running from one to five years, and may be very great in the case of +loans made for still longer periods, such as the bonded indebtedness +of nations, states, municipalities, and business corporations, and +as mortgages given by farmers on their land or by owners of city real +estate. A multitude of interests are thus affected by a change in the +value of money. When money rises in purchasing power, receivers of +fixed incomes are gainers. When it falls in purchasing power, they +lose. Receivers of fixed incomes from loans include not merely private +investors, but also many educational and charitable institutions which +dispense their incomes for public purposes. Wages and salaries of many +kinds go up and down less rapidly than do other prices, and thus +to some extent wage-earners are in the position of passive +capitalists[10] as regards changes in the monetary standard. In a +capitalistic age, therefore, almost every individual is affected in +some way by a change in the value of money. + +§ 8. #Fluctuating standard and the interest-rate.# In connection with +the standard of deferred payments there is presented a problem of +the effect that fluctuations of the standard may have upon the +interest-rate.[11] As the general price-level falls or rises, the +monetary standard conversely appreciates or depreciates.[12] If these +changes are slight in amount and imperceptible in their direction +they may not affect considerably the motives of borrowers and lenders. +Therefore, the rate of interest this year in long-time loans would be +just that resulting in the expectation, on all hands, of a stationary +level of general prices. Suppose that rate to be 5 per cent on the +standard investment (such as real-estate loans and good bonds). Then +the lender of $1000 will receive each year a $50 income and at the end +of the investment period $1000 principal, each dollar of which will +purchase the same composite quantum of goods that a dollar would have +purchased at the time the loan was made. Likewise, the borrower would +pay interest and principal in a standard that reflected an unchanging +general level of prices. But, now, if the general level of prices +unexpectedly falls 1 per cent within the year, the creditor of a loan +maturing at the end of the year would receive (principal and interest) +$1050 which will purchase 1 per cent more goods per dollar than the +sum he loaned, or (approximately) $1060 worth of goods. Hence, he +has received, in quantum of goods, a yield of 6 per cent on his +investment. If this change continues for five years, the lender of a +five-year loan would receive each year $50 having a purchasing power +successively 1, 2, 3, 4, and 5 per cent greater than the same sum +had at the making of the loan; and at the end of the five years would +collect the principal, having a purchasing power 5 per cent greater. +The lender, on his part, would have to pay interest and repay the +principal in a money that is to be obtained only in exchange for a +larger sum of goods than that which could be bought with each dollar +that he borrowed. This means that, with individual exceptions, +creditors generally gain and debtors lose by falling prices. + +But this is fully true only in respect to loans already made. For just +to the extent that such a movement of prices comes to be more or less +regularly in the same direction, both borrowers and lenders are able +to take it into account, and as experience shows, do take it into +account.[13] When prices fall men become more eager to sell wealth, to +lend the proceeds, and more reluctant to borrow for investment at the +prevailing rate of interest and at the prevailing prices. There is an +incentive to divest one's self of ownership (e.g., by selling stocks) +and to become a lender (e.g., by buying bonds). This whole situation +is reversed in a period of rising prices. The result is that the rate +of interest in any long continued period of falling prices (such as +from 1873 to 1896) has a trend downward and in a period of rising +prices (such as from 1897 to 1915) has a trend upward. This movement +of readjustment would not go on indefinitely, even if the same +trend of prices continued; for in the strict theory of the case the +adjustment would be complete when the interest rate had changed by +just the amount of the annual change in the level of prices. For +example, if 5 per cent is the static normal rate of interest, then +when prices are falling 1 per cent each year, the adjusted rate of +interest would be 4 per cent; and when prices were rising 1 per cent +each year, the adjusted rate of interest would be 6 per cent. Such +adjustments serve to some extent to neutralize the effects of changes +in the standard of deferred payments so far as concerns new loans made +in view of just such a change and in expectation of its continuance. +But no one can foresee exactly, and most persons take little account +of, such a change until it has continued for several years in the +same direction. The adjustment is therefore never very prompt or very +exact. In some years the general level of prices has risen more than +5 per cent, or more than enough to offset the entire interest received +by most lenders. A man with dollars to invest would have been as well +off if he had kept them buried during that period.[14] + +§ 9. #Notable changes in prices#. In most cases the true effects of +monetary changes escape recognition. In a few cases, however, the +change has been so great as to cause an economic revolution. Such +was the change in prices following the discovery of America, which +occurred soon after the old feudal dues had come to be generally +expressed in terms of money instead of labor services. In modern +times, since the mass of debts has become greater than ever before, +such changes bring even graver economic consequence. The increase in +the output of gold in 1849-57,[15] caused what was the most rapid, if +not the greatest money inflation that had occurred since the sixteenth +century. The substitution of gold for silver by some countries at that +time, by making a great additional market for gold, helped to check +the fall in its value. Indeed, a considerable decline in the output +of gold after 1870 combined with its widening use to cause in 1873 the +beginning of a great fall of gold prices. The resulting increase +in the burden of outstanding debts was felt by all debtors, but +particularly by great numbers of the agricultural classes both in +Europe and in America. Their tribulations were aggravated by the fact +that at that time (especially from about 1873 to 1896) the prices +of their products were falling much more rapidly than were general +prices, as a result of the very rapid extension of the agricultural +land supply.[16] There was complaint, agitation, and demand for relief +on the part of many interests in France, Germany, England, and the +United States. As a result, the money question became in this country +a leading political issue and continued to be such between 1873 and +1900. + +§ 10. #Nature and object of bimetallism.# First came "the greenback +movement," which, lasted until after 1880.[17] This then gave way to +an agitation for bimetallism. _Bimetallism_ is the plan of using two +metals as standard moneys. Bimetallism is legally authorized when both +metals are admitted to the mints for free coinage at an established +ratio of weight. Bimetallism may be legally authorized, but not +actually working, for, if the market-value long continues to vary +appreciably from the legal ratio, only one of the metals may in fact +be left in circulation. This situation is called _limping_ bimetallism +(or the halting double standard), tho this is a contradiction of +terms. National bimetallism is confined to a single country, as was +the case in the United States before the Civil War, or in France +before 1867. International bimetallism is that resulting from an +agreement among several nations to use two metals on the same terms. + +The theory of bimetallism is that the government can act on the value +of the two metals through the principle of substitution. The metal +tending to become dearer will not be coined, the other will be coined +in greater quantities. The degree of influence that can thus be +exerted on the value of the two metals depends on the size of the +reservoir of the metal that is rising in value. When it all leaves +circulation, the law on the statute book permitting it to be coined +becomes a mere phrase. In such a case there is bimetallism _de jure,_ +but monometallism _de facto._ The greater the league of states the +greater is the likelihood that the plan will continue to work. The +only notable historical instance of international bimetallism is +that of the Latin Union, which united France, Belgium, Italy, and +Switzerland in an agreement remaining actually in force from 1866 to +1874. A strong movement developed between 1878 and 1892 in favor of +forming a great international bimetallic union of states. + +One object of the movement was to put an end to the great fluctuations +in the rates of exchange of money between the silver-using and +gold-using countries, fluctuations which occasioned much uncertainty +and loss to individuals engaged in foreign trade. The rise in the +price of gold-exchange in the silver-using countries (notably India) +meant also an increase in their burden of taxation. These countries +collected their revenues in silver, but they had to pay their debts, +principal and interest, in gold. Another object of this movement was +to prevent the burden of individual debts from increasing by reason +of the rise in the value of the single standard, gold. It was, indeed, +hoped that by bringing silver much more into use, the value of gold +would be reduced, thus bringing relief to the debtor classes. Still +another object of the bimetallic movement was to aid the silver miners +and silver-producing districts by creating a larger market for silver. + +Several international conferences were held which were taken part +in by some of the leading financiers of the world representing their +respective governments. The United States was foremost in advocating +the policy, France at first favored it, as did in large measure the +British Indian administration, tho England was in the main opposed. +The movement came to nothing. + +§ 11. #The movement for national bimetallism in America#. When all +hope of international bimetallism failed, the efforts of many of its +advocates were turned to the plan of legalizing national bimetallism +in the United States at a ratio of 16 to 1. This was very different +from the market ratio. Gold had become before 1860, in fact, the +standard of our money system, and after 1873 it was the only metal +admitted to free coinage. Silver, little by little, had been losing +purchasing power in terms of gold, until from being worth, in 1873, +one-sixteenth as much, ounce for ounce, it became, in 1896, worth but +one-thirtieth as much as gold. The power of silver to purchase general +commodities fell much less than the change in its ratio to gold would +indicate, gold having risen in terms of most other goods as well as +of silver. Nevertheless, the proposal to open the mints to the free +coinage of silver at the ratio of 16 to 1 in the year 1896 threatened +a sudden and marked cheapening of money.[18] Probably gold would have +been entirely driven out as money and silver would have taken +its place as the standard. In any event "free silver" would have +accomplished the purpose of making the standard of deferred payments +cheaper. It was at first a debtors' movement, but to succeed it had +to enlist the support of other large classes of voters. And thus +it developed into the more sweeping theory that wages, welfare, and +prosperity were favored by a larger supply of money quite apart from +the effect it would have upon debts. + +In its extreme form the free-silver plan was a fiat scheme, for some +of its supporters believed that by the mere passage of the law the two +metals could be made to bear to each other any ratio desired. But its +most intelligent advocates recognized that the force of the law was +limited by economic conditions. The victory of the gold standard in +the campaign of 1896 was, it would seem, due more to the well-founded +fear that a sudden change of the money standard would cause a panic +than to a popular understanding of the question. + +The free-silver advocates got what they desired, a reversal of +the movement of general prices, through an occurrence for which no +political party could claim the credit. In 1883 the gold production of +the world was less than $100,000,000. From that date, with the opening +of newer gold-yielding territory in South Africa and in the Klondike, +the annual output of gold had been increasing rapidly and almost +steadily. The methods of extracting gold theretofore had still been in +large part of a primitive sort. But intricate machinery was taking the +place of crude tools, chemical processes had been introduced (notably, +the cyanide process), and the principal product began to come from +the regular and certain working of deep mines rather than from chance +surface discoveries. In many parts of the world were enormous deposits +of low-grade ores, before useless, that could be worked economically +by the new methods. + +The general price level fluctuated, but on the whole tended downward +between 1884 and 1893 (the year of panic), and reached a minimum in +the year 1895 in Germany, 1896 in England, and 1897 in America. It +is noteworthy that the very year 1896, which marked the height of the +political agitation to abandon the gold standard for silver, saw the +gold production for the first time in all history surpass the two +hundred million dollar mark. The gold output had caught up with, and +began to surpass, the normal monetary demands of the world, meaning by +that phrase, the amount of gold needed to maintain a stationary level +of prices. + +§ 12. #Rising prices after 1896#. The whole character of the monetary +problem then changed. A period of rising prices set in, which has +continued to the present time. By 1913 prices had risen just about 50 +per cent above the low level of 1896. The rise has been, and still +is, at the average rate of nearly 3 per cent each year. This caused a +reversal of the former positions of advantage and disadvantage on the +part of debtor and creditor respectively. The purchasing power of a +3 per cent annual interest on notes and bonds has been offset by the +decrease in the purchasing power of the principal of the debt. The +burden of the average debt began relatively to decrease. A wide field +for enterpriser's profits was opened up by the rapid displacement of +prevailing prices in all quarters of the industrial world. The price +of manufacturer's products rose in advance of the rise of costs of +many raw materials and especially of the labor costs of manufacture. +The average enterpriser's gain was the average wage-worker's loss. +Wages (and salaries), as nearly always in the case of a change of +price levels, moved more slowly than did the prices of most of the +commodities which are bought with wages, thus causing great hardship +to large classes living on comparatively slowly moving incomes.[19] +Extremes meet, and these classes include both those living on +passive investments, and those dependent on their daily labor for a +livelihood. + +Thus we escape the evils of a rising standard of deferred payments, +only to meet those of a falling standard. And as long as we have so +fluctuating a standard these difficulties must arise again and +again, continually repeated, causing unmerited gains and losses +to individuals. Let us conclude with a brief consideration of the +fundamental principles involved in this problem. + +§ 13. #Defectiveness of the gold standard#. Money is, in general, for +both borrowers and lenders the most convenient standard of deferred +payments. But from the usage of speaking of all things in terms of +gold, arises the popular notion that the value of gold is always +the same, while the value of other things changes. In truth, a fixed +objective standard of value is not possible of attainment. Altho the +value of gold is stable as compared with most things, it rests on the +estimates made by men and is constantly changing with conditions. The +current new supplies of gold are comparatively regular. For centuries +at a time there was little change in the methods of mining gold and +there were no radical changes in its output. The nature of the use of +gold, likewise, is such as to made changes in the amount of it needed, +under ordinary conditions, more stable than is that of most other +goods. Moreover, the stock of gold in monetary uses is but slowly +worn out; it is, therefore, a large reservoir into which flows a +comparatively small stream of annual production; the existing stock +is twenty or thirty times the annual output. Yet the value of gold +expressed in other things is never quite stable, and sometimes +several influences combine to affect it greatly and suddenly. Recent +inventions, chemical and mechanical, moreover, have considerably +altered the conditions of production. While, therefore, it is the +best standard yet devised and put into actual practice, it is very +imperfect. A standard better than a single metal, more stable than a +single commodity, is desirable if it can be found. + +§ 14. #Various ideal standards suggested.# It may, perhaps, be agreed +that the ideal standard of deferred payments is one that would insure +justice between borrower and lender. Yet different views may be and +have been taken as to what constitutes justice in this matter. The +suggestion is attractive that repayment should involve the return of +enjoyment equal to that which could be purchased with the sum at the +time of the loan. Such a standard is impossible of perfect realization +in any general way, for men's circumstances are constantly changing. +To insure even to the average man the same amount of enjoyment is only +roughly possible. The same goods do not afford the same enjoyment +when conditions, either subjective or objective, have changed. Another +suggestion is that the goods returned should represent the same +sacrifice as those loaned. Here again the difficulty is in the lack of +a standard applicable to all men. Whose sacrifice? That of the lender, +who may be rich, or that of the borrower, who may be poor? Some have +supposed that the condition of equal sacrifices was met by the labor +standard, according to which the sum returned should purchase the same +number of days of labor as when borrowed. But what kind of labor is to +be taken, that of the lender or that of the borrower or that of some +one else? Labor is of many different qualities, which can be exactly +compared only through their objective value in terms of some one +good.[20] + +It must be recognized that any possible concrete standard of deferred +payments will sometimes work hardship in individual cases. The best +average results for justice and social welfare will be secured by +measuring debts in some standard that will change least often, and +least rapidly, in relation to the great majority of people of all +classes in the community. + +§ 15. #The tabular standard.# Apart from the difficulties of its +practical operation, a standard better than a single metal and +more stable than a single commodity would be a _tabular standard_, +consisting of a number of leading commodities in fixed proportions, +such as is used in calculating index numbers expressing the general +scale of prices. Such a standard averages the fluctuations of +particular goods and would give a fair approximation in practice to +the ideals of equal sacrifice and equal enjoyment (on the average tho +not in individual cases). While some natural materials are growing +more scarce and call for more sacrifice, other products are by +industrial progress becoming more plentiful. This kind of standard has +been viewed with favor by many monetary authorities, and despite the +administrative difficulties ways may yet be found for putting it into +practice. + +After determining the tabular standard, the actual regulation of the +quantity of money to make prices conform to the standard might be +accomplished in one of several ways. It might be done by letting the +value of the gold dollar fluctuate as it does now, while requiring +a greater or less number of dollars to be given in fulfilment of all +outstanding contracts. For example, if prices by the tabular standard +fell from 100 to 95 in the time between the origin of a debt of $100 +and its payment, the debt would be discharged by paying $95; if prices +rose to $110, the debt would be discharged only by the payment of +$110. + +By the plan of a "compensated gold dollar" the legal weight of the +gold coins would be increased or decreased from time to time to +conform with the tabular standard. Still a third method would be to +regulate the issue of standard paper money, contracting and expanding +its amount by issue and redemption, by deposit in and withdrawal from +depository banks, at regular intervals to bring prices into conformity +with the tabular standard. These are as yet but distant possibilities, +and for some time to come gold will continue to serve as the standard +money in the same manner as in the past. + + +[Footnote 1: The amount of silver is here expressed at its coining +value; this is not the commercial value, but rather the number of +silver dollars 371.25 fine grains weight that could be made out of +the silver produced. Silver and gold of equal coining value are, +therefore, as to weight always in the ratio of 16 to 1.] + +[Footnote 2: See above, ch. 5, sec. 4.] + +[Footnote 3: See Vol. I, p. 45 ff. See also above, ch. 4, sec. 8.] + +[Footnote 4: Numerous tabular index numbers have been worked out for +different countries and periods. The main results of the more recent +ones have been brought together with critical comments, by Professor +Wesley C. Mitchell, in Bulletin 173 of the U.S. Bureau of Labor +Statistics, July, 1915, from which the figures here used are quoted.] + +[Footnote 5: The price movements in the United States between 1860 and +1879 must be left out of consideration here, for the excessive issues +of greenbacks drove gold out of circulation and made greenbacks the +standard money, except in California and elsewhere on the Pacific +Coast where, by public opinion, gold was retained as the circulating +medium.] + +[Footnote 6: This change was what later was referred to in political +discussions as "the crime of '73." The dollar referred to was the +_standard_ silver dollar; at the same time the coinage of a _trade_ +dollar was authorized (intended to be used only in foreign trade), +which, after 1876, was not legal tender in the United States.] + +[Footnote 7: See Vol. I, p. 262.] + +[Footnote 8: See Vol. I, p. 263, on credit transactions, and p. 302, +on the interest contract.] + +[Footnote 9: See Vol. I, p. 304.] + +[Footnote 10: See Vol. I, p. 319.] + +[Footnote 11: This could not be treated in connection with the +interest-rate in Vol. I, Part IV, for the reason that even its +elementary treatment must presuppose the fuller study of the nature of +money and the study of changes in the level of prices, that has just +been given in this and the three preceding chapters. The theory of +interest in Vol. I, therefore, is a static theory in respect to the +standard of deferred payments, and requires adjustment to apply to a +condition of a changing price-level.] + +[Footnote 12: See above, sec. 3.] + +[Footnote 13: Mention was made in Vol. I of the prospect of profit +as affecting the motives of commercial borrowers; e.g., pp. 298, 335, +348, 495.] + +[Footnote 14: The modern explanation of this phenomenon was worked out +in the period of falling prices before 1896 and hence was referred to +as the theory of "appreciation and interest" (meaning the relation of +the appreciating dollar to a falling rate of interest). More generally +the theory is that of the relation of a changing standard of deferred +payments and the rate of interest.] + +[Footnote 15: See ch. 4, sec. 12, and above secs. 1, 2, 4, 5.] + +[Footnote 16: See Vol. I, on agricultural leases, p. 159, wheat +prices, p. 436, and changes in the land supply, p. 442.] + +[Footnote 17: See ch. 5, sec. 11.] + +[Footnote 18: The advocacy of this proposal was called "the +free-silver movement" because it involved resuming the free coinage of +silver at the legal ratio of 16 to 1.] + +[Footnote 19: This happened to coincide with a relative increase of +the price of food-products and of other necessities of daily life at +a greater rate than general prices. This aspect of the much discussed +rising cost of living must be carefully distinguished from that of +the change of the _general_ price level, and also from that of the +relatively slower change of wages. See Vol. I, pp. 437, 445-446 on +population and food supply.] + +[Footnote 20: See on the labor theory of value, Vol. I, pp. 210, +228-229, 502.] + + + + +PART III + + +BANKING AND INSURANCE + + + + +CHAPTER 7 + +THE FUNCTIONS OF BANKS + + § 1. Nature and classes of banks. § 2. Functions of banks. § 3. The + essential banking function. § 4. Time deposits. § 5. Demand deposits. + § 6. Discount and deposit. § 7. Nature of banking reserves. § 8. Bills + of exchange, domestic. § 9. Issue of notes. § 10. Divergent views of + typical bank notes. § 11. Banking credit as a medium of trade. § 12. + Productive services of banks. § 13. Income of banks. + + +§ 1. #Nature and classes of banks.# Banks perform a variety of useful +functions in every modern community. All these functions touch in some +way upon the use of money, and banking problems always are related to +money problems. It is our purpose now to understand the general nature +and work of banks in relation to the general business activity of the +community. A bank, as one first comes to know it, is a building (or +a room in some building) in which there is a fire- and burglar-proof +safe. In this room are men receiving and paying out money and acting +as bookkeepers. Gradually one comes to understand that the bank is +perhaps not the building but the business organization that is there +performing these transactions. + +In the United States there were in 1913 about 26,000 banks +reported.[1] These may be classified first according to the source +from which they derive their charters or authority to do a banking +business as: national, state, and private. The last are unchartered +and act under the general state laws governing private contracts; +in general they are unsupervised.[2] Banks may be classified also +according to the two main types of business they perform, as banks +for savings and commercial banks. Most banks do mainly a general +commercial business; some are distinctly banks for savings; but in +truth this dividing line can be less and less sharply drawn between +banks as wholes; rather the distinction must be made between the +savings function and the commercial discount function, which are more +and more being performed by one and the same bank. The trust company +usually well exemplifies this union of functions. This will best be +explained in connection with the subject to which we now turn, the +analysis of the functions which banks perform. + +§ 2. #Functions of banks.# Almost every bank performs various +functions useful to its customers, but some of which are not +essentially bound up with banking, and may be performed by +institutions that are not truly banks. Among these are: + +(a) Maintaining a safe deposit vault, where space may be rented by an +individual to keep his valuable papers, jewels, etc. The customer +does not usually deliver to the bank possession of the valuables, +but himself retains the key to the box which the bank has no right +to open. In larger cities this work is often done by separate +institutions. + +(b) Acting as money-changer to buy and sell moneys of different +nations. This function is of less importance in America than elsewhere +because of the great size of our country and of the small portion +of our boundaries touching those of other nations using different +monetary units. Moreover, the function is in large part performed for +Americans by ticket agencies at the ports of embarkation and by the +steamship companies en route. + +(c) Selling bonds and other investments to customers. In smaller +communities the customers of a bank turn to it as the best source +of information for safe investments of personal or trust funds. This +opens to it a new possibility of service. Large investments, however, +are usually made through the agency of more specialized investment +brokers. + +(d) Acting as trustee and business manager for passive investors, and +especially as executor and administrator of estates or as guardian of +a minor heir. This function has been taken up rapidly since about 1890 +by the trust company[3] organized under state laws. + +§ 3. #The essential banking function.# The one essential function of +a bank, however, is selling (lending) its credit to its customers in +some form which will conveniently serve the same function as money. A +bank is sometimes defined as a business whose income is derived from +lending its promises. The bank's credit is sold in the form of its +promises, the evidences of which are its receipts, depositors' +account books, drafts and checks on other banks, and bank notes. The +indispensable condition to the exercise of this function by a bank is +public confidence in its ability to fulfil its promise to pay whenever +it is due. This confidence is built upon the bank's paid-up capital; +its surplus and undivided profits: the further liability of the +stockholders to make good any losses up to an amount equal to the +capital stock each holds ("stockholder's double liability"); +the financial prestige of the bank's officers, directors, and +stockholders; the bank's established reputation and "good will" in the +community after a period of successful operation; the character of +its loans and of the securities which it owns; and, finally, by the +reliance placed in the control and inspection by official examiners. +The bank may then sell its credit in any one or in all of the +following five ways: (1) by receiving time deposits; (2) by receiving +demand deposits; (3) by the method of discount and deposit; (4) by +selling exchange of funds to distant points; (5) by issuing bank +notes. + +§ 4. #Time deposits.# Time deposits are funds to the credit of +customers which, by agreement, are to be left for some specified +minimum time or on condition that the bank may require notice in +advance of the depositor's intention to withdraw them. The notice that +may be required is usually thirty to ninety days; but only in times +of general financial crises or of runs on particular banks is this +requirement enforced. A sufficient deterrent to irregular withdrawal +of funds is usually found in the loss of interest if deposits are +withdrawn at other than stated times. The bank's right to require +notice makes prudent the investment of a much larger proportion of its +deposits and for a longer time; it reduces the proportion of deposits +needed for reserves, and yet reduces the danger of a "run" upon the +bank in time of financial distress. These are reasons why banks can +and usually do pay interest on time deposits (at from 2 to 4 per +cent), as until more recently they rarely did on demand deposits[4]. +From the standpoint of the depositor a time deposit is, by its very +nature, an investment and not a demand credit available for current +monetary uses. Only that portion of a person's capital that for some +more or less considerable period is not likely to be needed for other +purposes ought to be put into time deposits. A bank, however, is +generally a much safer place in which to keep a fund of purchasing +power for the future than is the strongest private treasure box. +Receiving time deposits is the one essential function of savings +banks, but this function is increasingly performed by other banks[5]. +Sometimes time deposits are cared for by a separate department and +kept separate from the general business of a commercial bank. + +§ 5. #Demand deposits#. Demand deposits are those payable on demand, +the demand in practice being by means of personal checks requesting +the bank to pay to (or on the order of) a specified person, or to pay +to bearer. A customer's bank account consisting of demand deposits is +called a checking account. Since the turn of the century it has become +increasingly the practice to pay a low rate of interest (about 2 per +cent) on current balances, oftener to large depositors. Banks attract +demand deposits mainly by the convenience and economy which they offer +to their customers in the guarding of funds from theft and fire and +in saving the time, trouble, and expense of carrying money for making +payments. A deposit in a bank is to the depositor for most purposes +"just as good" as money in the pocket and for many purposes is +even better. Thus the banks have become the custodians of a large +proportion of the money (or funds) needed for current use by +individuals and business corporations. + +§ 6. #Discount and deposit#. The process of discount and deposit is +the purchase of the promissory note of a customer,[6] the price being +a credit in the form of a demand deposit on the books of the bank. +This--the central and most characteristic banking operation--has +something of mystery in it at first view. The simplest idea of making +a deposit is that of bringing to a bank window bags and rolls of money +or other funds (credit papers such as checks and drafts, calling for +the payment of money). The bank in that case becomes the debtor and +the depositor becomes the creditor of the bank. But in discount and +deposit the depositor brings no money, and the credit paper that he +gives is his own promise to pay whereby he becomes the bank's debtor. +For example, when a bank discounts a thousand dollar note for three +months and credits its customer with the proceeds, its deposits are at +that moment increased (let us say) $985. Notice that hereby the bank +does not add a cent to the cash in its vaults while it has added to +its liabilities payable on demand. As an off-setting asset it holds +the note of its customer receivable at some future time. + +§7. #Nature of banking reserves#. Banks would have nothing to gain by +receiving deposits or by issuing notes if they were obliged to keep +in the vaults actual money to the amount of their deposits and +outstanding notes (unless they were paid by depositors for taking care +of deposits). Banks have found it necessary in practice to keep on +hand money amounting to only a fraction of all their outstanding +obligations in order to be able to pay promptly all due demands, +excepting in periods of general financial distress. The sum thus kept +on hand is called the _reserve_ or the _reserves_ of the bank, and +this is frequently expressed as a percentage of reserves against +deposits or against note issues, respectively. Frequently, as in the +United States, a minimum percentage of reserves is fixed by law.[7] + +A bank's reserves consist, first, of the lawful money which it +actually holds in its vaults at any moment and secondly, of certain +other credit items in other banks or with the government, of such +a nature that a bank is permitted to count them as tho immediately +available. + +The explanation of the adequacy of a mere fractional reserve is +found in the nature of the individual monetary demand[8] and in the +effective way in which a checking account serves as a substitute for +actual money.[9] Every customer, if he would avoid overdrawing his +account, must at most times keep a goodly balance to his credit that +he does not immediately need. Many individuals and corporations must +at times keep very large balances. The times of maximum monetary need +of the customers of a bank never exactly coincide and many payments +are made among the customers of a single bank, requiring only +bookkeeping transfers. A fractional reserve is therefore ordinarily +fully adequate, altho with any less than a 100 per cent reserve +any bank would be insolvent if all of its demand obligations were +presented at the same instant. Such a contingency is made impossible +by business custom and public opinion especially among the larger +customers of banks, but the panic of small depositors often brings +about dangerous conditions. + +§ 8. #Bills of exchange, domestic.# Foreign and domestic exchange +is the sale of orders for the payment of specified sums of money +at distant points. But for this, payments at distant points would +ordinarily have to be made by sending the money in some way. It must +often occur, for example, that hundreds of payments, aggregating +millions of dollars, must be made by persons in and near Chicago to +those in and near New York, while, at the same time, equally large +sums are due from New York to Chicago. The wasteful process of +shipping these sums back and forth is avoided by the cancellation of +indebtedness between the two localities. It has been the practice for +each small bank to keep a part of its legal reserves in correspondent +banks in one or more of the larger cities on which it draws bills +of exchange for its customers and to which in turn it remits for +collection drafts and checks which it has received. From time to +time, as balances of accounts increase on the one side or the other, +shipments of actual money become necessary, but these are only a small +fraction of the total amount of the bills of exchange. Similarly, the +settlement of accounts between any two localities can be made by +the shipment of comparatively small sums of money. Under the Federal +Reserve Act the reserve banks are in various ways assuming the +functions of the correspondent banks. + +The wider use and acceptance of individual checks at long distances +from the banks upon which they are drawn limit by so much the +proportion of special bills of exchange drawn by the banks themselves. +Domestic exchange involves just the same principles as foreign +exchange of funds, except that in the latter, usually, two different +units of standard money are used. In connection with the discussion of +foreign trade below, foreign exchanges will be explained and further +light will be thrown upon the adjustment of the money supplies and +levels of prices of the various sections of a single country as well +as between different countries. + +§ 9. #Issue of notes#. The issue of bank notes as a mode of lending a +bank's credit calls for consideration here. Yet it must be observed +at once that comparatively few banks in the world have now the legal +right to issue their own notes. In some cases the right has been +granted as a monopoly to certain banks in return for specified +payments and services. But in general the function of bank note +issue has come to be treated as so closely connected with that of +the coinage and regulation of the standard money that it has been +increasingly limited in each country to a central national bank, +or group of banks, which is in many respects practically if not +technically an organ of the government. This public nature of bank +note issues has been strikingly evident in Russia, England, France, +Germany, and other countries since the outbreak of the war in 1914. + +No two countries have quite the same system and kind of bank notes. +It is well to consider first, therefore, the qualities of typical bank +money. This consists of notes issued by banks on the credit of their +general assets, without special regulation by law. With such a form of +note we have had until 1914 no experience in the United States since +1866, at which time a federal tax of 10 per cent on state bank notes +made their issue unprofitable. Since the passage of the Federal +Reserve Act we have temporarily two kinds of national-bank notes, the +old bond-secured notes, in use since 1863 (very different from the +typical form),[10] and the new kind of Federal reserve notes very +nearly typical in character but issued only by the Federal reserve +banks, not by individual banks. + +A bank, by the issue of notes, puts into circulation as money its own +promises to pay. The customer, in borrowing money or in withdrawing +deposits or cashing checks and drafts from other banks, is paid with +the bank's notes instead of with standard money. These notes may be +returned to the issuing bank either to be redeemed in specie or to be +paid in some other form of credit, such as deposits or exchange. The +limit of the issue of such notes is the need of the community for that +form of money, and if they are promptly redeemed in standard money on +demand, they never can exceed that amount. A holder of a note (in the +absence of special regulations) has the same claim on the bank that +a depositor has. As it is to the interest of the bank to keep in +circulation as many notes as possible, there is a temptation to abuse +the power of note issue, to which many banks in America yielded in the +period of so-called "wild-cat" banking before the Civil War. + +§ 10. #Divergent views of typical bank notes#. Some persons seeing in +bank notes but a form of ordinary commercial credit (like a promissory +note or an individual's check) have contended that their issue should +be entirely unlimited and unregulated except by the ordinary law of +contract which makes the bank liable to redeem the notes on demand. +Such bank notes would not be legal tender, and every one would be free +to take or refuse them as he pleased. Each bank would thus put into +circulation as many notes as it could, and as they would constantly +be returned for redemption when not needed as money their volume would +expand and contract with the needs of business. + +It may be conceded that there is much truth in this view, but not the +whole truth. For, in reality, when bank notes are in common use, every +one is compelled to take the money that is current. This offers a +constant temptation to the reckless and unscrupulous promotion of +banking enterprises, as has been repeatedly shown (notably in America +in the days of "wild-cat" banking before 1860). The average citizen +cannot know the credit of distant banks, and thus has not the same +power of judging wisely in taking bank notes that he has even in +making deposits in the bank of his own neighborhood. Between bank +notes and ordinary promissory notes there are other differences. Bank +notes pass without endorsement and thus depend on the credit of the +bank alone, not, like checks, on the credit of the person, from whom +received. Unlike ordinary promissory notes, they yield no interest +to the holder. They go into circulation and remain in circulation for +considerable time by virtue of their monetary character in the hands +of the holders. Thus they approach political money in their nature, +and the banks are near to exercising the sovereign right of the issue +of money. + +At the other extreme of view have been those who consider bank notes +to be essentially of the nature of political money. If they are so, it +is argued, the power of issue should not be exercised by any but the +sovereign state. In this view it is overlooked that bank notes, unlike +inconvertible paper money, depend for their value on the credit of the +bank, not on their legal-tender quality and on political power.[11] +They must be redeemed on penalty of insolvency; government notes need +not be, and yet will circulate at par if properly limited. Adequate +provision for the prompt return and redemption of bank notes makes +them "elastic" in their adaptation to monetary needs, which fluctuate +with changes in commerce and industry from season to season and even +from day to day. + +The predominant opinion to-day is that in their economic nature bank +notes share to some extent the character both of private promissory +notes and of political paper money. They stand midway between the two. +Everywhere it has come to be held that the issue of paper money of any +kind is in its nature a public monopoly, and yet everywhere the +bank note policy has come to be that of permitting the issue only to +certain institutions, under strict public legislation and regulation, +and of requiring in return for this privilege some substantial +services or payments to the government. + +§ 11. #Banking credit as a medium of trade.# The credit which, in five +ways, banks sell (see above, section 3) serves, in most cases, the +purposes of money to their customers. This is least true of time +deposits, for the motive of the depositor in such cases is usually to +_invest_ his funds for a time rather than to keep them available as +money. However, there are many cases in which persons save for some +moderately distant use--such as the purchase of furniture, of a piano, +of a house. The safety and convenience of time deposits, combined +with the reward of a small rate of interest, cause great sums, in the +aggregate, to be deposited as _temporary_ savings, which otherwise +would be hoarded in the form of money and thus withdrawn from +circulation. In all such cases the time deposit is serving both as +an investment and as a monetary fund for future use. This is a great +economy in the use of money, for experience shows that in the savings +banks of America the average reserves of actual money kept against +deposits are only about 1-1/2 per cent. In countries where banks are +little known, the amount of actual money hoarded is therefore vastly +greater than it is in the United States where there are $5,000,000,000 +of individual deposits in _regular_ savings banks, besides large sums +in time deposits in commercial banks. + +Demand deposits, while not money, clearly perform the function of a +reserve of purchasing power for depositors and reduce by so much the +amount of money each must keep at hand to meet his current needs of +purchasing power. If the depositor's credit balance bears no interest, +he has no motive to keep a balance greater than he would require +of actual money, and he has the motive to spend it or invest it in +income-bearing capital whenever his balance (plus his cash in hand) +exceeds his monetary needs.[12] Thus demand deposits are often spoken +of (somewhat inaccurately) as "deposit currency," being funds at +the command of depositors which are as disposable and as active and +current for the monetary function as so much actual money would be. +It is estimated that the rate of turnover of deposits in the United +States is about 50 times a year. We may view the demand deposits +subject to check as either a substitute for money or as a means by +which the rapidity of circulation and the monetary efficiency of +actual money held in bank reserves is multiplied many fold.[13] + +The method of payment by bank drafts in domestic exchange reduces the +need for, or increases the efficiency of, money in just the same way +as does the use of checks. By the mutual credit of banks in different +parts of the country, very large payments may be made in both +directions with the movement of only the comparatively small amount +of physical money needed to pay the balance after the cancellation of +drafts, bills of exchange, and checks. + +The use of bank notes reduces the amount needed of other kinds +of money more directly, tho not more effectively, than do deposit +accounts. Bank notes _are_ money, and so long as their amount is +limited by prompt redemption they circulate _instead of_ so much of +other kinds of money. Redemption is possible by the use of a reserve +of standard (or of legal tender) money very much smaller than the +amount of notes outstanding. + +§ 12. #Productive services of banks.# There have always been some +erroneous ideas regarding the magic power of banks to multiply the +power of money. But there should be no more of mystery about +banking credit than about the nature of money itself. Banks are the +labor-saving machinery of finance. They gather loanable funds, reduce +hoarding, make money move more rapidly, and create a central market +between borrowers and lenders for the sale of credit. While not +creating more physical wealth directly, they add to the efficiency +of wealth; they simplify and quicken the movement of nearly all +commercial transactions. Banks perform incidentally a further service +in developing better business methods in the community. They enforce +promptness and exactitude in business dealings. In supplying credit to +enterprises, banks are constantly passing judgment on the collateral +security presented to them and on the soundness of the enterprises +that are seeking support. This gives to bankers great economic power, +capable at times of misuse in political and social affairs, especially +where a group of selfish men come to exercise a practical monopoly of +business credit in any community. + +§ 13. #Income of banks.# The income of banks is drawn from different +sources, according to the size of the community and the nature of the +banks. While in the villages and smaller cities the commercial banks +perform a number of functions, in the larger cities they usually +specialize in a far greater degree. The trust companies, however, with +their greater versatility, are increasing in number. The income +of banks is derived from discounts, interest on their own capital, +charges for exchange and collection, dividends, interest and rents on +investments, and profit from their bank notes. The capital with which +a bank starts in business[14] could be loaned with less trouble and +more cheaply without starting a bank, but used as a banking capital it +can be loaned in part while still serving to attract deposits, which +are the main source of the income of banks to-day. Charging smaller +customers for exchange is a source of income to some banks, but in +many cases this service is freely performed for regular customers and +becomes a considerable expense. Banks make few investments in real +estate or other physical property; it is, in fact, their duty to keep +out of ordinary enterprises, but they are forced sometimes to take for +unpaid debts things that have been held as security. Profits on +bank notes have at times been the main, almost the sole, motive for +starting banks; but that is not the case to-day when the right of +issue is so strictly limited. + +[Footnote 1: These are classified as follows: + + _Number_ --_Per Cent_-- + _National charter_: 28.56 + National banks 7,404 28.56 + _State charter_: 67.52 + State banks 14,011 54.05 + Loan and trust companies 1,515 5.84 + Savings banks 1,978 7.63 + _Private_: 3.92 + Private banks 1,016 3.92 + ------ ------ ------ + 25,924 100.00 100.00 +] + +[Footnote 2: Opinion favors prohibiting the use of the word bank +to any except regularly incorporated organizations, or at least +subjecting private banks to the same supervision as the chartered +banks.] + +[Footnote 3: Not to be confused with a trust in the sense of a +monopolistic enterprise, with which it has no connection except by +mere verbal accident, through the word trust.] + +[Footnote 4: See next sec.] + +[Footnote 5: The Federal Reserve Act of 1913 has given encouragement +to this practice by reducing to 5 per cent the reserve required to be +kept against time deposits. See ch. 9, sec. 7.] + +[Footnote 6: Usually with deduction of interest in advance; a process +called discount. See Vol. 1, pp. 275, 302.] + +[Footnote 7: The legal requirements as to minimum reserves vary +greatly from no specific per cent to 40 or more in different +countries, for different classes of banks, and for different purposes. +Some examples of legal reserve requirements in the United States occur +in the two following chapters.] + +[Footnote 8: See above, ch. 4, sec. 5.] + +[Footnote 9: See below, sec. 10.] + +[Footnote 10: Including, now, some Federal Reserve bank notes secured +by United States bonds.] + +[Footnote 11: In some cases, as during the bank restriction in +England, 1797-1821, bank notes become inconvertible--practically +political money.] + +[Footnote 12: Payment of interest on credit balances reduces the +motive to withdraw for investment elsewhere any such excess, and +mingles in the depositor's thought monetary and investment motives.] + +[Footnote 13: In the United States in 1914 there were individual +deposits reported in banks other than savings banks to the amount of +about $13,400,000,000 + + In national banks .................................. $6,000,000,000 + + In state banks ..................................... 3,250,000,000 + + In loan and trust companies .......................... 4,000,000,000 + + In private banks ..................................... 150,000,000 + +Nearly all these were doubtless demand deposits (what proportion were +time deposits we have no data for determining), and were available as +immediate purchasing power for the depositors. The total money (other +than bank notes) in the commercial banks of the country was hardly 11 +per cent of this amount. In that year the total amount of money of all +kinds in circulation (and in banks) in the United States (outside the +Treasury), including gold and silver and certificates represented +by bullion in the treasury, United States notes of all kinds, and +national bank notes, was about one fourth of the amount of these +individual deposits in commercial banks. This may suggest the enormous +influence that banking has in determining the average efficiency of +the circulating medium of the country.] + +[Footnote 14: See above, sec. 3.] + + + + +CHAPTER 8 + +BANKING IN THE UNITED STATES BEFORE 1914 + + § 1. The First and Second Banks of the United States. § 2. Banking + from 1836 to 1863. § 3. National Banking Associations, 1863-1913. + § 4. Defects of our banking organization before 1913. § 5. Lack of + system. § 6. Inelasticity of credit. § 7. Periodical local congestion of + funds. § 8. Unequal territorial distribution of banking facilities. + § 9. Lack of provision for foreign financial operations. § 10. The + "Aldrich plan." + + +§ 1. #The First and Second banks of the United States.# + +A knowledge of the history of banking is helpful to an understanding +of the present banking system in our country. The form of our present +banking system has been affected by various economic and political +events which will be sketched here in broad outline to give a +background for our present study. + +Alexander Hamilton, the great first Secretary of the Treasury in +Washington's cabinet, advocated the charter of a central national +bank as one portion of his larger plan of national financiering. His +purpose was realized in the chartering, in 1791, of the First Bank of +the United States, for a period of twenty years. The capital for this +institution was in small part subscribed by the government, but mostly +by private capitalists. The management of the bank was left almost +entirely in private hands. The central bank established branches +in many parts of the country, issued bank notes which circulated +everywhere without depreciation, acted as the governmental depository +of funds and as governmental agency in various ways. It seems to +have been successful and useful as a banking institution until +the expiration of its charter in 1811, but it was touched by the +contemporary controversies over state rights and was from the first +opposed by those who feared the growth of a strong central government. +This opposition prevented the extension of its charter. + +In 1816, however, after only a moderate discussion, the Second Bank +of the United States was chartered for a period of twenty years. This +also, in its purely banking aspects, seems to have been distinctly +successful, conducting numerous branches in various parts of +the country, maintaining at all times the parity of its notes, +facilitating domestic exchange throughout the country, and enjoying +unquestioned credit and solvency. However, this bank became, even in +a greater degree than did the First Bank, the creature of political +rivalries. In the period of rising democratic sentiment typified +and led by Andrew Jackson, the bank came to be looked upon as the +embodiment, or the stronghold, of plutocratic interests, and Congress +permitted its charter to expire by limitation in 1836, near the close +of Jackson's administration. + +§ 2. #Banking from 1836 to 1863#. The Federal Government, which up to +that time had deposited its funds in the central bank and its branches +and in local state banks, established the "independent treasury," in +1840 (abolished in 1841 and re-established in 1846). By this plan the +government kept its money of all kinds in various depositories (or +sub-treasuries) in charge of public officials. While from 1792 to 1836 +almost continuously a central banking system was in operation, other +banks, organized under state charters, were steadily increasing in +number. They received deposits, issued bank notes under state laws, +and cared for local commercial needs. The abolition of the central +national bank in 1836 left to the various state banks for twenty seven +years all the banking functions of the country. The banks of some +states (notably those of New England and New York), under careful +regulation and held to strict standards by public sentiment, for the +most part maintained a high credit; but many banks, under lax laws and +regulations, were guilty of great abuses of credit and of downright +dishonest practices. The evils were more especially evident in +connection with excessive issues of bank notes. + +§ 3. #National Banking Associations, 1863-1913#. The next step in +federal legislation was taken in 1863 in the midst of the Civil War by +chartering local "national banking associations." The purpose was in +part to provide banks under national charters for banking purposes +(both of deposit and of issue), and in part it was to make a wider +market for United States bonds at a time when government credit was +at low ebb. The plan adopted followed the experience of New York state +(1829 on) with a system of bond-secured bank notes. Congress provided +that every bank taking out a national charter must purchase bonds of +the United States and deposit them with the treasurer of the United +States, in return for which it would receive bank notes to the amount +of 90 per cent of the denomination or of the market value of the +bonds.[1] Bank notes issued on this plan, being secured by the bonds, +rest ultimately on the credit of the government, not on the credit of +the bank. They are not promptly sent back for redemption to the banks +issuing them, as should be done if they were typical bank notes. They +may circulate thousands of miles away from the bank that issued them, +and for years after the bank has gone out of business. They are not +an "elastic currency," increasing or diminishing with the needs of +business. The changes in their amount depend upon the chance of the +banks to make more or less in this way than by any other use of their +capital, and this in turn depends largely on the price of bonds and on +the rate of interest they bear. From 1864 to 1870, fortunes were made +from this source, but thereafter banks could make little more from +note issues than they could by investing the same amount in other +ways. Many banks for a long period did not avail themselves in the +least of their privilege of issue. The notes were subject to a tax.[2] + +A national bank (as the law now stands) may be organized, with $25,000 +capital in towns not exceeding three thousand population, with $50,000 +in towns not exceeding six thousand, with $100,000 in cities not +exceeding fifty thousand, and with $200,000 in large cities. Three +cities, New York, Chicago, and St. Louis, have long been designated as +central reserve cities, and some 47 other cities as reserve cities, +in which the reserves of banks were required to bear a considerably +larger proportion to their deposits than in other cities.[3] Other +banks might count as part of their legal reserves their deposits in +reserve city banks, up to a certain proportion. The national banks in +the larger cities thus became the great capital reservoirs of cash for +the whole country. + +National banks have been subject to stricter inspection than have been +the banks in most of the states, a fact which has strengthened public +confidence in their stability. Except in this and the other respects +above mentioned, a national charter offered few, if any, attractions +to small banks, a majority of which have found it more advantageous to +operate under state charters because of less stringent regulations as +to amount of capital, reserves, and supervision. + +§ 4. #Defects of our banking organization before 1913#. Taken +altogether, the banks in the United States since 1868 have represented +great banking power and very efficient service for the community in +times of normal business. But in several respects it long ago became +evident that our banks were operating less satisfactorily than those +of several other countries. American banking organization had failed +to keep pace with the increasing magnitude and difficulty of its +task. Especially at the recurring periods of financial stress, such as +occurred in 1893, 1903, and 1907, our banking machinery showed itself +to be wofully unequal to the strain put upon it. Financial panics +were more acute here than in any other land, and the evil clearly +was traceable in large part to defects in the banking situation. In +academic teaching and in public conferences of bankers, business men, +publicists, and students, the subject was continually discussed +after 1890. At length Congress in 1908 created a "National Monetary +Commission" to inquire into and report what changes were necessary and +desirable in the monetary system of the United States or in the laws +relative to banking and currency. After the most extended inquiry +and discussion that the subject had ever received, the commission +submitted its report in January, 1912. The defects to be remedied, +as enumerated in the report,[4] may be reduced to the following five +headings: (a) Lack of system, (b) Inelasticity of credit, (c) Periodic +local congestion of funds. (d) Unequal territorial distribution of +banking facilities. (e) Lack of provision for foreign banking. + +§ 5. #Lack of system#. Only in a loose sense could the banks of the +United States be said (before 1914) to constitute a system at all. +Both national and state laws dealt with individual banks only. It was +not legal for a bank to establish branches in another city as is done +in most countries. The several national banks in one city were legally +quite separate. It was only by voluntary agreement that in some of +the larger cities they came together into clearing-house associations. +They made possible some measure of coöperation which, small as it +was, proved at times of stress to be of much service within a limited +sphere for the local communities. But even with the aid of these +organizations the banks were unable in times of emergency to avoid the +suspension of cash payments. + +There was no provision whatever for the concentration of bank revenues +so that each bank would be supported by the strength of the other +banks, if a movement began to withdraw deposits in unusual amounts. +Each bank then was compelled for self-protection to call for any sums +it had deposited with other banks,[5] and to keep for its own use all +the reserves it might have in excess of its own immediate needs. This +threw a great strain upon the banks in the reserve cities, which +in normal times had become the depositories of a good part of the +reserves of the banks in other places. Thus developed a spirit of +panic, like the fright of theater-goers crowding toward the door at +the cry of fire. + +The maintenance of the government's independent treasury contributed +to the difficulties by causing the irregular withdrawal of money from +circulation and thus depleting bank reserves in periods of excessive +government revenues and by returning these funds into circulation only +in periods of deficient revenues. Efforts to modify this system by +a partial distribution of the public moneys among national banks had +resulted, it was charged, in discrimination and favoritism in the +treatment of different banks and of different sections of the country. + +§ 6. #Inelasticity of credit#. Our banks, considered both separately +and collectively, were unable to increase their loaning powers +quickly and easily to respond to business needs. The need of greater +elasticity of credit was felt in the more or less regular seasonal +variations within the year, and in the more irregular variations +in cycles of years from periods of prosperity to those of panic and +depression in business. The inelasticity was necessitated by illogical +federal and state laws restricting absolutely the further extension of +credit when the reserves fell below the percentage of deposits (15 or +25 per cent) fixed by law. Reserves thus could not legally be used to +meet demands for cash payments at the very time when most needed. +This feature has been likened to the rule of the liveryman who always +refused to allow the last horse to leave his stable so that he would +never be without a horse when a customer called for one. The refusal +of credit by the banks at such times when they still had large amounts +of cash in their vaults increased the need and eagerness of the public +to draw from the bank all the cash they could, and often precipitated +the insolvency of the banks. Clearly some means were needed to enable +the loaning power of the individual banks to be increased at such +times, so that no customer with good commercial paper need fear to +be refused a loan, even tho the rate of interest might have to be +somewhat higher for a few days or weeks than the normal rate. + +Our bond-secured bank notes lacked almost entirely the quality of +elasticity needed to meet these changing business needs.[6] Their +value being dependent primarily upon the amount and price of United +States bonds, they might be most numerous just when least needed as a +part of our circulating medium. + +§ 7. #Periodical local congestion of funds#. In times of general +confidence each bank finds it profitable, and is tempted, to extend +its credit to the extreme limit permitted by the law governing the +proportion of reserves to deposits. Of the 15 per cent reserves +required in most banks, three-fifths (9 per cent) might be kept in +banks in reserve cities, and of the 25 per cent in reserve city banks, +12-1/2 per cent might be kept in central reserve cities, where it +counted as part of the depositing banks' legal reserves, was a fund +upon which domestic exchanges could be drawn, and usually earned a +small rate of interest (usually 2 per cent). Very large reserves were +kept in New York city where they could be loaned "on call," and the +largest use for call loans was in stock-exchange speculation. Thus +every period of prosperity encouraged an unhealthy distribution of +reserves, gave an unhealthy stimulus to rising prices, and "promoted +dangerous speculation." + +§ 8. #Unequal territorial distribution of banking facilities.# Another +aspect of this concentration of surplus money and available funds in +the larger cities was the comparatively ample provision of banking +facilities in the cities and in the manufacturing sections, and +imperfect provision in the agricultural districts. The whole financial +system seemed designed to induce the poorer country districts to lend +funds at low rates of interest to be used speculatively in cities, +instead of enabling the richer districts, the cities, to lend to the +rural districts for productive enterprise. The rates of bank +discount in different sections of our country have long been most +unequal--lowest in the largest cities, and highest in the rural South +and West--whereas in all parts of Canada, with a different system of +banking, the rates have long been much more approximately uniform. + +Indeed, our national banking development has been predominantly urban +and commercial to the neglect of rural and agricultural interests. +National banks were (until 1913) forbidden to make loans on real +estate, and this greatly "restricted their power to serve farmers and +other borrowers in rural communities." There was "no effective +agency to meet the ordinary or unusual demands for credit or currency +necessary for moving crops or for other legitimate purposes." The lack +of uniform standards of regulation, examination, and publication of +reports in the different sections prevented the free extension of +credit where most needed. Finally, the methods and agencies for +making domestic exchange of funds were, compared with other countries, +imperfect and uneconomical even in normal times and could not "prevent +disastrous disruption of all such exchanges in times of serious +trouble." + +§ 9. #Lack of provision for foreign financial operations.# Not without +its influence on public opinion was the consideration that we had "no +American banking institutions in foreign countries." Many bankers and +business men felt, as did the commission, that the time had come when +the organization of such banks was "necessary for the development of +our foreign trade." Foreign banks in South America and the Orient, +handling American trade, were believed to favor their own countrymen +rather than the interests of American merchants. In contrast with the +European nations with their centralized control of banking, we had "no +instrumentality that" could "deal effectively with the broad questions +which, from an international standpoint, affect the credit and status +of the United States as one of the great financial powers of the +world. In times of threatened trouble or of actual panic these +questions, which involve the course of foreign exchange and the +international movements of gold, are even more important to us from a +national than from an international standpoint." + +§ 10. #The "Aldrich plan."# The National Monetary Commission submitted +with its report a plan which was known by the name of the commission's +chairman, Senator Aldrich. This plan was embodied in a bill for +a National Reserve Association, a bank for banks which bore some +likeness to the great central banks of Europe. In the many details +of the plan an effort has been made to remedy every one of the +difficulties above described and to supply all the needs indicated. +The plan was favored pretty generally by bankers, but called forth +many adverse opinions. In the year of a presidential election, +however, Congress took no action in the matter. All parties were +pledged to some kind of banking reform, but particular proposals were +not discussed in the campaign. + + +[Footnote 1: Whichever was the smaller. In 1900 this was changed so +that notes could be issued to the full amount of the denomination of +the bonds.] + +[Footnote 2: In recent years this has been one half of 1 per cent when +2 per cent bonds, and 1 per cent when bonds bearing a higher interest, +were deposited.] + +[Footnote 3: In reserve cities 25 per cent and in other cities 15 per +cent. The details of the regulations in the old law (given in part +below, sec. 7) were ll altered by the legislation of 1913.] + +[Footnote 4: The expressions within quotation marks in the following +sections are taken from this report.] + +[Footnote 5: See further on this in sec. 7 on periodical congestion of +funds.] + +[Footnote 6: See above, sec. 3.] + + + + +Chapter 9 + +THE FEDERAL RESERVE ACT + + § 1. General banking organization. § 2. The Federal Reserve Board. + § 3. Federal reserve banks. § 4. Federal reserve notes. § 5. Reserves + against Federal reserve notes. § 6. Reserves against Federal reserve + bank deposits. § 7. Reserves in member banks. § 8. Rediscount by + Federal reserve banks. § 9. Changes in national banks. + § 10. Operation of the Act. + + +§ 1. #General banking organization#. President Wilson and the newly +elected Congress with its Democratic majority made banking reform one +of the main objects on the program for the special session beginning +March 5, 1913. The result was the Glass-Owen bill, which became law +as the Federal Reserve Act December 23 of that year. The bill was +actively discussed within and without the halls of Congress, and +many of its features were attacked by bankers individually and acting +through the bankers' associations, at various stages of its progress. +As a result it underwent numerous amendments in details, and tho it +remained in most essentials as it was first proposed, it was at last +accepted even by its critics as on the whole a beneficent act of +legislation. Indeed, its strongest critics had been the friends of +the Aldrich plan, and the Federal Reserve Act embodies, in a greater +degree than its authors were ready to admit, the main features of the +Aldrich plan. In one important respect, however, it is different; it +provides for more decentralization of control and of reserves than did +the Aldrich plan. It created not one central banking reserve, but, in +the end, twelve regional, or district, banks each to keep the reserves +of its district. The Jacksonian tradition of opposition to a central +bank[1] in part helps to explain this; in part the contemporary +congressional investigation and discussion of the so-called +"money-trust" and the consequent desire to decrease the importance of +"Wall Street" and of New York city banking power. + +On the accompanying map are given the outlines of the districts as +constituted and altered down to 1916.[2] + +[Illustration: FEDERAL RESERVE BANK DISTRICTS] + +§ 2. #The Federal Reserve Board#. At the head of the banking system +stands the Federal Reserve Board of seven members, five of them +appointed by the President and Senate of the United States for this +purpose, and two serving _ex-officio_--the Secretary of the Treasury +and the Comptroller of the Currency. One of the five shall be +designated by the President as Governor and one as Vice-Governor of +the Board, but the Secretary of the Treasury is _ex-officio_ chairman. +The term of the appointive members is ten years and the salary is +$12,000 a year. + +The powers of the board are numerous and important. The board is made +the head of a real _system_ of banking, the twelve parts of which can, +in times of emergency, and at the board's discretion, be compelled +to combine their reserves by means of lending to each other +(rediscounting), to the very limit of their resources, at rates fixed +by the board. By this means the reserves of the several district banks +may be "piped together" and thus be practically made into one central +bank under governmental control, altho centralization was in outward +form avoided by the bill. Alongside of the Reserve Board, is placed a +Federal Advisory Council, consisting of one member from the board of +directors of each of the twelve district banks. This council has only +the power to confer with, make representations and recommendations to, +and call for information from, the Federal Reserve Board. + +§ 3. #Federal reserve banks#. The twelve Federal reserve banks which +opened for business November 16, 1914, are of a type of institution +new in our financial history. They are "banks for banks" belonging to +the system in their respective districts. Every national bank must, +and any state bank or trust company may,[3] subscribe for stock to +the amount of 6 per cent of its capital and surplus, and thus become +a "member bank." The capital of each Federal reserve bank was to be +at least $4,000,000; in fact only two of those organized (Atlanta and +Minneapolis) had at their opening less than $5,000,000 capital; the +largest (New York) had $21,000,000, and the average was $9,000,000. +The member banks are to receive dividends of 6 per cent, cumulative, +on this stock, and net earnings above that amount are to be paid to +the Government as a franchise tax.[4] + +Each reserve bank has nine directors, consisting of three classes of +three men each. Classes A and B are elected by the member banks by a +system of group and preferential voting designed to prevent the large +banks from outvoting the smaller ones. Directors of class A are chosen +by the banks to represent them, and are expected to be bankers; those +of class B, tho chosen by the banks and tho they may be stockholders, +shall not be officers of any bank, and shall at the time of their +election be actively engaged within the district in commerce, +agriculture, or some other industrial pursuit. Directors in class +C are appointed by the Federal Reserve Board, one of them being +designated as chairman of the board of directors and as Federal +reserve agent. They represent the public particularly, and may not be +stockholders of any bank. + +Any Federal reserve bank may: + +a. Receive deposits from member banks and from the United States. + +b. Discount upon the indorsement of any of its member banks negotiable +papers, with maturity not more than ninety days, that have arisen +out of actual business transactions, but not drawn for the purpose of +trading in stock and other investment securities. + +c. Purchase in the open market anywhere various kinds of negotiable +paper. + +d. Deal anywhere in gold coin and bullion. + +e. Buy and sell anywhere bills, notes, revenue bonds, and warrants of +the states and subdivisions in the continental United States. + +f. Fix the rate of discount it shall charge on each class of paper +(subject to review by the Federal Reserve Board). + +g. Establish accounts with other Federal reserve banks and with banks +in foreign countries or establish foreign branches. + +h. Apply to the Federal Reserve Board for Federal reserve notes to be +issued in the manner below indicated. + +§ 4. #Federal reserve notes#. In 1914 there were outstanding about +$750,000,000 of what we may now call the old-style bank notes +(bond-secured). These were by the new act not forcibly retired at +once; but, as the law is shaped, they probably will be retired at +the rate of about $25,000,000 a year, and will all disappear from +circulation in thirty years.[5] + +Whenever the banks having old-style bank notes outstanding desire to +retire any of their circulating notes, the Federal reserve banks +are required[6] to purchase the bonds in due quota (not to exceed +$25,000,000 in any one year). On the deposit of these bonds with the +Treasurer of the United States, the Federal reserve banks may receive +other circulating notes (essentially of the old style) called Federal +reserve bank notes, or may receive 3 per cent bonds not bearing the +circulating privilege. + +The new kind of notes provided by the act are called Federal reserve +notes. They are not secured by the deposit of government bonds, but +they are secured beyond all question in other ways. First, they are +obligations of the United States receivable for all taxes, customs, +and other public dues, and are redeemable in gold on demand at the +Treasury of the United States. Secondly they are receivable by all +member banks in the twelve districts and by all Federal reserve banks, +and redeemable by the latter in gold or lawful money (which includes +greenbacks and gold and silver certificates). Thirdly, their credit +and prompt redemption is insured by certain elastic rules as to +reserves in gold which must be kept for the redemption of outstanding +notes. Fourthly, they are secured by collateral, consisting of notes +and bills accepted for rediscount from member banks, which must be +deposited by a Federal reserve bank with the Federal reserve agent of +its district, dollar for dollar for every note it receives. Fifthly, +the notes become "a first and paramount lien on all the assets of the +bank." This is what gives the notes their character of asset currency. +It is evident that the notes unite in a manner without example +the characteristic of asset bank notes with the characteristics of +political paper money.[7] + +No notes, it will be observed, are issued by or on request of the +member banks, but only on request of a Federal reserve bank. After the +notes have been issued, the bank may reduce its liability any day by +depositing lawful money with the Federal reserve agent who is right +there in the bank. The Federal reserve banks and the United States +Treasury must promptly return to the banks through which they were +issued all notes as fast as they are received, and "no Federal reserve +bank shall pay out notes issued through another on penalty of a tax of +ten per centum." The regulations do not apply to the member banks, +but their effect must be to keep notes from circulating long in any +district except that for which they were issued. + +§ 5. #Reserves against Federal reserve notes.# The rule applying in +normal times to reserves against note issues is that each bank must +provide a reserve in gold equal to 40 per cent "against the Federal +reserve notes in actual circulation, and not offset by gold or lawful +money deposited with the Federal reserve agent." At least 5 per +cent is to be on deposit in the Treasury of the United States. The +proportion of reserves to the liability for note issues by any bank, +however, may be allowed to fall below 40 per cent, on condition that +the Federal Reserve Board shall establish a graduated tax of not more +than 1 per cent per annum (it evidently might be made less if the +board chose) upon such deficiency, until the reserves fall to 32-1/2 +per cent and thereafter a graduated tax of not less than 1-1/2 +per cent on each additional 2-1/2 per cent deficiency or fraction +thereof.[8] + +This tax must be paid by the reserve bank, but it must add an amount +equal to the tax to the rates of interest and discount charged to +member banks. The effect of these rules is to give a power of note +issue in time of emergency without compelling the reserve banks to +lock up their reserves held against notes. Suppose for example that +the circulating notes were in normal times $1,000,000,000 and the +reserves, therefore, were $400,000,000 and the rate of discount 5 per +cent. Then the circulation might be doubled with the same reserves, +the proportion thus falling to 20 per cent of outstanding notes, and +the rate of discount to customers rising to 13.5 per cent (5 plus +8.5). Or, to take a most extreme supposition, suppose that the +withdrawal of gold had been so great as to reduce the reserves against +notes to $50,000,000; yet outstanding notes might be doubled (becoming +$2,000,000,000,) the proportion falling to 2.5 per cent, the rate of +discount rising to 24 (5 plus 19). + +§ 6. #Reserves against Federal reserve bank deposits.# Every Federal +reserve bank shall, under normal conditions, maintain reserves in +lawful money of not less than 35 per cent against its deposits. But +the Federal Reserve Board may suspend any reserve requirement in the +Act for a period not exceeding 30 days and from time to time renew the +suspension for periods not exceeding 15 days; but in that case it +must establish a graduated tax upon the amounts by which the reserve +requirements may be permitted to fall below the levels specified as to +note issues. Altho the amount of the tax on the deficiency of reserves +against deposits is not indicated in the act (as it is in respect to +excess note issues) it is plainly the thought that the Board, to which +discretion is left, will follow somewhat the same rule in both cases. +The great discretionary power as to reserve requirements thus lodged +in the hands of the Board makes possible at times of emergency the +use of the reserves both of the reserve banks and of the member banks, +down to the last dollar, if need be, without violation of law. This +gives practically unlimited opportunity to expand credit both by +the issue of bank notes and by discount and deposit in periods of +financial crises. + +§ 7. #Reserves in member banks.# A fundamental change is made in the +rules as to the reserves against deposits that must be maintained by +the member banks. A new distinction is made between time and demand +deposits. Time deposits are defined as those payable after thirty days +or subject to not less than thirty days' notice; and demand deposits +as those payable within thirty days. In every case the reserve +requirement against time deposits is only 5 per cent. This gives +encouragement to banks to maintain savings departments. + +The requirements as to reserves against demand deposits are not +uniform, being the lowest for banks in smaller cities (the great +majority), larger for banks in the reserve cities, and largest for +banks in the three central reserve cities (New York, Chicago, St. +Louis). The act substitutes the new Federal reserve banks for the +banks in reserve and central reserve cities as the depositories of +funds that may[9] be counted as a part of the reserves of member +banks. The new rule requires that one-third must be in the bank's own +possession, a fraction slightly over a third must be in the Federal +reserve bank, and the remainder may be kept in either place. This may +be tabulated as follows: + + _Not in In reserve In central + reserve cities cities reserve cities_ + + Total reserves, per cent 12 15 18 + Must be in its own vaults 4/12 5/15 6/18 + May be either place 3/12 4/15 5/18 + Must be in a Federal reserve bank 5/12 6/15 7/18 + +These requirements as to total reserves are, as compared with +requirements of national banks under the old law, a reduction +respectively of 20 per cent, 40 per cent, and 28 per cent. The total +decrease in the amount of reserves required for all three classes of +national banks was about $400,000,000 on the amount of deposits held +in September, 1914. + +§ 8. #Rediscounts by Federal reserve banks.# More important than +any other single feature of the act is, however, that by which each +Federal reserve bank is to rediscount notes, drafts, and bills of +exchange arising out of actual commercial transactions, when indorsed +and presented by any of its member banks. This, quite apart from +the note issues, gives a power to the banks collectively, under +the general supervision and control of the board, to expand credits +indefinitely at any time for real business purposes. Any business man +able to offer any commercial paper of sound quality should now be able +to borrow on it at some rate of discount, even in the most stringent +times. And, in turn, every member bank will now be able at such times +to rediscount such paper and thus secure credit toward its reserve +requirement on the books of its Federal reserve bank. Suppose, for +example, that a member bank (in a central reserve city) saw its +reserve in the Federal bank fall below 7 per cent of its deposits. It +could by rediscounting $7000 worth of notes increase by $38,888 the +amount to which it might legally extend credit to its customers (i.e., +$7000 is 18 per cent of that sum). The deposits of the Federal reserve +bank would then be increased $7000, against which it must have a +reserve of 35 per cent, or $2450. If the reserves of any Federal +reserve bank fall too low, it can in turn rediscount its paper with +the other Federal reserve banks.[10] If the time comes when no one of +the twelve banks can longer maintain a 35 per cent reserve, the +board may reduce or suspend the requirement, levying a tax graduated +according to the deficiency. The provision here for elasticity of +credit combined with union and solidarity of all the central banking +reserves of the country to meet unusual demands in emergencies, +exceeds any needs which can be expected to arise. + +§ 9. #Changes in national banks.# There is here created a national +system of reserves, but it will be observed that membership in the new +system of the Federal reserve banks is not limited to national banks, +but is open on equal terms to banks organized under state laws. While +in most respects the general banking law remains as it was, certain +changes are of importance. The percentage of reserves henceforth +required of all member banks (as above indicated) is a substantial +reduction of the former requirement for national banks. In some other +respects the powers of national banks are enlarged. One with a capital +and surplus of $1,000,000 may with the approval of the Board establish +foreign branches, and one not situated in a central reserve city may +loan on farm lands for a term not longer than five years, but not to +exceed one third of its time deposits or 25 per cent of its capital +and surplus. National banks may now be granted permission by the board +to act as trustee, executor, administrator, or registrar of stocks and +bonds, thus having the rights that have proved in many cases to be of +advantage to trust companies organized under state laws. + +§ 10. #Operation of the Act#. It was fortunate that this act was +nearly ready to be put into operation when, August 1, 1914, the great +European war broke out. The able appointees to the Federal Reserve +Board commanded the confidence of the bankers and of the public. The +knowledge that the reserve banks would early begin operations was +reassuring during the grave financial stress of the next three months, +and the opening of the district banks in November, 1914, at once made +possible the release for commercial uses of cash reserves and +credits to meet the needs of reviving business.[11] Only an extended +experience can show how this enormous new banking organization will +operate as a whole and in its details. + +Because of the very wide discretionary powers given to the board +in the administration of the act much depends on the character and +ability of the members of the board as well as on a sound public +opinion that will keep this great power from use in partisan and +selfish ways. No doubt amendments of the act will appear necessary, +but there can be no question that the Federal Reserve Act has +inaugurated a new epoch in the banking and financial history of our +country.[12] + + +[Footnote 1: See ch. 8, sec. 1.] + +[Footnote 2: The law provided that an organization committee should +designate not less than eight nor more than twelve cities as Federal +reserve cities and should divide the continental United States, +excluding Alaska, into districts each containing one such city. Twelve +districts were designated. Wherever, therefore, the act speaks of "not +less than eight nor more than twelve," or of "as many as there are +Federal reserve districts," we may, for convenience, speak of twelve.] + +[Footnote 3: On agreeing to comply with reserve and capital +requirements of national banks and to submit to Federal examination.] + +[Footnote 4: Except that until the surplus of any reserve bank amounts +to 40 per cent of its paid-in capital stock, one half of its net +earnings shall be paid into a surplus fund.] + +[Footnote 5: These notes are all secured by the deposit of bonds of +the United States, a large share of them bearing interest at the very +low rate of 2 per cent. Two per cent is less than the market rate for +government loans, for 3 per cent bonds without this privilege +sell above par. Therefore these 2 per cent bonds were held almost +exclusively by banks, and would have lost a good share of their value +had the note-deposit privilege been withdrawn.] + +[Footnote 6: Through the Federal Reserve Board or they may do it +voluntarily, sec. 4.] + +[Footnote 7: The Act does not explicitly say by whom the notes are +issued: it says that they are "to be issued at the discretion of the +Federal Reserve Board"; that "the said notes shall be obligations of +the United States." Further on the notes are spoken of as "issued +to" a Federal reserve bank, and again as "issued through" a Federal +reserve bank, but not _by_ it. But the phrase occurs (sec. 16) "its +[i.e., the Federal reserve bank's] Federal reserve notes." The notes +thus are technically issued by the United States, but not as ordinary +political (fiat) money, for they are not given a forced circulation +by the Government in paying its indebtedness. But the banks "shall pay +such rate of interest on" the amounts of notes outstanding as may be +established by the Federal Reserve Board (i.e., to the Government of +the United States). Practically the notes (as respects choice of time +of issue, amounts, profits from them, commercial assets to secure them +and to redeem them) are asset currency issued by the several Federal +reserve banks.] + +[Footnote 8: This may be shown in the following table: + + When reserves against notes are the tax rate upon the total + are-- deficiency shall be-- + + Below 40.0 to 32.5 per cent 1.0 per cent + " 35.5 to 30.0 " " 2.5 " " + " 30.0 to 27.5 " " 4.0 " " + " 27.5 to 25.0 " " 5.5 " " + " 25.0 to 22.5 " " 7.0 " " + " 22.5 to 20.0 " " 8.5 " " + " 20.0 to 17.5 " " 10.0 " " + " 17.5 to 15.0 " " 11.5 " " + " 15.0 to 12.5 " " 13.0 " " + " 12.5 to 10.0 " " 14.5 " " + " 10.0 to 7.5 " " 16.0 " " + " 7.5 to 5.0 " " 17.5 " " + " 5.0 to 2.5 " " 19.0 " " + " 2.5 to 0.0 " " 20.5 " " +] + +[Footnote 9: The complete application of the new rule is deferred for +a period of three years from the passage of the act.] + +[Footnote 10: See on "piping" provision, sec. 2, above.] + +[Footnote 11: See sec. 7 above.] + +[Footnote 12: Several other features of the law well merit +description. Among these features are measures for developing bankers' +acceptances, open market operations, the gold clearing system of +the Federal Reserve Board, and the clearing of checks and parring of +exchange.] + + + + +CHAPTER 10 + +CRISES AND INDUSTRIAL DEPRESSIONS + + § 1. Mischance, special and general, in business. § 2. Definitions. + § 3. A feature of a money economy. § 4. European crises. § 5. American + crises. § 6. A business cycle. § 7. General features of a crisis. + § 8. "Glut" theories of crises. § 9. Monetary theories of crises. § 10. + Capitalization theory of crises. § 11. The use of credit. § 12. Interest + rates in a crisis. § 13. Dynamic conditions and price readjustments. + § 14. Tariff changes and business uncertainty. § 15. Rhythmic changes + in weather and in crops. § 16. Remedies for crises. + + +§ 1. #Mischance, special and general, in business.# Every separate +business enterprise is subject to chances which suddenly decrease +its profits and the prosperity of its owners; such are fire, flood, +illness of its owners, unfavorable changes in prices of materials +or of the products.[1] The interests of many other persons in the +neighborhood may be so bound up with an enterprise that its losses may +mean unemployment, lower wages to workingmen, and bankruptcy to local +merchants and to banks. Sometimes misfortune and disaster affect whole +communities. The lack of cotton while the Civil War was in progress +compelled the factories of Manchester to close in 1864, and the +earthquake and fire in San Francisco in 1906 left a quarter of a +million people homeless. + +But a change of business conditions is constantly occurring that is of +wider extent, that is of less accidental and of more rhythmic nature, +and that appears to be the effect of slowly working and more general +causes. The enterprise of a modern community, as a whole, "general +business," moves along, in a wavelike manner, going through a somewhat +regular series of changes that is called a business cycle. We are now +to study the nature of these cycles. + +§ 2. #Definitions.# Crisis means, generally, a decisive moment or +turning point. The word crisis suggests a brief period, a moment, +something that is sudden, severe, and soon over. In medical usage +it is the period when the disease must take a turn for better or +for worse. As used in economics, the term, however, implies a sudden +change of business conditions for the worse, a collapse of prosperity. +What precedes has not the appearance of disease, but rather that +of exuberant health. Crises in economics may be distinguished as +industrial, speculative, and financial, according as one or another +influence seems to be more potent, but all are essentially financial. +The change that occurs always is connected in some way with the use of +money and credit. + +A financial _crisis_ is the culmination of a period of rising prices, +and a sudden fall which shatters the credit of some banks, brokers, +merchants, and manufacturers. Every crisis is marked by much confusion +and loss and by hasty efforts of individuals and institutions to meet +their pressing obligations. Sometimes this process of liquidation goes +on quietly and in other cases it becomes a wild scramble, each one +trying to save himself, in which case it is a financial _panic_. +An _industrial depression_ is the period of hard times that usually +follows a financial crisis. + +§ 3. #A feature of a money economy.# Financial crises, by their +very nature, are confined to communities in which the money economy +prevails and where there is a developed state of industry. The periods +of industrial hardship in the Middle Ages were connected usually not +with the collapse of prices, but with political oppression, famine, +wars, pestilence, and scourges of nature. Throughout the lands money +was little used and there was no development of credit and of credit +prices. The money economy began, as has been noted, in the cities. +As the use of money spread, as larger commercial enterprises were +undertaken, as borrowing and the payment of interest became common, +there began to appear in city trading circles, on a small scale, the +phenomena of the modern crisis.[2] + +§ 4. #European crises.# In Europe financial crises date from 1763 +and have occurred at more or less regular intervals since. The common +statement that the cycle of a crisis is run in a period of ten +years, finds only partial support in history. The chief crises of the +eighteenth century occurred in 1763, 1783, 1793, these dates marking +the close of wars of some magnitude. The crises were not widespread +or general, but were more marked in England, which was at that time +farther developed industrially and in its money economy than other +countries. Likewise, in the nineteenth century, the crises were of +unequal force in various countries, usually being severer in England. +They may be dated 1803, 1825, 1838, 1847, 1857, 1864-66, 1875, 1890, +1900, 1907, and 1914. These were attributed to various causes; that of +1825 to over-trading abroad; that of 1847 to railroad-building; while +that of 1866 followed the severe disturbance of trade in 1864 caused +by the interruption of the cotton trade and commerce by the Civil +War in America. While in many parts of England the crisis of 1864 was +unusually severe, in other countries it was of little moment. Germany, +after several years of great speculative prosperity, had a most +severe crisis in 1875; while France, although prostrated by the war +of 1870-71, losing a large amount of wealth, and paying a thousand +millions of dollars to Germany as a war indemnity, escaped a +commercial crisis almost entirely at that time. + +§ 5. #American crises.# Since the beginning of the nineteenth century, +the financial connections of the United States with London, the +leading loan market of Europe, have been such that every crisis +in either England or America has extended its effects to the other +country. But the disturbances are so modified by the particular +conditions (of crops, politics, and speculation) that the phenomena +never correspond exactly in time of occurrence, in duration, or in +intensity. The first notable crisis in America occurred about 1817 +in the very violent readjustment of trade after the resumption of +commerce with Europe in 1816.[3] In 1837-39 came in quick succession +two crises, not quite distinct from each other, the second similar +to the relapse of a fever patient. The conditions were rapid westward +expansion, over-speculation in lands, reckless state internal +improvements, great issues of state bank notes, and the financial +measures of Andrew Jackson, which included the dissolution of the +Second Bank of the United States in 1836.[4] The crisis of 1857 +followed a period of great prosperity marked by rising gold production +and prices and a great increase in foreign trade. The crisis of 1873, +possibly the severest in our history, followed great speculation, +especially in the direction of railroad building on an unexampled +scale after the war. The blow, when it fell, was intensified by the +relative contraction of currency then in progress, leading to the +return to a specie basis and lower prices.[5] The crisis of 1884, +a comparatively slight one, occasioned (rather than caused) by the +discussion of the money question, was followed by some years of +noticeable depression. The years 1889 to 1892 witnessed prosperity, +only slightly interrupted in 1890, that culminated in a crisis in May, +1893 (likewise generally explained as due to the unsettled state of +our monetary system), followed by a period of great depression lasting +until 1897. A rapid growth of business was checked but little in 1900 +when a crisis occurred in Europe, especially severe in Germany. In +November, 1902, began in America what has been called "the rich +man's panic" of 1903 in which for a year many securities were sold +by holders because European creditors were recalling their loans. +American business, however, slackened but little, altho building +operations were somewhat checked. General prices, which had been +moving upward since 1897, remained almost unchanged in 1903 and +1904, and then continued going upward until 1907. In the period from +September to November of that year occurred a severe crisis both in +Europe and in America. The industrial depression following this was +marked in 1908, slowly growing less. The crisis at the outbreak of the +war in August, 1914, was quite exceptional, being due to the sudden +demand of Europe upon New York for funds. Within a couple of months +it was over and soon prices were again rising as the result of large +exports of merchandise followed by gold imports. + +§ 6. #A business cycle#. Let us now sketch in broad outline a business +cycle, bearing in mind that this series of changes does not repeat +itself with unvarying regularity, but that it is fairly typical in +the modern business world. The period leading up to a crisis is one +of relative prosperity; then occurs a crisis in which prices fall, +at first rapidly, and afterward for a while going slowly lower. When +prices are at the lowest point many factories are closed, and much +labor is unemployed. Let us start at that point. Conditions are worse +in some industries than in others. General economy and great caution +prevail; few new enterprises are undertaken. For those persons having +available funds this is a good time to buy, and property begins to +change hands. Then hoarded money begins to come out of its hiding +places. Money and credit flow in from other countries, particularly if +business conditions are better abroad than here, for when prices are +lower than they have been, relative to those of other countries, a +country is a good place in which to buy. At the same time that the +money in circulation thus increases, there is a general return of +confidence that increases credit. Not only are there more dollars, but +each does more work. Then old enterprises are resumed and new ones are +undertaken. The purchase of materials in larger quantities causes a +rapid rise in the prices of many raw materials and of all kinds of +industrial equipment. The less efficient laborers and others that have +been out of work, begin to find employment, and then, more tardily, +wages begin to rise. As a result, the costs of many products begin to +rise rapidly. The only classes not sharing in this improvement are the +receivers of fixed incomes. As prices rise, the purchasing power of +their incomes correspondingly falls. + +At length prices begin to go up less rapidly, and the question arises +in many minds whether the movement can continue, and if not, when it +will cease. Men wish to hold on for the last profits, and are willing +to risk something to gain them. When prices rise not only as compared +with former domestic prices, but as compared with current foreign +prices, foreign imports are stimulated and exports fall. This calls +for a new equilibrium of money and requires at length large and +continued exportation of specie. This checks prices, and, reducing the +specie reserves of the banks, compels them to be more cautious. At the +same time the increase of costs in many industries begins to reduce +profits. The fall in the value of many stocks and securities held +by the banks forces many brokers and speculators to convert their +resources into ready money. This is the moment of danger; weak +enterprises find their foundations crumbling, and there are many +failures.[6] The falling prices, the shattered credit, and the +financial losses force many factories to close, and many workmen +are thrown out of employment. This moment of widespread loss is the +crisis, It is followed by another period of low prices and of small +output, and therefore of profits small or negative in many industries. +Business must again enter upon a period of retrenchment, for it has +completed another cycle. + +§ 7. #General features of a crisis.# Altho irregular in time of +occurrence and unlike in their immediate occasions, financial crises +show certain general features. They are a part of the larger movement +here outlined as the business cycle. Some have thought this cycle to +be normally a period of ten years, divided into one year of crisis, +three years of depression, three years of recovery, and three years of +unusual prosperity. This succession of events occurs pretty regularly, +though not in the regular intervals of time. Crises are more severe in +countries with more extensive use of money and credit, but still more +severe where the credit system is more loosely administered and less +efficiently coördinated. They are harder in the United States and +England than in Germany, harder in Germany than in France, harder in +western Europe than in eastern Europe, harder in Christendom than in +heathendom. They are less severe in rural districts, where prosperity +depends more on crop conditions, and business has in it less of +financial speculation. Their effects are least felt in the staple +industries, for when hard times come people economize on the +less essential things. The glove-factory, the silk-factory, the +golf-club-factory are more likely to close than the flour-mill. In +a crisis wages and salaries are less affected than are profits, but +wageworkers suffer in the loss of employment. Those money lenders who +have eliminated chance as far as possible and have taken a low rate +of interest lose little; the risk-takers who draw their incomes from +dividends on stock or from bonds of a less stable kind, often lose +much. + +§ 8. #"Glut" theories of crises#. Many explanations of the causes of +financial crises have been offered.[7] Nearly all of these belong to +the general group of "glut" theories, of which genus there are two +species, under-consumption and over-production theories. These are, in +truth, but two aspects of the same idea.[8] The one view is that too +many goods are produced, the other that too few are consumed. The +over-production theorist seeing that in a crisis warehouses are filled +with goods that cannot be disposed of for what they cost (or at best, +not so as to give a profit), and that factories are shut down and men +are out of employment for lack of demand, declares that productive +power has grown too great. The under-consumption theorist, seeing +the same facts, says that the trouble is lack of purchasing power. He +observes that there are some people who would like to buy more of some +of these things, but that such people lack income with which to buy. +Usually he asserts that this is because production grows faster +than wages, wages being fixed, as he believes, by the minimum +of subsistence--a theory akin to the iron law of wages. In both +over-production and under-consumption theories, the inequality of +demand and supply is looked upon as a general one. There is supposed +to be not merely an unequal and mistaken distribution of production, +but a general excess of productive power. + +The wide vogue held by these views would justify a fuller discussion +and disproof of them here, did space permit. It must suffice to +indicate merely that they have the same taint of illogicalness as the +"fallacy of waste," and the "fallacy of luxury."[9] They overlook the +fact that an income, either of money or of other goods, coming even +to the wealthiest, will be used in some way. It may be used either +for immediate consumption or for further indirect use in durable +form. Through miscalculation there may be, at a given moment, too many +consumption goods of a particular kind, but the durable applications +can find no limit until the inconceivable day when the material world +is no longer capable of improvement. At the time of a crisis, there is +unquestionably a bad apportionment of productive agents, and a still +worse adjustment of their valuations, but these facts should not be +taken as proving that there is an excess of all kinds of economic +goods. + +§ 9. #Monetary theories of crises.# Another group of theories explains +the crises as being due to money, either too much or too little. The +unregulated issue of bank notes has been assigned as the cause of +crises, especially under the circumstances accompanying such crises +as those of 1837 and 1857 in America, when bank note issues greatly +contributed to the unsound expansion of credit. The issue of +government paper money years before, leading to inflation and +speculation, was by many believed to be the cause of the crisis +of 1873. The reverse view is taken by the advocates of a cheap and +plentiful money. They say that these crises were caused, not by the +expansion, but by the contraction of the money stock; for example, not +by the inflation of prices through the issue of greenbacks in 1862 to +1865, but by the contraction of the currency from 1866 to 1873. + +There is only a fragment of truth in these various views. It is always +lack of "money" at the moment of the crisis that causes any particular +failure, and in that sense it is always lack of "money" that causes +a crisis. The question is, whether in any reasonable sense it can be +said that it was lack of a circulating medium before the crisis that +brought it on. There is no support for this view, except in the rare +case when the money standard is undergoing a rapid change, as in the +United States from 1866 to 1873, and the statement then needs much +modification and explanation. The monetary theories of crises are a +bit nearer to the truth than are those of the over-production type, +for the crisis is always connected with prices and credit. But it +is clear that these rhythmic price changes occurring in the business +cycle are not due to the same causes as are the general movements of +the price level, due to an increasing or decreasing output of gold or +again to a paper money inflation. Statistics show that while a general +price level is slowly changing like a tidal movement, the effect +of the rhythmic business cycle appears now in hastening, now in +retarding, the changes in the price level. + +§ 10. #Capitalization theory of crises#. Here we verge upon a +different type of explanation of the financial crisis--one of a +psychological nature. The quantity of money, we have seen, affects +prices more or less according as credit is more or less used in +connection with it. Money plus confidence has a larger power of +sustaining prices, than money without, or with less, confidence. And +throughout the business cycle the amount of confidence, expressed in +such ways as the readiness to grant credits and in the easy extension +of the time of collection, is constantly changing. Over-confidence at +one time is suddenly followed by widespread lack of confidence. This +has led some to say that lack of confidence is the cause of crises. +This is a truism, but it does not explain what is the real cause of +this lack of confidence, which, when the crisis comes, is not mere +unreasoning fear that needs only to ignore the danger to banish it. +Might it not just as truly, if not more truly, be said that the cause +is _over-confidence_ in the period preceding the crisis? + +The essential characteristic of a crisis is the forcible and sudden +movement of readjustment in the mistaken capitalization of productive +agents. Capitalization runs through all industry. The value of +everything that lasts for more than a moment is built in part upon +incomes that are not actual, but expectative, whose amount, therefore, +is a matter of guesswork, or "speculation."[10] Many unknown factors +enter into the estimate of future incomes. The universal tendency +to rhythm in motion (material or psychic) manifests itself in an +overestimate or underestimate of incomes and of every other factor in +value. This is emphasized by a psychological factor called sometimes +the "hypnotism of the crowd," and sometimes, the "mob mind." Most +men follow a leader in investment as in other things. The spirit of +speculation grows till often it becomes almost a frenzy, and people +rush toward this or that investment, throwing capitalization in some +industries far out of equilibrium with that in others. + +The cause of crises immediately back of the maladjusted capitalization +thus is seen to be a psychological factor; it is the rhythmic +miscalculation of incomes and of capital value, occurring to some +degree throughout industry, but particularly in certain lines. This +subjective cause in men is given an opportunity for action only when +certain favoring objective conditions are present. + +§ 11. #The use of credit.# Most noteworthy of these objective +conditions is the general use of credit. The credit system greatly +enhances the rhythm of price. If the value of a thing that is fully +paid for falls, the owner alone loses; but if the value of a thing +only partly paid for falls so much that the owner is forced to default +in his payment, the loss may be transmitted along the line of credit +to every one in a long series of transactions. A credit system, highly +developed, is a house of cards at a time of financial stress. Demand +liabilities are at such a time the greatest danger, so that the banks, +ordinarily the pillars of financial strength, become at such a time +the points of greatest weakness in the financial situation. If many +of the customers were not restrained by their sense of personal +obligation to the banks, by the strong pressure which the banks can +bring to bear upon them, or by the force of public opinion among +business men, from withdrawing the balances to their credit in a time +of crisis, all commercial banks would become insolvent at once in a +crisis by the very nature of their business; for all their ordinary +deposits are nominally payable on demand. + +§ 12. #Interest rates in a crisis.# In normal times there is always +outstanding a great mass of short-time, commercial loans.[11] The +motive of the borrower, in most cases has been to hire more labor and +to buy more materials for use in his business. Ordinarily these loans +can and are renewed without difficulty or are replaced by others, +based on the security of new business transactions in unbroken +succession. Now at the time of a crisis a general contraction of +credit occurs, and all borrowers with maturing obligations are faced +with bankruptcy. The effort of the business man at such a time is not +to make a positive profit, but to save what he can from the threatened +wreck. The demand for short-time loans, therefore, in such times +of stress, fluctuates rapidly, and exceedingly high interest rates +prevail in these loan markets for a few days or a few weeks, rates +which have only a remote relationship with the usual capitalization of +most agents. + +The distress of the business man is magnified by the fact that it +is just at such times that both the equipment he has bought and the +products he has made become temporarily almost unsaleable at prices as +high as he paid for them when he bought them with the borrowed money. +He may know that prices will soon be higher, but he cannot wait. +Various courses are open to him in this emergency; he may borrow the +money at a very high rate of interest, holding the goods for better +prices; or he may sell the goods under the unfavorable conditions; or +he may sell other capital such as stocks and bonds. The end sought +is the same--to get ready money; and the methods are not essentially +unlike--the exchange of greater future values for smaller present +values. The sacrifice sale thus reveals the merchant's high estimate +of present goods in the form of money. The purchaser of some kinds +of property in times of depression is securing them at a lower +capitalization than they will later have. The rise in value may be +foreseen as well by seller as by buyer, but the low capitalization +reflects the high interest rate temporarily obtaining. A.T. Stewart, +once the most famous New York merchant, is said to have laid the +foundation of his fortune when, being out of debt himself, he bought +up the bankrupt stocks of his competitors in a great financial panic. +The high interest at such times is but the reflection of the high +premium on present purchasing power. + +The worst of the evils of crises are confined to the markets where the +greatest numbers of short-time loans are made. Most of the long-time +loans do not fall due in such seasons of stress, and the great mass of +slowly exchanging wealth alters little and slowly in price. Such loans +as fall due can generally be renewed for long periods at rates little +higher than usual, the market for long-time and short-time loans being +in large measure independent of each other. But they are not quite +independent, and some lenders take whatever sums they can collect on +maturing long-time obligations and loan them on short terms at high +rates of interest, or buy goods, whole enterprises, bonds, and stocks, +at the unusually low prices temporarily prevailing. The effect of this +is to raise somewhat the interest rate on long-time paper to accord +with the new conditions. + +§ 13. #Dynamic conditions and price readjustments.# Another condition +favorable to the rhythmic movement of capitalization is a dynamic +economic society. The past century has opened up new fields for +investment on an unexampled scale. Investment has advanced both +intensively and extensively in a series of great waves. New machinery +and processes have given undreamt of opportunities for enterprise in +the older countries, and the physical frontier of investment has moved +outward with the march of millions of immigrants to people the fertile +wilderness. Such factors disturb the equilibrium of prices both in +time and space, give a powerful impulse toward higher values in +the older lands, and stimulate the hopes of all investors. When the +balance between the capitalizations of various industries and between +the incomes of the various periods proves to be false, the inevitable +readjustment causes suffering and loss to many, but particularly in +the inflated industries. But, because of the mutual relations of men +in business, few even of those who have kept freest from speculation +can quite escape the evils. + +Among the dynamic conditions in industry are changes in the general +price level whether due to changes in the production of the standard +money commodity (relative to population) or to changing methods of +doing business. If the price level is falling (i.e., the standard unit +is appreciating), the burden of the great mass of outstanding debts +is growing heavier upon the debtors.[12] Sooner or later some of them +break down under its weight. At such times many attempt to shift their +capital from active investments such as stocks, to passive investments +such as bonds. When the price level is rising, the opposite conditions +prevail. But such adjustments proceed uncertainly and unevenly in +different industries, with much speculation in shifting from one type +of business to another, and with much accompanying miscalculation. + +§ 14. #Tariff changes and business uncertainty.# Another variable +influence in American business has been the tariff. Every tariff +revision, whether the rates go upward or downward, shifts somewhat +the relative opportunities and profitableness of different industries. +Some of these call for far-reaching readjustments of investments and +of productive forces. Some persons gain and some lose by every such +change. It is observed that a reduction of tariff rates seems to have +a more disturbing effect upon business than does an increase. This +probably is because the industries favored by protective tariffs in +America are those most fully within the circle affected by crises; +whereas most of the consumers adversely affected by a rise of tariff +rates are outside the commercial circles where short-time credit +is common and where the rapid readjustment of investment leads to a +financial crisis. It never has been convincingly shown, however, +that there is any large measure of correspondence in time (not to say +causal relation) between tariff revisions and crises.[13] + +§ 15. #Rhythmic changes in weather and in crops#. A psychological +movement, once started, accumulates force and momentum up to a certain +point where a reaction begins. This rhythmic movement as it appears +in the capitalization of enterprises is favored and magnified, we +have seen, by the wide use of credit and by the constantly changing +technical and physical conditions of industry. These call for constant +revaluations of the sources of incomes, thus destroying customary +and habitual valuations. But why should the cycle begin or end at one +point of time rather than at another; and what determines the length +of the cycle? Some of the new dynamic forces such as inventions and +growth of population are distributed pretty regularly along the line, +so that their influences are nearly equalized. But occasionally +some large impulse may serve to start a swing and if this impulse +is somewhat regularly repeated, it may serve to keep up the rhythmic +motion. True, the lack of coincidence in the impact of various +influences which occur accidentally, such as political changes, wars, +and the rapid opening of new routes of transportation, would serve +to hasten or to retard, perhaps for a time quite to alter, what would +otherwise be the rhythm of the cycle. That there is nevertheless, a +noticeable degree of regularity in the recurrence of crises may be due +to the presence of one dominating factor. + +Alternation of good and poor harvests has always seemed to be +favorable to business prosperity. In America since about 1865, farm +products have constituted the larger part of our exports, so that a +succession of large harvests has usually acted to stimulate exports +(one of the features of a period of prosperity), to give us a larger +credit balance in international trade, and to reduce the rate of +exchange. Large harvests of the staple agricultural crops in America +have been known to be closely related to the amount of rainfall in the +three most important growing months. Recently, it has been shown that +the rainfall of the Ohio Valley occurs in cycles of about eight years, +and in a larger cycle of thirty-three years. The cycle of yield per +acre of the nine principal crops is shown to correspond closely with +the cycle of pig iron production (one of the best single indices of +growing business) dated one to two years later.[14] As the cycles of +rainfall and of harvests are not coincident in different countries, it +will require further study to adjust to these observations the fact +of the world-wide extent of the great financial crises. But a better +understanding of objective conditions of this kind will give fuller +meaning to the psychological interpretation of crises. + +§ 16. #Remedies for crises#. The financial crisis must be looked upon +as an economic disease which brings many evils in its train. The need +is not merely to mitigate the severity of the brief period of crisis, +but also to smooth out the curve of the business cycle so as to reduce +periodic unemployment, the lottery element in profits, and the number +of unmerited failures in business. Several measures may aid toward +this end. In the past the crisis has been more severe in America than +in Europe because of certain well-recognized defects which now have +been largely remedied in the Federal Reserve Act.[15] The provisions +whereby any one may get credit on good commercial assets should +make it impossible for a crisis to degenerate into a panic. This +legislation has provided springs to reduce the jolt of the change from +a higher to a lower level of prices. + +Probably other improvements may be made in our banking laws. Competent +students of the subject have urged that the payment of interest +on deposits not subject to notice before withdrawal should be made +unlawful, because demand deposits constitute the greatest danger at +critical times. In principle this objection is sound, tho experience +may show that this evil has been practically remedied by other +features of the Federal Reserve Act. Moreover, bankers could, by +pursuing a more conservative policy, discourage speculative methods of +enterprise. The strong public disapproval of stock-market speculation +on margins may some day be able to express itself effectively in ways +that will not injure healthy business. Greater stability in our tariff +policy would remove a constantly disturbing factor in prices, as would +likewise the stabilizing of the standard of deferred payments. In +the attempt to remedy the great evil of unemployment, public works of +every kind might be planned and distributed in time so as to better +equalize the demand for labor and materials. Finally, much better +commercial statistics are needed, and for collecting them and +reporting the outlook, government organization is required comparable +in range and methods to the weather bureau. + +It cannot be expected, however, that financial crises, in the sense of +general readjustments of prices downward from time to time, ever +can be completely abolished. There will always be changes in general +industrial conditions calling for reevaluation of the existing sources +of income; and in this process there will always be a tendency to +rhythmic swing like that of a river, which carries the stream +of prices now on this side of the valley, now on that. But this +fluctuation of general prices surely can be so greatly moderated in +magnitude and in evil results as to make the word "crisis" almost a +misnomer. It is toward the attainment of this irreducible minimum of +uncertainty and disaster in business that efforts should be directed. + + +[Footnote 1: On the way these affect private profits see Vol. I, pp. +340, 341 (and references there given in note), 348 ff. and 361 ff. +There are thus good reasons for discussing crises in connection with +profits, as well as with money and banking.] + +[Footnote 2: See Vol. I, pp. 51, 154, 300-302.] + +[Footnote 3: See below, ch. 15, sec. 5, on the tariff legislation at +this time.] + +[Footnote 4: See ch. 8, sec. 1.] + +[Footnote 5: See ch. 6, sec 5.] + +[Footnote 6: See diagram of business failures 1890-1914, in Vol. I p. +364.] + +[Footnote 7: In the first annual report of the United States +Commissioner of Labor is given a long catalog of theories that have +been suggested, many of them quite fantastic.] + +[Footnote 8: See Vol. I, ch. 38, on Abstinence and Production. +Believers in the glut theory usually condemn efforts to encourage +frugality among the masses, calling it the "fallacy of saving."] + +[Footnote 9: See Vol. I, ch. 37, secs, 6 and 9.] + +[Footnote 10: See e.g., Vol. I, pp. 271. 335, 365 367.] + +[Footnote 11: See Vol. I, p. 304.] + +[Footnote 12: See above, ch. 6, on the standard of deferred payments.] + +[Footnote 13: See note on tariff legislation and business crises, end +of ch. 15.] + +[Footnote 14: In both cases there is what is called in statistics +a high degree of correlation (viz., .719 and .800), indicating that +there is that percentage of probability that there is some causal +relation between the two sets of figures.] + +[Footnote 15: See above, ch. 9, secs. 5, 6, 8.] + + + + +CHAPTER 11 + +INSTITUTIONS FOR SAVING AND INVESTMENT + + § 1. The nature of saving. § 2. Economic limit of saving. § 3. Commercial + bank deposits of an investment nature. § 4. Investment banking. + § 5. Savings banks in the United States. § 6. Typical mutual + savings banks. § 7. Postal savings plan. § 8. Advantages of the postal + savings plan. § 9. Collection of savings and education in thrift. § 10. + Building and loan associations. § 11. The main features. § 12. The + continuous plan. § 13. The distribution of earnings. § 14. Possible + developments of savings institutions. + + +§ 1. #The nature of saving.# The motives actuating the different +classes of lenders may, for our present purpose, be reduced to two: +to postpone the consumption of income, and to obtain a net income +from wealth (or investment). Saving always is relative to a particular +period and is for more or less distant ends. The child saves its +pennies to go to the circus next week, the working girl saves her +dimes for a new hat next spring, the earnest high school pupil saves +to go to college next year, and the provident man saves for his +family's future needs and for his own old age. But always, to +constitute saving, there must be for the time a net result: the +excess of income over consumptive outgo in that period. This is easily +distinguishable from various forms of pseudo-saving of which many +persons that are really spending all their incomes are very proud. +Such forms are: planning to buy a particular thing and then deciding +not to do so, but buying something else; finding the price less than +was expected, and thereupon using this so-called saving for another +purpose; spending less than some one else for a particular purpose, +such as food, but off-setting this by larger outlay for another +purpose, such as clothing; spending all one's own income but less +than some one else with a larger income. We may define saving as the +conversion, into expenditure for consumptive use, of less than one's +net income within a given income period. + +Saving goes on in a natural economy both by accumulation of indirect +agents and by elaboration so as to improve their quality.[1] It goes +on to-day by the replacement of perishable by durative agents, as in +replacing a wooden house by one of stone or concrete, and by producing +wealth without consuming it, as in increasing the number of cattle on +one's farm. But saving has come to be increasingly made in the form +of money (or of monetary funds), and in this chapter we shall consider +some of the ways in which this can now be done. + +§ 2. #Economic limit of saving#. There is an economic limit to saving, +as judged from the standpoint of each individual.[2] The ultimate +purpose of every act of saving is the provision of future incomes, +either as total sums to be used later or as new (net) incomes to be +received at successive periods. The economic limit of saving in each +case is dependent upon the person's present needs in relation to +present income and conditions, as compared with the prospect of his +future needs in relation to his future income and conditions. Each +free economic subject must form a judgment and make his choice as +best he can and in the light of experience. There is no absolute and +infallible standard of judgment that can be applied by outsiders to +each case. Yet there is occasion to deplore the improvidence that is +fostered and that prevails, especially among those receiving their +incomes in the form of wage or salary. Considered with reference to +the possible maximum of welfare of the individuals themselves, the +apportionment of their incomes in time is frequently woful. It is +uneconomic for families of small income to save through buying +less food than is needed to keep them in health; but it is likewise +uneconomic to spend the income, when work is plentiful and wages good, +for expensive foods having little nutriment and then, for lack of +savings, to go badly underfed when work is slack and wages are small. +There is for each class of circumstances a golden mean of saving. The +saving habit may develop to irrational excess and become miserliness, +but this happens rarely compared with the many cases where men in the +period of their largest earnings spend up to the limit on a gay life +and make no provision for any of the mischances of life--business +reverses, loss of employment, accidents, temporary sickness, permanent +invalidity, or unprovided old age. Despite the development of late of +new agencies and opportunities for saving there is need of doing more +toward popular education in thrift.[3] + +§ 3. #Commercial bank deposits of an investment nature.# If a +commercial bank pays no interest on demand deposits there is no motive +for the depositor to keep a balance larger than he needs as current +purchasing power. When his bank account increases beyond that point, +it becomes available for a more or less lasting investment to yield +financial income. If the sum is small or if the owner is at all +uncertain as to his plans or if he is not in a position to find +another attractive form of investment, the offer by the bank of a +small rate of interest on special time deposits (2 to 3 per cent is +not an unusual rate in such cases) will suffice to cause him to leave +such funds in the bank. Since about 1900 the practice has been greatly +extended of paying interest even on "current balances" of regular +checking accounts (demand deposits). If the new 5 per cent rule[4] as +to reserves against time deposits operates to cause commercial banks +generally to pay a rate ranging from 2-1/2 to 3-1/2 per cent on time +deposits, their amount will doubtless increase greatly. But still, in +the future as in the past, those depositors having funds that can be +invested for considerable periods will seek a higher rate of interest +than can be obtained from commercial banks. + +In their loaning function the "commercial" banks (as the adjective +indicates) serve mainly the special needs of the _commercial_ elements +of the community--business men borrowing for short terms to carry out +particular transactions. Loans made on short-time commercial paper +(quick assets) are very suitable to the needs of a bank that has its +liabilities largely in the form of demand deposits. Time deposits can +be more safely loaned on the security of real estate and for longer +periods. + +Despite their limitations in this respect, the commercial banks must +be recognized as of growing importance in the work of encouraging and +collecting small savings, which in many cases are better invested in +other ways. In 1916, the centenary of the beginning of savings banks +in this country, a nation-wide propaganda was undertaken by the +American Bankers' Association for the encouragement of savings. + +§ 4. #Investment banking#. Enormous amounts of securities issued by +governments or by corporations (railroad or industrial) are now on +the market and to be bought conveniently by private investors. Through +special bond houses some bonds are to be had in denominations as small +as $100 and $500. The regular brokers on the stock exchanges buy and +sell, for a small commission, the regular bonds and investment stocks. +Several large statistical and financial expert agencies[5] in return +for an annual subscription, offer advice to investors regarding +general market conditions and special securities. + +For a large number of investors the personal examination and selection +of sound securities is too difficult a task. To serve their needs many +bonds and trust companies have of late developed special departments +for investment banking. Through these agencies the banks are +constantly placing as relatively permanent investments securities +which they have bought or have aided "to float" or which they handle +only as commission agents. In any case the real investment banker +is bringing to his task special training and a high sense of +his professional obligations, and is employing the services of +statisticians, financial experts, and of practical engineers to +determine exactly the fundamental conditions of each investment. +Investment banking promises to increase steadily in amount and +importance. + +§ 5. #Savings banks in the United States.# For the increasing +number of wage-earners, salaried employees, and persons following +professions, investment as active capitalists is impossible.[6] Their +savings must take the form of passive investments. But there are few +good opportunities for lending money in small amounts, without great +risk, and the requirement of skill, time, and labor to look after the +loans and to collect the interest is prohibitive to a small lender. To +provide a place where small sums could be kept with safety and so as +to yield a moderate rate of income, the first modern savings bank +in the United States was instituted in New York in 1816 after a plan +already developed in England. + +In form these banks are mutual, having no capital stock on which +dividends are to be paid. The boards of trustees are self-perpetuating +and receive only fees for attending meetings. In their legal aspect +these banks have a philanthropic character. Their investments are +limited by law to specified, conservative classes of securities and +loans on real estate. The total increase from investments is, +after paying the expenses of operation and setting aside a surplus, +distributable to the depositors at regular periods. In the United +States the number of such institutions reported in 1914 was 2100.[7] +They have over 11,000,000 depositors, deposits to the amount of +$5,000,000,000, an average deposit of $444 per depositor, or of $50 +per capita of the whole population. These figures are very unequally +distributed geographically, the divisions ranking as to total deposits +in the following order: the Eastern Middle, New England, Middle +Western, Pacific, Southern, and Western divisions. The first two of +these groups of states have about 75 per cent of all the deposits, the +Southern states hardly 2 per cent, and the Western (North Dakota to +Oklahoma) only 1/4 of 1 per cent. + +§ 6. #Typical mutual savings banks#. About one third of these banks +are on the mutual plan, having no capital stock (most of them in the +East) and these contain about four fifths of all the deposits. +The stock savings banks have individual deposits of over a billion +dollars, and have outstanding capital stock to the amount of about +$90,000,000 (about 9 per cent of their deposits). These stock savings +banks to a much greater extent than do the mutual banks transact also +a commercial business. + +The banks on the mutual plan are therefore the most important, the +typical savings banks. The average rate of interest they paid +to depositors in 1914 was 3.86 per cent. About one half of their +resources are invested in loans, mostly to small borrowers on the +security of real estate, and most of the remainder consists of bonds +and other securities of the safer kinds. + +Savings banks are subject to the supervision and inspection of the +banking departments in the several states, a fact that exerts a +salutary effect though not insuring absolutely against either mistaken +judgment or dishonesty on the part of the bank officials.[8] + +Savings banks seek to keep invested as large a part as possible of +their assets, keeping only in ready cash enough to meet a possible +temporary excess of withdrawals over deposits. In contrast with the +policy of commercial banks with their demand deposits, the sound +policy for savings banks is to reserve the right to require notice of +intention to withdraw. The period of such notice varies from a +minimum of ten days to a maximum of about sixty days. In ordinary +circumstances it is not needful or usual for a bank to exercise this +right, but it is a needful safeguard in times of commercial crises. +This requirement of notice is greatly to the advantage of depositors +collectively and thus of the community as a whole. It is not an undue +limitation of the rights of the individual depositor. It is unfair +for the individual, in a period of financial stress, to seek his own +safety in a manner which is impossible for all, and thus to endanger +the interests of all.[9] + +The mutual savings banks in 1914 had (on the average) but six tenths +of a cent of actual cash (and "checks and cash items") in their tills +for every dollar of deposits, but in addition they had for every +dollar of deposits four cents due on demand from state and national +(commercial) banks. In the aggregate these demand deposits amounted to +the large sum of $172,000,000, a large part of which bore a low rate +of interest. + +The depositors in savings banks have a direct legal claim on the bank +as a corporation. The bank's only means of payment are its assets, +consisting of claims upon the owners of such wealth as houses, +factories, railroads, electric light plants, good roads, and school +buildings. Thus virtually the depositors have by their savings made +possible the building and equipping of these actual forms of wealth, +and have an equitable claim upon the usance of them, which claim is +met by the payment of interest and dividends to the savings banks. +Viewed in this way the great social importance of the savings function +appears, and the importance of developing the savings institutions. + +§ 7. #Postal savings plan.# In many countries of the world the +governments have not only authorized private, corporate, and trustee +savings banks, but have provided public agencies where it is possible +for the citizens to deposit small amounts. Thus municipal, and what +are called communal, savings banks are operated by many European +cities; but the most effective and widely used agencies for the +purpose are the national post-offices. Postal savings banks, or postal +savings systems as divisions of the postal service, are now found in +all the larger countries of the world, and in many smaller ones. The +United States of America was almost the last civilized country to +establish such a system, which was authorized by act of Congress in +1910, and went into operation in a few designated cities in January, +1911. The number of offices at which it was in operation was rapidly +increased, and the number in 1914 was about 10,000. + +Any one ten years of age may become a depositor. Deposit must be made +always in multiples of one dollar. Not more than $100 will be accepted +for deposit in any one calendar month, and nothing after the total +balance to the depositor's credit is as much as $1000, exclusive of +accumulated interest. However, amounts less than one dollar may be +saved for deposit by purchasing a ten-cent postal savings card and +affixing ten-cent postal savings stamps until the nine blank spaces +are filled. Such a filled card will be accepted as a deposit of +one dollar either in opening an account or in adding to an existing +account. + +Deposits are not entered in a depositor's book, as is the usual +practice of savings banks, but are evidenced by certificates issued in +fixed denominations of $1, $2, $5, $10, $20, $50, and $100. These bear +interest, from the first day of the month next following that in which +the deposit is made, at the rate of 2 per cent per annum for a whole +year (interest is not paid for any fraction of a year). Interest +is not compounded, unless the depositor withdraws the interest and +redeposits it, but simple interest continues to accrue annually on +a certificate so long as it is outstanding, without limitation as to +time. + +By the end of the first year (1911) of operation the savings system +held a balance to the credit of depositors of nearly $11,000,000; in +the next year (1912) there was added to this about $17,000,000; in +the next year (1913) about $12,000,000; and this average rate of one +million dollars a month net addition to deposits has continued to the +present (1916). These funds are deposited in banks belonging to the +federal reserve system, which must deposit with the Treasurer of +the United States designated kinds of bonds (national, state, and +municipal) as security and pay interest at the rate of 2-1/2 per +cent on the amount of the deposits. The one-half per cent difference +between this rate and that paid to individuals goes far toward paying +the expense of operating the system. + +Provision is made for the issue of postal savings bonds in exchange +for certificates issued in sums of $20 or multiples thereof up to +$500. These bonds bear interest at the rate of 2-1/2 per cent payable +in semi-annual instalments, January 1 and July 1. These bonds are +not counted as a part of the $500 maximum of deposits allowed to one +person, and there is no limit to the amount of bonds which may be +acquired by one depositor. Postal savings bonds are exempt from all +kinds of taxes, federal and local. These bonds are issued only on the +surrender of postal savings deposits, but may be sold by the owner +at any time. Three years after the law went into effect, there were +$4,635,820 of postal savings bonds outstanding. + +§ 8. #Advantages of the postal savings plan.# As compared with +corporate savings banks the postal savings system has certain +advantages. + +(a) It protects the small depositors from the danger of dishonest +private bankers who have preyed upon the immigrants in the larger +cities. To foreigners, accustomed to the postal savings plan in their +home countries, it is especially useful. + +(b) It gives to every depositor the greatest safety possible, as "the +faith of the United States is solemnly pledged" for the repayment of +depositors. + +(c) It brings a savings institution to many a small town and rural +place formerly entirely lacking in facilities for small depositors. +The benefit of this has not immediately appeared to be great, but may +in time prove to be. + +(d) It pays interest from the first of the month following the date of +deposit whereas the usual practice of savings and commercial banks is +to pay only from the beginning of the quarter year or half year. + +(e) It provides for the exchange of deposits for bonds bearing a +higher rate of interest--a unique feature greatly simplifying for the +small saver the process of buying bonds for more lasting investment. + +In some respects, however, the postal savings system falls short of +the advantages of the regular savings banks. These usually accept +for deposit as small an amount as ten cents; they pay interest either +quarterly or semi-annually; they pay on the average (at present) +almost double the rate of interest, and the interest is credited +to the depositor's account at stated intervals and automatically +compounded. The postal savings system, as the law now stands, may be +looked upon, therefore, as supplementing the regular savings banks +rather than competing with them. + +§ 9. #Collection of savings and education in thrift.# Small savings +have been encouraged in many places by penny provident funds, dime +savings banks, and school savings funds, which have been conducted at +public schools, social settlements, and factories, by school officers +and by charitable and educational societies acting through canvassers. +These plans all call for much personal effort and cost, which must be +provided by volunteer services and private gifts. These plans being +undertaken mainly as a means of education in thrift and in the +related moralities, their results are not to be measured merely by the +magnitude of the sums collected. They are not rivals of the ordinary +savings banks, but rather auxiliary methods of encouraging their use. +The funds collected by these agencies are usually deposited in local +savings banks, and depositors are encouraged to open individual +accounts there, whenever they have considerable sums saved. + +In Germany the public schools have been furnished with automatic stamp +vending machines, from which savings stamps in as small denominations +as ten pfennigs (2-1/2 cents) may be had by dropping a coin into a +slot.[10] This method could be used very effectively in connection +either with the postal savings system or with a local savings bank. It +ought to be made easy to deposit funds at every school house, at every +post-office, at every factory counter on pay day, and wherever people +pass in numbers. Allurements to foolish expenditures meet old and +young at every turn; to spend the dime is made all too easy, whereas +to save it and deposit it in a safe place too often calls for wasteful +and discouraging efforts from the person of small means. + +§ 10. #Building and loan associations.# Building and loan association +is the name applied to a coöperative organization of persons with +the purpose of collecting regularly from members small sums which +are loaned to some members for the purpose of building or paying +for homes.[11] The first association of this type was organized in +Frankford, Pennsylvania, in 1831. It and others of its kind have +made Philadelphia notable among all the larger cities as "the city of +homes." The number of such associations has almost steadily increased +in the United States. Pennsylvania continues to rank first in respect +to amount of total assets, with Ohio a close second, and New Jersey +third (the ranking first in proportion to population). Associations +of this type have been hardly second in importance in America to the +savings banks as institutions for savings for persons of moderate +means. The number of their members (nearly 3,000,000) is about +one-fourth of that of savings bank depositors, and the amount of +their assets (1-1/4 billion dollars) is about one-fourth that of the +reported savings banks. But their relative influence in educating and +encouraging to thrift is doubtless much greater than these figures +indicate. There are more than three times as many of them as of +reported savings banks, their management is much more democratic than +is that of the banks, and many of their members attend and participate +in the meetings and understand how they are conducted. Moreover, the +savings made through these associations are constantly passing on into +the houses that are fully paid for, and which continue to yield their +incomes to their owners. Each year these associations collect from +their members as dues and in repayment of loans (made to build houses) +the sum of over half a billion dollars, which is twice as much as the +annual increase in the deposits of the reported savings banks.[12] + +§ 11. #The main features.# A building and loan association is +organized by a group of persons in a neighborhood, uniting to form a +corporation under the laws of the state, every member to subscribe +for one or more shares. The officers elected all serve without pay +excepting the secretary-treasurer, who receives a small fee for his +services. All official meetings are open to all members. The shares +vary in denomination from $25 to $200; the larger figure being common +under the serial plan and $100 being usual under the continuous (or +permanent) plan, described below. Whenever there is a sufficient +sum it is loaned to one of the members for the purpose of building a +house. The borrower must subscribe for shares to the par value of his +loan. + +The receipts of the association are of several kinds. + +(a) Interest is received from members, usually at the rate of 6 +per cent, and from banks at a lower rate on the small working cash +balances kept on deposit. Usually the loans made are large enough to +cover a large proportion of the cost of the house, but the land on +which the house stands must be free from all incumbrance, and its +value gives a margin of safety to the association. Then by the method +of payment of dues the debt is, from the first month, steadily reduced +and the security for the loan therefore grows constantly better. + +(b) Premiums are collected in addition, sometimes in the form of a +higher rate of interest, but the practice of charging premiums has +been mostly abandoned and the total amount of premiums now constitutes +less than 1 per cent of all payments from members. + +(c) Fines for delinquency also are less commonly imposed now and +constitute a small fraction of 1 per cent of total payments. + +(d) Deductions are made on account of withdrawal before the maturity +of the shares; under these circumstances it is usual to pay a portion +but not all of the accumulated profits, sometimes a proportion +increasing as the shares approach maturity. + +Different plans have been and still are followed in respect to the +method of issuing the shares. Under the _terminating plan_ all +the shares begin and mature at the same time (for all members that +continue to the end). Whereupon the association dissolves or starts +anew. The chief difficulty in this plan is that the association has +too few funds to loan at the beginning of its career, and a surplus +of unloanable funds as it nears the maturity of the series. It is +therefore necessary to encourage or to compel the withdrawal of +non-borrowing members on the payment of estimated profits to date. + +The better to remedy this difficulty the _serial plan_ was devised, +by which new series of stock are issued at intervals--yearly, +half-yearly, quarterly, and even oftener. + +§ 12. #The continuous plan.# A further development is the continuous +plan (usually called the _permanent_ or the Dayton plan), by which +much greater flexibility is attained in the organization. Shares +of stock may be subscribed for at any time, each man's separate +subscription of shares being treated as a separate series, and +maturing each at its own time. There is thus, after an association has +been for some time in operation, a continuous stream of new members +(or new subscriptions) flowing into the association, and a continuous +outflow of shareholders whose shares have matured. The maturing shares +of borrowing members discharge their indebtedness to the association; +the maturing shares of non-borrowing members are paid in money, or +may (if the association has use for the funds) be left as an +interest-bearing loan. + +Additional funds are obtained when needed by issuing paid-up stock to +non-borrowers. This is convenient at the beginning of an association +and when the movement in building is more active than usual. But if an +association has funds that cannot be loaned, outstanding paid-up stock +may be called in. In practice a large part of the paid-up stock as +well as of the running stock is subscribed for and held not by large +capitalists but by persons of small means, especially "the more frugal +element in the working classes." Non-borrowing members desiring +to withdraw may do so at any time under certain conditions; but to +safeguard the association, the laws usually require that thirty days' +notice of intention to withdraw shall be given, that not more than +one half of the funds received in any one month shall be paid on +withdrawals, and that withdrawing shareholders shall be paid in the +order of the notices of intention to withdraw. + +The most intelligent and prudent workers were formerly deterred from +subscribing by the fear that sickness, unemployment, or other mishap +might make it impossible to keep up regular payments. Now, however, +fines for late payment have been almost entirely done away with. On +the other hand, extra payments may be made at any time by borrowing +members, to hasten the date when their shares mature and their debt +be discharged. These privileges are possible because of the method of +distributing earnings which will now be described. + + +§ 13. #The distribution of earnings.# Every six months is ascertained +the amount of the gross earnings which, under this plan, consist +almost entirely of interest paid on loans. From this amount are +deducted expenses (and in some states 5 per cent of the total is +placed in a "loss fund" to meet possible losses) and the rest is +divided in proportion to the amount standing to the credit of each +member, being credited to the account of running stock and paid in +cash to holders of paid-up stock. + +The payment of dues is correspondingly simple. The dues at twenty-five +cents a week amount to $13 a year per share of $100. This is the whole +bill; there are no extras. The interest at 6 per cent (the usual rate) +is $6, and the rest, $7, is credited upon the stock. Thus at the end +of the first six months the member has $3.50 to his credit, and is +entitled to his share of the net earnings on that amount. Thus his +share of the earnings is steadily increased by compound interest, and +if he keeps up his regular payments the shares mature in about sixteen +years. This means in most cases that a prudent tenant can become the +owner of a house in sixteen years while paying no more than the rent +would be. As the active investor he becomes his own rent collector +and uses the house with less need of repairs, thus dispensing with +services and costs which are included in contractual rents.[13] + +These associations are properly made subject to supervision and +examination by state officials, in the manner of that exercised over +banks. They have been favored by exempting the shares of members and +the mortgages held by the associations from all state and municipal +taxation. As the houses built or paid for are taxed, this is of course +but just, but it is an exception to the rule of the illogical general +property tax.[14] + + +§ 14. #Possible developments of savings institutions.# The social +importance of increasing and improving the agencies of savings for the +masses is being more fully recognized, but much more might be done in +these directions. Some possible changes have been suggested above, and +a few words more may be added. + +Probably the greatest developments in the near future will be through +the savings departments of commercial banks (favored by the reserve +rules of the Federal Reserve Act) rather than by the increase in the +number of special banks for savings. The initial expense and risk of +starting a savings bank is considerable, and outside of cities of some +size this is prohibitive. Whereas a savings department, with its +funds and reserves separated, can be easily and cheaply operated in +connection with a general bank. It is much to be desired, however, +that a larger measure of popular coöperation might be made possible to +the depositors, both for its educational value and to reduce the real +evil of the autocratic or the plutocratic centralization of the money +power in the small communities. + +Savings banks usually limit the amount of an account to $3000. It +is desirable that depositors should be able easily to convert their +savings-bank deposits over certain amounts into good bonds, bearing +a higher rate of interest (after the method of the issue of postal +savings bonds). There is need of a central market in each community +where such bonds can be bought and sold at any time; and the savings +banks might easily serve to buy and sell for their customers in this +way in the larger bond market. This would be of benefit also to the +states and municipalities which issue bonds for such purposes as +schools, roads, and public utilities, by creating a more open and +regular market to small investors than now is provided for such +securities. This might somewhat reduce the rate of interest and there +would be a gain divided between taxpayers and lenders. + +The general plan and principles of local building and loan +associations might well be extended to groups of rural coöperators, +enabling them to make loans to their members; and to groups of small +investors, permitting them to hold real estate mortgages and bonds and +stocks of corporations, free from taxation other than that paid on the +wealth itself. Members of such organizations could get a higher income +on their investments than a savings bank could pay, and with greater +security than if each attempted to save and invest by himself.[15] + +Savings institutions are necessarily also lending institutions. In +this chapter they have been looked at mainly from the saver's (the +lender's) standpoint, though their service to the borrower is of +coördinate importance. In the case of building and loan associations +this feature is most apparent. Later, the problem of the agricultural +borrower will receive further consideration. + + +[Footnote 1: See Vol. I, chs. 9 and 10.] + +[Footnote 2: See Vol. I, pp. 285-290 for the analysis of saving from +the individual standpoint; and pp. 482-499 for its relation to general +economic conditions.] + +[Footnote 3: See Vol. I, p. 484.] + +[Footnote 4: See above, ch. 9, sec. 7.] + +[Footnote 5: E.g., Babson Statistical Organization, Brookmire Economic +Service, Moody Manual Co., Moody Corporation Service.] + +[Footnote 6: See Vol. I, p. 318.] + +[Footnote 7: Report of the Comptroller of the Currency. Not all of +these are mutual. Statistics, moreover, include in some cases (e.g., +California) the savings deposits of commercial banks but not the +number of such banks, and in other cases (Michigan) some banks that do +chiefly a commercial business. The line of demarcation between savings +banks and savings departments of commercial banks cannot be sharply +drawn. The Comptroller of the Currency reported in 1914 in a different +form the amount of savings deposits and of time certificates +of deposits in _all_ kinds of banks as the enormous sum of +$8,675,000,000.] + +[Footnote 8: In the last twenty-three years, on the average, seven +savings banks a year have failed, the annual excess of liabilities +over assets being about $200,000, or about $30,000 for each failing +bank. The total loss has been about 1/5 of 1 per cent of total +deposits.] + +[Footnote 9: The Federal Reserve Act, by making it possible for loans +to be had at any time (through member banks) on good security, should +reduce the danger of runs on savings banks.] + +[Footnote 10: The author saw in operation a new machine of this kind +which had been installed in a German public school as early as 1910.] + +[Footnote 11: See Vol. I, pp. 290, 297-298, 484, and 486.] + +[Footnote 12: The figures here given and the description of methods +apply to the "local" building and loan associations. The success of +this kind led to the organization of other associations which took the +name "National" building and loan associations, to carry on a business +in a larger field. The number of these has always been comparatively +small, and their operation is less simple, democratic, and economical +than the local associations. They have borne more of the nature of +ordinary profit-making enterprises. They should not be confused with +the local associations.] + +[Footnote 13: On these economies, see Vol. I, p. 298.] + +[Footnote 14: See ch. 17, sec. 4.] + +[Footnote 15: Since this was written the Federal Rural Credits Act has +been passed, embodying the main idea here described.] + + + + +CHAPTER 12 + +PRINCIPLES OF INSURANCE + + § 1. Chance, unavoidable and average. § 2. Uneconomic character of + gambling. § 3. Borderland of gambling. § 4. Insurance: definition and + kinds. § 5. Insurance viewed as a wager. § 6. Insurance as mutual + protection. § 7. Conditions of sound insurance. § 8. Purpose of life + insurance. § 9. Assessment plan. § 10. The reserve plan. § 11. The + mortality table. § 12. The single premium for any term. § 13. Level + annual premiums and reserves. § 14. Different features of policies. + § 15. Insurance assets and investments as savings. § 16. Excessive + costs of insurance operation. + + +§ 1. #Chance, unavoidable and average.# Every action and every +movement in life has in it some element of chance. There are what +may be called natural chances, arising from the uncertainties of the +seasons, or from rainfall, heat, hail, storm, flood, lightning, or +land-slides. Such chances must be taken both by the small enterpriser +and by the large. In earlier conditions of society natural chance +dominated industry, and it still remains and must always remain +important. There is the chance of unexpected political events, such +as war, riot, and legislation on money, tariffs, credit, and business +relations. These things are caused, it is true, by the action of men, +but it is a collective action out of the control of the individual. +There is the chance of human carelessness causing fire, explosions, +and wrecks on misplaced switches. There is the chance of physical or +mental collapse, as the sudden insanity or the sudden death of one +performing responsible duties. There is the chance of sickness that +often wrecks the plans and the fortunes of a whole family. There is +the chance of economic alterations in methods of production and of +transportation, in fashions and demand in this direction or for those +materials. + +Some of these chances are more connected with money-lending, others +with manufacturing, some with agriculture, others with commerce; but +all are present in some degree in every industry. Some events are +unique in nature and seem unlikely ever to occur again; others are of +a kind occurring so irregularly that no reasonable prediction can be +made as to the time and frequency of their occurrences. Still others +occur frequently and to many different persons; but no individual can +tell when and how they will occur to him. A general average of chances +in different lines of business causes some to be called safe, others +extra-hazardous. Chance has its favorable as well as its unfavorable +aspects. Chances are averaged and added algebraically to the profit or +loss in an industry, for an extra-hazardous enterprise must in general +afford a higher average of profit in order to induce men to engage in +it. It is folly to take a risk without ascertaining its degree so far +as general experience enables one to choose. But inasmuch and in so +far as the gains and losses fall unequally upon different individuals, +income depends upon chance. + +§ 2. #Uneconomic character of gambling.# This prevalence of chance +sometimes tempts men to say that business is "a gamble." But a +distinction in principle must be made between gambling and legitimate +risk-taking. The chances enumerated above are not sought, but avoided +as far as possible; yet they must be borne by some one if productive +enterprise is to continue, and the burden must somehow be distributed +throughout the community. Gambling is, however, a kind of risk-taking +which has a very different economic and moral quality. Gambling +creates the hazard, making the gain or loss of income depend on an +event that is not a necessary part of productive enterprise. Typical +gambling is the transfer of wealth on the outcome of events absolutely +unpredictable, so far as the two gamblers are concerned. Examples are +the shaking of unloaded dice or the honest dealing of a pack of cards, +and the betting on prices in so-called "bucket-shops" by persons +having no connection with the market of real things, and seeking to +get something for nothing as a result of mere chance. + +Cheating is not a necessary mark of gambling, altho the cruder +forms of dishonesty, such as the loading of dice or the collusion of +horse-owners or of horse-jockeys to deceive the betting public, are +so common that they seem often to be an essential feature. Gamblers +recognize fair as opposed to unfair methods. Fair gambling is a kind +of minor morality within the immoral field of gambling, like the +honor found among thieves. The chance-taking in gambling has no useful +purpose or result outside itself. Betting and gambling do not produce +wealth, but merely shift the ownership of existing wealth. The +gamblers constitute themselves a little fictitious economic circle, +and they transfer gains and losses on the turn of events that have no +practical objective result within their circle except to determine the +direction of the transfer. Even when fairest, gambling must, in its +average results, be uneconomic. In any economic trade each trader +gains by getting goods that are, on the marginal principle, to him +more valuable than the other kinds of goods he gives up.[1] But in +gambling the winner gets all, the loser gets nothing. If two men of +like incomes gamble the additional desires that the winner is able +to gratify are (by the principle of decreasing gratification) less in +amount than the desires which the loser must forego. As a result the +loser is often depressed and seriously injured by the loss of his +income, the winner makes reckless and extravagant use of his winnings. +Easy come, easy go, is the rule of gamblers. + +Moreover, gambling reduces the amount of wealth by relaxing the +motives of economic activity, diverting energy from productive +enterprise, tempting men into dishonesty to offset their losses, and +leading them into speculation and embezzlement. + +§ 3. #Borderland of gambling.# Ranging between the extremes of +unavoidable risk-taking and of gambling are a number of cases of a +mixed nature. In nearly all wagers, judgment in some degree influences +the choice of sides. One man bets on a horse whose pedigree and +performances he knows thoroly; another judges by the horse's +appearance as it comes upon the track. The professional bookmakers +have the latest possible and most exact information on which to base +their bids. + +In the bets made on one's own prowess, as on speed in running, the +chance-taking is still on the uneconomic side of the borderland, +certainly if the running is for the sake of the wager, not for +pleasure or for a useful purpose. A premium won by a runner for speed +in delivering a message of economic importance presents an essential +contrast to the winnings in a wager. + +Finally, the very borderland of difficulty is reached in the purchase +and sale of goods in the market with a view of profiting by chance +changes in price. The purchasing and holding of land, lumber, grain, +cattle, and other tangible and useful things, that need to be stored, +held for buyers, or taken to market, must be judged liberally. The +quality of gambling depends somewhat on the motive as well as on the +ability of the trader. The enterpriser dealing with real wealth, and +fitted to take the risks both because of his resources and of his +exceptional knowledge, needs the motive of gain in such cases, and in +a sense can be said to earn socially what he gets. The motive of the +uninformed must be a blind trust in luck, and a hope to gain from a +rise in prices which they are quite unable to foresee or to explain. + +§ 4. #Insurance: definition and kinds.# The large element of luck in +industry due to unavoidable chances has something of the same evil +character as gambling. It brings unearned prizes to some and to others +unmerited losses. It must therefore be a benefit to the community, if +this element of unavoidable chance cannot be reduced as a whole, +at least to regularize it and make it exactly calculable for any +individual. In this way each may be encouraged by the more certain +prospect of receiving a reward proportionate to his efforts and +abilities. This desirable condition has in many respects been +accomplished by means of insurance. + +_Insurance_ is the act of providing a guarantee of indemnity against +a financial loss that will result if an event of a specified kind +occurs. The person seeking some surety against the possible loss is +the _insured_; the person contracting to indemnify against the loss is +the _insurer_; the written contract of insurance is the _policy_; +and the price paid by the insured in fulfillment of his part of +the contract is the _premium_; the amount paid when a loss has been +incurred is the _indemnity_; and the person to whom the indemnity is +paid is the _beneficiary_ (who may or may not be the insured). + +The insurance with which we are here concerned is that which gives +financial indemnity. This is given for loss of expected net income, +when by chance either receipts are less or costs are more than +average. The two main classes as regards kinds of loss are property +insurance and personal insurance. _Property insurance_ is that which +indemnifies for loss of one's possession in specified ways, such as by +fire, by the elements at sea (marine), by hail, lightning, or cyclone, +by death (of valuable animals), by robbery, and by breakage (of window +glass). _Personal insurance_ is that which indemnifies the beneficiary +for loss of income as the result of various happenings to persons, +the chief being death, accident, sickness, invalidity, old age, and +unemployment. The principle of insurance is being constantly extended +to new subjects[2] and it is capable of further development in a +variety of directions. + +§ 5. #Insurance viewed as a wager.# Insurance, without question a +highly useful thing, appears, paradoxically, to be in its outer form +a bet. The large merchant with many vessels used in many kinds of +business had in the days before marine insurance an advantage in +distributing his losses over a number of voyages. Antonio, the wealthy +merchant, is made thus to express his security: + + "My ventures are not in one bottom trusted + Nor to one place; nor is my whole estate + Upon the fortune of the present year. + Therefore my merchandise makes me not sad." + +In its early form marine insurance was the attempt of smaller +ship-owners to distribute their losses (as could the wealthy merchant) +over a number of undertakings, lucky and unlucky. It became customary +for a ship-owner to bet with a wealthy man that the ship would not +return. If it did come back, the owner could afford to pay the bet; +if it did not, he won his bet and thus recovered a part of his loss. +Gradually there came about a specialization of risk-taking by the men +most able to bear it. They could tell by experience about what was the +degree of uncertainty, and could lay their wagers accordingly. When +several insurers were in the same business, competition forced them to +insure the vessel and cargo of the ordinary trader for something near +the percentage of risk involved. The insurance thus tended to become a +mutual protection to the ship-owners; what had to be paid in premiums +to cover risk came to be counted as part of the cost of carrying on +that business. + +Every legitimate form of insurance exhibits substantially the same +characteristics; it reduces loss at the margin where it is felt most +keenly. The difference between insurance and gambling, thus, lies +primarily in the purpose of insurance, which is not to increase +artificially the risk that any individual runs, but to neutralize or +offset an already existing chance. The insurance bet is what is called +a "hedge." The difference lies further in the collective method of +insurance, which combines the chances scattered among a number of +persons. Insurance does not increase the total of risks and of losses, +but merely combines, averages, and distributes them equally among all +the insured. This eliminates the chance element to the individual by +converting it into a regular cost. + +§ 6. #Insurance as mutual protection.# Modern insurance is conducted +either by enterprisers for profit, or by mutual companies; but in any +case in large measure the losses in insurance are mutually shared, +as the premiums (plus interest earned) equal the total losses plus +operating expenses and profit, if any is made. Each insured gets a +contract of indemnity for the payment of a sum that will help cover +the losses of others. Such an exchange is mutually beneficial. The +premium comes from marginal income; the loss if it occurs would fall +upon the parts of income having higher value to the insured. The less +urgent needs of the present are sacrificed in order to protect +the income that gratifies the more urgent needs of the future. In +insurance each party gives a smaller value for a greater; each makes a +gain. The greater security in business stimulates effort. This effect +is quite the opposite of that of gambling. + +§ 7. #Conditions of sound insurance.# To be economically sound, +insurance must have to do with real productive agents, and with +a group of occurrences which, as a whole, are approximately +ascertainable in advance--however irregularly they may fall upon +individuals. The beneficiary must have an _incurable interest_ in the +property or person insured; that is, the beneficiary must actually +suffer a loss by the occurrence insured against. Finally, the amount +of the indemnity must not be greater than the loss incurred. Some of +the greatest difficulties in insurance arise from the absence of these +essential conditions. When there is no insurable interest or when +the indemnity is greater than the loss that may be incurred, the +beneficiary may and sometimes does find it to his interest to bring +about the socially injurious event insured against. He artificially +increases the loss against which insurance was taken. When the insured +sets fire to his own buildings, he makes an illegitimate use of +insurance. Constant efforts are made by insurance companies to guard +against these "moral risks," the least calculable of any. Merchants +whose stocks have been mysteriously burned two or three times find +difficulty in getting further insurance. Formerly insurance was not +paid in case of death by suicide; but now usually no such limitation +is contained in a policy after a period of one or more years. As men +rarely plan suicide years in advance, death by one's own hand some +years after taking life insurance is regarded as coming under the +ordinary rules of chance. Yet it is to be feared that this +liberal policy serves as a temptation at times to crime and to +self-destruction. + +§ 8. #Purpose of life insurance.# Property insurance is mainly an +aspect of enterpriser's cost, whereas personal insurance is more +closely connected with the object of saving.[3] We shall in the rest +of this chapter limit the discussion to the one most important form +of personal insurance, that called life insurance (sometimes called +survivors' insurance). + +Life insurance is that form of insurance in which partial indemnity +is provided for survivors against the financial loss incurred by the +death of the insured. Usually the insured is the breadwinner of +the family and the beneficiary is a member of his family, but in an +increasing number of cases the beneficiary is the surviving business +partner, a creditor, or a business corporation with an insurable +interest in the life of one of its employees. + +Life insurance has been much used by persons mainly dependent on labor +incomes[4] rather than on incomes from capital, by those receiving +salaries, professional fees, and by active business men. It has of +late been extended rapidly, as "industrial insurance" to wage earners, +in policies never exceeding $1000, but averaging very much less, +and often being for no more than enough to pay funeral expenses. The +premiums on such policies are usually collected weekly and by agents +making personal visits. The cost to the insured is, therefore, +necessarily very high in proportion to the amount of insurance. + + +§ 9. #Assessment plan.# Life insurance plans may be distinguished, +with reference to the time and method of collecting the premiums, as +assessment and reserve insurance. + +In the simple form of assessment insurance originally the losses were +paid by contributions taken after the losses occurred, each member +paying an equal share without regard to age. In a slightly improved +plan the assessments are made at the beginning of the year, based upon +the expected mortality for the year. The sum just sufficient for this +purpose (omitting expenses) is called the _natural premium_. The +cost of such insurance is closely related to the average age of +the members. The rates are very low in a new organization with a +membership of young men; but each year the average age, and therefore +the mortality of the membership, rises and the annual assessments must +be increased. By constant additions of young members, this rise of +cost may be retarded. But when these members grow older, a still +larger addition of young members is required to keep down the average, +and the mathematically inevitable result is an increasing rate of +assessment. This keeps young men from entering, and finally results in +failure or in some form of "reorganization" that drives out the older +members. The assessment plan carries with it the seeds of its own +decay. + +To meet these difficulties in part, various modifications of the +flat-rate assessment plan are employed, such as classification by age +at entry, so that each member pays a flat-rate according to age +at entry; or large initiation fees at entry which form a temporary +"reserve" to offset increasing mortality in late years. Finally, +the policies may be issued on the natural premium plan, by which the +members of each age class pay exactly what the insurance costs for the +year. Under this plan the company will remain solvent, but with this +and all the other expedients the surviving members are forced to drop +the insurance in later years. + +Assessment insurance is sold by business companies organized +for profit, by fraternal orders, and by various types of mutual +organizations. The business companies have had a dismal history +of hardship to surviving members and of eventual failure. They are +disappearing under the influence of hostile legislation resulting +from a better popular knowledge of insurance principles. The fraternal +orders combine insurance with other objects of a benevolent and social +character. With good management, a favorable death rate, and very low +expenses, some of them have provided protection at very low rates for +many years. Others have failed with disappointment and disaster to +the older members. Still others are struggling with difficulties that +presage dissolution. Many now have some form of reserve accumulations, +and some have so improved their methods that they closely resemble +reserve companies. The assets of all the assessment companies are +now $1.37 per $100 of insurance in force, while the legal reserve +companies have $22.66. The assessment companies now get 10 per cent of +their total incomes from their funded investments, as against 24 per +cent for the old-line companies. Even with the favorable conditions +under which the fraternal orders conduct their insurance business they +are doomed to failure unless they adopt rates and policies based upon +adequate reserve accumulations. Many thousands of present members +are paying for insurance at rates which will not suffice to meet the +future losses. The assessment plan fails to eliminate the one great +risk, that of leaving the survivors without insurance in advancing +years. + + +§ 10. # The reserve plan.# The reserve plan, if honestly administered, +gives complete protection against the difficulties just indicated. The +essential purpose of the reserve plan is to collect during the earlier +years of the insurance policy when the mortality is less, a sum larger +than is needed to meet the current losses. This sum, the reserve, is +kept invested and accumulating an income, sufficient to offset the +increase in losses as years advance. In reserve insurance, therefore, +the premium never increases from year to year, altho it may be so +arranged as to diminish or to cease entirely sometime within the term +for which the insurance continues. + +The premium must always be fixed in advance. The calculations for +determining the premiums on different kinds of insurance policies are +many and complex, but all conform to a few general principles. The +three factors assumed are an average mortality table, a rate of +interest (or yield on investments), and an expense rate in proportion +to the premiums or outstanding insurance. Insurance on the reserve +plan is often called "scientific insurance" because, upon the basis +of these assumptions resulting from experience, it makes exact +mathematical calculations of the premiums and reserves needed for +insurance of any particular kind in respect to age of insured, +number of payments, method of paying the beneficiary, and any other +conditions. The premium thus fixed is, however, only a maximum, and +usually is reduced as the result of conditions more favorable than +those assumed. + +§ 11. #The mortality table.# When large numbers of men are taken as +a group, a certain proportion of those at each age may be expected to +die. A mortality table starts with a group of persons, as 100,000, at +a given age, as 10 years, and shows the number who die and the number +who survive at each year of age until all are dead. The table most +widely used in the United States is the American Experience Table of +Mortality, constructed by Sheppard Homans in 1868. The figures of this +table, at different years, are given below: + + Age Number Living Deaths each year Death rate + per 1,000 + + 10 100,000 749 7.49 + 20 92,637 723 7.80 + 30 84,441 720 8.43 + 35 81,822 732 8.95 + 40 78,106 765 9.79 + 50 69,804 962 13.78 + 60 57,917 1,546 26.69 + 70 38,569 2,391 61.99 + 80 14,474 2,091 144.47 + 90 847 385 454.54 + 95 3 3 1,000.00 + +The actual number of deaths of any group of insured will not +correspond exactly with the figures of any mortality table. But this +is not an essential defect of a table so long as the figures of the +table are approximately correct and are at least as great in the +earlier years as the actual mortality. For any excess of premium thus +collected but increases the safety of the insurance and reduces later +payments. In fact the mortality in nearly all companies in the United +States is much below the figures of the American Experience Table, +partly because of the influence of medical selection on the recently +insured and partly because of the decided improvement in longevity +since the table was constructed. + +§ 12. #The single premium for any term.# It is evident that the +natural assessment premium payable at the beginning of the year for +$1000 of insurance for that year is expressed by the death rate, e.g., +at age 35, the payment of $8.95 by each of the 81,822 living at the +beginning of the year will provide the $732,000 needed to pay the +losses.[5] + +In the same manner would be determined the natural assessment premium +for each year of insurance. Now, when it is possible to invest the +premiums so as to yield a minimum rate of income it is a simple matter +to determine the amount of a single premium, at any age, that is +adequate to pay for insurance covering any selected number of years +(term insurance) up to the entire period of each insured person's +life (full life). It is necessary only to apply the formula of present +worth and that of compound interest on investments.[6] Thus the +expected losses of any year according to the table of mortality, +divided by 1 + rate of yield on investments raised to the power of +years distant, equals the present worth of insuring the entire group +for that year. The sum of the discounted cost of insurance for all the +years of the term divided by the number living at the beginning of the +period, gives the single premium for each of the insured. Let P be the +present worth of all the policies for a group of the same age, p the +present worth of one policy, X the total insured at the beginning of +the period, f the natural assessment premium this year, or the natural +premium required for any year. Then + + f f1 f2 fn + P = __________ + _________ + ________ + _________ + (l + r) (l + r)^2 (l + r)^3 (l + r)^n + + P + p = _________ + X + +The payment in advance of the single premium for any selected period +provides a reserve fund sufficient, on the assumptions made, to carry +all the insurance without further payments. Each year there is added +to the fund the income earned on investments, and there is subtracted +the amount of the losses for the year, until the death of the last +member of the insured group. If the deaths in the earlier years are +fewer than were expected in the mortality table, this will be offset +eventually by more deaths at the advanced years; but in the meantime a +reserve larger than was expected is yielding income, thus providing +a larger sum than is needed to pay all the policies at maturity. This +surplus might be distributed as so-called "dividends" from time to +time to those surviving, or be added pro-rata, at intervals, to the +amount of the policies as accumulated dividends. + +§ 13. #Level annual premiums and reserves.# It is a matter of no very +abstruse mathematics (in principle) to find the equivalent of this +single premium in any one of many other forms of premium payment. +The processes are mainly but variations of present worth and compound +interest calculations. Such calculations, however, lead into many +complexities of practical detail difficult to explain in brief +compass, and are the special task of the actuary (the mathematical +expert dealing with such problems in the insurance business). The most +useful actuarial equivalent of the single premium is the level annual +premium for any period (term or life). Almost all policies now written +have the level annual premium as a feature. The amount of the level +annual premiums at first is greater than the losses; this causes for +a time the steady accumulation of a reserve which yields income. Then, +as the losses grow, they overtake and finally surpass the amount of +the annual premiums. Therefore, the total reserve for any group of +insured increases year by year to a maximum and then declines until +it reaches zero with the payment of the last claim. The individual +reserve for each policy not yet matured increases steadily the longer +it is in force. The total reserve is essential to the solvency of +the company and the payment of all the policies as they fall due. The +companies which issue policies on the level premium plan or reserve +plan are known as "old line" companies, or as "legal reserve" +companies, because the state laws require every company of this type +to maintain the reserves calculated on the basis of a certain rate +of yield. The growth of the legal reserve companies in recent times +constitutes one of the financial marvels of the age. + +§ 14. #Different features of policies.# The premiums thus far +discussed are "net premiums" estimated as just sufficient to meet the +actual payments required by the contracts in the policies. To provide +for the expenses of management an addition is made to the net +premium called the "loading." The entire premium is called the "gross +premium." + +Reserve insurance is still carried on by a few stock companies, but of +late some stock companies have been transformed into mutual companies, +which are the prevailing type. The mutual company legally belongs to +the policyholders. The gross premiums in reserve insurance are, for +the purpose of safety, fixed at a figure larger than the expected cost +of the insurance, and normally the earnings from interest are higher, +the mortality is lower, and expenses are less than those on which the +calculation of rates is based. From the excess of income resulting, +the company sets aside a surplus and then divides the rest among +the policyholders. These returns, virtually but the refund of excess +premiums, are called "dividends" (a somewhat misleading term, not +to be confused with dividends on corporate stock). The policies +that receive dividends are called "participating" and are said to +participate in the earnings. Formerly the majority of policies paid +"deferred" dividends after 5, 10, or 20 years, according to various +tontine and semi-tontine plans, the survivors to these periods +receiving their dividends plus those of the other policyholders who +had died or had withdrawn from the company. This form of payment +having been found objectionable, it was made illegal in New York and +other states, and in most cases dividends are now paid annually. The +stock company, organized for profit, frequently charges lower premiums +for "non-participating" policies, and then retains such profits as may +result from keeping expenses below receipts. + +The most popular policies are term policies (usually for 5, 10, 15, +or 20 years); ordinary life policies with annual premiums; limited +payment life policies (the policy payable at death, with premiums +fully paid up after 10, 15, or 20 years); and endowment policies (the +face of the policy payable after 10, 15, or 20 years if the insured is +still living). An endowment policy must be understood to be a regular +term policy of insurance for the specified number of years, plus a +plan of regular annual savings, which at compound interest, accumulate +to the face of the policy. Many persons are attracted to endowment +insurance by the oft expressed thought that "you don't have to die to +beat it." But this is a mistaken thought. For the premium in endowment +insurance is much higher than that for life insurance alone during the +same period, so that the endowment is merely a pretty convenient but +somewhat costly plan of saving, hitched on to an insurance policy, +with which "actuarially," it has no essential connection. In "scientific" +insurance the insured pays its full actuarial cost for each additional +feature of the policy that he buys. The various policies issued by a +company are approximately equivalent actuarially, on the basis of the +assumptions made, but they are of very different degrees of desirability, +in view of the circumstances of the insuring individual. The choice of +policies deserves a more careful investigation than it usually received. +Moreover, carelessness and ignorance in the choice of a company is +responsible for widespread loss and suffering. + +Policies differ in respect to the mode of payment. The payment usually +takes the form of a lump sum payment at death or at the maturity +of the endowment. In recent times there has been a growing use of +optional forms of payment which give to the beneficiary annual or +monthly installments for a definite number of years or for life. + +§ 14. #Insurance assets and investments as savings.# The discussion of +savings institutions in the last chapter left unmentioned insurance, +which probably is destined to be the most important of all. The assets +of life insurance companies in the United States have already attained +the enormous sum of $5,000,000,000, a sum equal to the reported +savings bank deposits. In the last twenty years life insurance assets +have more than doubled in each decade, and are now increasing by about +a quarter of a billion dollars every year.[7] These great funds, +which in equity nearly all belong to the policyholders, form already +approximately one thirtieth of all the private capital of the country. +They are invested in many ways, in real estate, in loans secured +by mortgages on real estate, in bonds--municipal, railroad, and +industrial. The problem of wise legislation for these organizations, +of their competent and honest management, and of their relation to the +social, business, and political life of the nation, is certain to be +of ever-increasing importance. We are hardly more than emerging from +the experimental stage of life insurance, hardly more than at the +beginning of its development. + +The premium in personal insurance (life, accident, sickness, +invalidity, old age pensions) is in almost all cases paid out of some +current income. The premium paid is just so much subtracted from the +amount available for present direct use and applied to the purchase of +future incomes for one's self or family. The insurance method differs +from the method of depositing savings by its contingent nature, the +resulting income of any individual being possibly much greater than +the amounts actually saved (e.g., when the insured dies or is injured +soon after taking insurance), and possibly less or nothing at all. A +very desirable kind of insurance which is yet little developed is +that for a term ending with the usual retirement age (say 65 years) +combined with an old-age pension for life thereafter. + +It is probable that abstinence will more and more express itself not +in accumulating large capital sums to provide for one's old age or for +survivors, but in providing insurance for survivors, and invalidity +and old-age pensions for the insured and others, payable as terminable +annuities. In any case the results to be expected in the changing +forms and magnitude of private fortunes are certain to be great. + +§ 15. #Excessive costs of insurance operation.# So beneficent is +insurance that the enormous cost of transacting the business under +present methods is much to be regretted. A very large part of the +premiums paid by the insured is retained by the companies.[8] In the +case of reserve life insurance a considerable part of what is not +returned is, however, set aside as reserve virtually held in trust for +the policyholders. In the case of the other kinds of insurance, nearly +all of the amount not returned is either cost of operation or profits, +tho it must be recognized that a part of the cost of some kinds +of insurance is for real services, such as inspection and fire +prevention. It is remarkable that the percentage returned by the life +insurance companies, accumulating, as they do, large reserves in trust +for the policyholders, is greater than it is for the other kinds of +companies (fire, marine, casualty, surety, liability, accident, and +health insurance). + +It is a striking evidence of the importance of the marginal +principle[9] that insurance at such a cost should still be desired by +men. The use of insurance would be much wider and its benefits greater +if this "tare and tret" of doing the business could be reduced. It +seems a reasonable hope, now that the experimental stages are passed, +that this may be done. In the case of all kinds of insurance as yet a +large expense for agents has been necessary to educate men to see +the value of insurance and to purchase it, as well as for many other +competitive expenses. It has been found that much of this expense +can be saved by insurance in groups (for all employees in an +establishment), by compulsory insurance (as of all working men), and +by central state administration serving to regularize and unify the +organizations. This important question will be further considered in +connection with "social insurance" as a measure to benefit the working +classes. + + +[Footnote 1: See Vol. 1, ch. 5, sec. 7.] + +[Footnote 2: The Jeffries-Johnson prize-fight was insured, against +rain, for $30,000. Frequently, race-horses, the fingers of pianists, +the lives of ball-players, and the throats of singers, are now +insured. Summer hotels in England regularly insure for large sums +against more than so many days of rain per season.] + +[Footnote 3: On the former, see Vol. I, pp. 365 and 374; and on the +latter, below, sec. 14.] + +[Footnote 4: See Vol. I, labor-incomes, in Index.] + +[Footnote 5: There is an appearance of a slight discrepancy due to +the omission of fractions of cents. If premiums are collected at the +beginning of the year and losses are paid at the end of the year, and +if interest can be earned meantime at the rate of 3-1/2 per cent, the +natural premium for a one year term policy is about $8.64, that being +the present worth of $8.95 due a year hence, interest being 3-1/2 per +cent. In these calculations there is no allowance for expenses, the +necessary "loading," on which see below, sec. 14.] + +[Footnote 6: See Vol. I, p. 279.] + +[Footnote 7: The following are the chief statistical facts regarding +the life insurance business in the United States, Jan. 1, 1914, +showing separately legal reserve and assessment companies, and the total. + ------------------------------------------------------------------ + | Number of | Policies | Insurance + | Companies | in force | in force + | | | + Legal reserve ..| 260 | 38,206,000 | $20,256,000,000 + Assessment .....| 605 | 8,789,000 | 10,023,000,000 + Total ..........| 865 | 46,995,000 | 30,587,000,000 + ----------------------------------------------------------------- + | Premium | Total | Per cent income + | income | income | from premiums + | | | + Legal reserve ..| $715,000,000 | $946,000,000 | 75.6 + Assessment .....| 138,000,000 | 153,000,000 | 90.2 + Total ..........| 853,000,000 |1,099,000,000 | 77.6 + ---------------------------------------------------------------- + | Payments to| Assets | Assets for each + | policyholders| | 100 insurance + | | | in force + | | | + Legal reserve | $470,000,000 |$4,659,000,000 | $22.66 + Assessment .... | 106,000,000 | 195,000,000 | 1.37 + Total ....... | 576,000,000 | 4,854,000,000 | 15.87 +] + +[Footnote 8: In 1913 the total premiums collected by all kinds of +insurance companies reported (Statistical Abstract of the U.S., 1914, +pp. 549-557) were about $1,512,000,000, and the amount returned to +policy holders the same year was $918,000,000, or about 61 per cent +of all premiums, the amount not returned ($584,000,000) being 39 per +cent. + + Premiums received Returned to policyholders + Amount Percent + + Life insurance + reserve companies ..$715,000,000 $470,000,000 67 + assessment companies 138,000,000 106,000,000 76 + Other kinds ......... 659,000,000 342,000,000 52 + ------------- ----------- -- + Total ........... $1,512,000,000 $918,000,000 61 +] + +[Footnote 9: See above, secs. 2 and 5.] + + + + +PART IV + + +TARIFF AND TAXATION + + + + +CHAPTER 13 + +INTERNATIONAL TRADE + + § 1. Political and trade boundaries. § 2. Benefits of international + trade. § 3. Choice of the more advantageous occupations. § 4. Persistence + of differences between nations. § 5. Doctrine of comparative + advantages. § 6. Equation of international exchange. §7. Balance of + merchandise movements. § 8. Cancellation of foreign indebtedness. § 9. + Par of exchange. § 10. International monetary balance and price-levels. + + +§ 1. #Political and trade boundaries.# By international trade is +meant, in general, trade between persons resident in different +countries; comparatively rare is the case in which one of the two +parties to a trade is a whole nation acting through its government +as a unit (e.g., in the purchase of munitions of war in neutral +countries). Outside of a communistic group such as the family, trade +is a necessary accompaniment of division of labor. As territorial +division of labor began between neighboring tribes,[1] international +trade was the earliest kind of regular interchange of goods. Indeed +the very word "market" meant originally the boundary between tribes. +Thus, from primitive times when wandering savages gave bits of flint +or copper in return for salt or fish, individuals have sought to +adjust their goods to their desires through trade with men of other +political groups. With the progress of the world in the means of +communication and transportation, international trade has widened in +extent and grown in volume. + +Economic relations never have been coextensive with political +relations. The economic groupings of men connected by a network of +trades never have and never will correspond very nearly with political +groupings of men bound together by common citizenship in particular +states. Indeed it is not uncommon for many of the residents in two +adjoining states to trade far more with each other than they do with +their own fellow citizens. Lawmakers and rulers from the beginnings of +formal governments have constantly tried to hinder this kind of trade. +They have done this chiefly because of their belief that they could +strengthen their states in political and economic ways, and could +favor some of their citizens, by confining economic relations within +political boundaries--if not exclusively, more closely than when trade +was left to take its natural course, guided by individual motives. The +regulation of international trade, therefore, has always constituted +an economic problem of great importance in the field of political +action. + +§ 2. #Benefits of international trade#. Now, bearing in mind that +international trade is carried on by individual traders in any two +countries, we may ask what motive impels men to trade across the +political boundaries of a state. The simple answer is that each trader +has something to give and desires to get something in return. Each +is seeking to get something that has to him a greater value than the +thing he gives, and believes he can do this in trade with a foreigner +better than by trading at home. In any trade, both parties gain, or +think they are gaining.[2] In international trade there is the same +chance for mistake as in domestic trade, but no more. In a single +transaction in either domestic or foreign trade one party may be +cheated, but the continuance of trade relations is dependent upon +continued benefits. The once generally accepted maxim that the gain +of one in trade is the loss of another is now generally rejected, +but often still it is assumed to be true of international trade. +The starting point for the consideration of this subject is in +this proposition: Foreign trade is carried on by individuals, for +individual gain, with the same motives and for the same benefits as +are found in other trade. + +The advantages of international trade are indeed but those of division +of labor in general, in the particular case where it happens to cross +political boundaries. The great territorial divisions of industry are +determined first and mainly by natural differences of climate, soil, +and material resources. Thus trade arises easily between North and +South, between warm and frigid climates, between new countries and +old, between regions sparsely and regions densely populated.[3] + +Territorial divisions of industry are determined secondly by social +and economic differences such as those with respect to accumulation +of wealth, amount of loanable capital, invention, organization and +intelligence of the workers, and the grade of civilization. + +Foreign trade normally imparts increased efficiency to the productive +forces of each country. In most cases it is apparent that labor is +more effective and gets a larger product when it is applied in those +ways for which the country is best fitted and for which it offers the +best and most bountiful materials; and that, further, when special +branches of industry have developed at one place, they make possible +the advantages of large production and of high specialization. + +Certain erroneous explanations of the advantages of foreign trade may +be dismissed with brief mention. It is said to give vent for surplus +production and to give a wider market to what would otherwise go to +waste. This involves the same fallacy as the "lump of labor notion," +the destruction of machinery, and the praise of waste and luxury.[4] +If it were true that sale to backward nations were now necessary +to give an outlet for products which would otherwise rot in the +warehouses, a time would come at length when the world would have +an enormous surplus unless neighboring planets could be successively +annexed. Again it is said that the great purpose of foreign trade is +to keep exports in excess of imports so that the money of the country +may constantly increase in amount. The ideal of such theorists is an +impossible condition where the country would constantly sell and never +buy.[5] In the narrow commercial view of the subject the sole object +of foreign trade is to afford a profit to the merchants, regardless of +the welfare of the mass of the citizens. + +§ 3. #Choice of the more advantageous occupations#. Let us consider +the cases of two countries somewhat differently situated, such as an +old country like England and a newer country such as was the United +States in the nineteenth century. Now the relative advantages of +various industries in two such countries are very unlike. The newer +country excels in its broad area, its abundant rich lands, its +bountiful natural resources of forests and mines. These are the +superior opportunities which give the economic motives for settlement +and for continued immigration from the other lands. Most of the +newcomers find it to their advantage to develop the peculiar +opportunities of the new land, rather than to go on producing the same +things in the same way as they did in the old country.[6] Thus they +get a larger quantity of products per day's labor, and are able to +gain by trading a part of these for the products of the older country. +Thus the characteristic industries of the two countries must differ. +Without any government supervision, therefore, but simply through the +choice of enterprises, each seeking the best investment of capital for +himself, industries are developed in which each country is either +most markedly superior, or least inferior, to its neighbors. If +either laborers or capitalists in the new country were to turn to +the less-favored industries they would be forced to accept a smaller +reward than they can earn in the more favored. + +§ 4. #Persistence of difference between nations#. If both men and +wealth interchanged between industries and between countries with +perfect readiness and without any outlay whatever for transportation, +these differences would soon disappear, and perfect equilibrium +of advantage would everywhere result. In every country, in every +occupation, labor and wealth of given quality and amount would receive +the same reward. But the interchange of labor and of products between +countries is never without friction. + +The laborers, enterprisers, and investors in a naturally rich country +are thus in a position of more or less enduring advantage relative to +those of older and poorer countries. Differences of the same nature +appear as between different parts of the same country, as between the +Northern and the Southern states of the American union, between the +Eastern and the Western states, and even between neighboring countries +of the same state. The differences between two countries, however, are +likely to be more marked, the circulation of factors being so active +within a country that it is allowable to speak broadly of prevailing +national rates of wages and of interest. Altho, as Adam Smith said, "a +man is of all sorts of luggage the most difficult to be transported," +the higher wages in a new country attract constantly from the older +lands a portion of their laborers. The higher rate of interest in new +countries constantly attracts investments from abroad; yet, despite +these forces working toward equalization, the inequality may remain +and, through the working of other influences, may even increase in the +course of years. + +§ 5. #Doctrine of comparative advantages.# It may be that two +countries both possess the necessary technical conditions for making +both articles that are to be traded for each other. It may even be +that the people in one country would be able to make not only one of +the two objects of trade, but both of them, more easily and with less +sacrifice and effort than the people in the other. If, for example, +American labor can produce two bushels of wheat in a day and English +labor but one bushel a day; and American labor can produce just as +much iron in a day as English labor--or more--the question always +arises: Is it not foolish and wasteful not to produce both the wheat +and the iron? + +Now, exactly the same case is presented in almost every simple +neighborhood trade. The proprietor may be able to keep his books +better than does the bookkeeper whom he employs. The merchant may be +able to sweep out the store better than the cheap boy does it. The +carpenter may be able to raise better vegetables than can the gardener +from whom he purchases. Yet the merchant does not turn to sweeping and +the carpenter to raising vegetables, because if they did they would +have to quit or limit by so much their present better-paying work, and +would lose far more than they would gain. + +So whenever the people in one country have a greater advantage in one +article than in another, relative to another country, the foreigners, +like the low-paid man, will be willing to exchange at a ratio that +will make it profitable to specialize in the product wherein the +greater superiority lies.[7] + +But this is always hard doctrine for the popular mind, and +particularly for the commercial mind endeavoring to carry on a +business that can not be made "to pay" in the face of foreign +competition. It is easy to believe that a country ought not to import +goods unless it is at an _absolute_ disadvantage in their production. +It is often declared that as our country can produce any kind of goods +"as well" as foreign countries (meaning with as few days' labor), +there is a loss on every unit imported. The fundamental principle of +trade as applied to such cases shows that not the advantage which +one country enjoys over the other as to a single product determines +whether it will gain by producing at home, but the comparative +advantages enjoyed in the production of the two articles in question. + +As a simple example, suppose that a day's labor in country A will +secure two bushels of wheat (2x) and two hundred pounds of iron (2y), +whereas in B a day's labor will secure 1x or 2y. Then A's comparative +advantage in producing x becomes a reason for A's not trying to +produce y. Trade can take place (aside from transportation outlay) +at any ratio between 2x = 2x (A's minimum) and 2x = 4y (B's maximum). +Evidently at any rate between these two ratios each party would gain +something by the trade, e.g., at 2x = 3y A would get 3 instead of 2y +by a day's labor, and B would get 1-1/3x instead of 1x for a day's +labor (2x for 1-1/2 day's labor instead of for two days'). If, +however, A could produce exactly twice as much of everything as B +could, then there could be no motive on either side for trade. But +this never happens. + +§ 6. #Equation of international exchange.# Foreign trade of course +can take place as barter, and in earlier times, particularly, very +commonly did so. But in the existing monetary economy nearly all +trades are expressed in terms of monetary prices. Both the prices +of all the particular objects of international trade and the general +levels of prices in any two trading countries come to be pretty +definitely interrelated. Changes in the one country at once compel +readjustments in the other. To understand in the most general way +how this occurs, a knowledge at least of the elementary principles of +foreign exchange is required, and to this we may now turn. + +Let us begin with the proposition known as the equation of +international exchange, which is sometimes given thus: the value of +the imports of a country must in the long run equal the value of +the exports. But this proposition (especially the words imports and +exports) must be understood in a much broader sense than that of +the movements of merchandise merely. The proposition might better be +expressed: the total credits of a nation (including money actually +sent abroad) must just equal its total debits (including money +imported). Into the balance of accounts between any two nations enter +many items: the cash values of the imports and exports of merchandise; +freights, insurance premiums, and commissions; the expenses of +citizens while traveling abroad; money brought in or taken out by +immigrants; the cost of the governmental foreign services (such as the +salaries of consuls and of diplomatic representatives); subsidies +and war indemnities received from or paid to foreign nations; the +investments of foreign capital; and credit items of many kinds, on +both sides of the account. + +The effect of loans upon the equation differs at different periods +according as they are just being made, are continuing, or are being +repaid. When foreign capital is first invested in a country, whether +it is loaned to the government or to individuals or to corporations, +either gold must be remitted to the borrowing country or goods be +sent. But later the interest payments and the eventual repayment of +the principal of the loan act in the opposite direction. Accruing +interest must be offset annually by exports from the debtor country +and the repayment of the principal requires that either money or goods +be exported equal in value to the original obligations. In popular +opinion an excess of exports of merchandise is an index, if not the +real cause, of national prosperity; but evidently it is no true index +whatever on this point. An excess of exports may at any given moment +indicate that the country is rich and is lending abroad, or that it is +in debt and is paying interest, or that it is repaying the principal. +On the other hand, an excess of imports may indicate either that a +country is poor, and is borrowing from abroad, or that it is rich, +with many foreign investments, and is receiving the income from them +in the form of a regular shipment of goods from the debtors. + +The following statistics of the foreign commerce (merchandise imports +and exports) of the principal countries of the world are given in +significant groupings which call for various explanations. + +Figures are in million dollars ($1,000,000) and are mostly for the +year 1908, (Stat. Abst. 1908, p. 769). At the present writing the war +has altered all the lines of commerce. + + COUNTRIES HAVING EXCESS OF IMPORTS OF MERCHANDISE + + |Excess %|Imports.|Exports.| + United Kingdom ..| 57 | 2886 | 1835 | + Germany ..........| 20 | 1824 | 1523 | + Netherlands ......| 30 | 1130 | 873 | + France ...... | 12 | 1089 | 975 | + Belgium ..........| 33 | 642 | 484 | + + Italy ............| 68 | 562 | 334 | + Aust.-Hung .......| 7 | 487 | 457 | + Switzerland ......| 44 | 287 | 200 | + Spain ............| 10 | 168 | 153 | + Sweden ...........| 26 | 163 | 129 | + Denmark ..........| 16 | 191 | 165 | + Norway ...........| 58 | 101 | 64 | + + Canada ...........| 34 | 298 | 222 | + China ............| 43 | 254 | 178 | + Turkey ...........| 59 | 135 | 85 | + + COUNTRIES HAVING EXCESS OF EXPORTS OF MERCHANDISE + + |Imports.|Exports.|Excess %| + United States ....| 1312 | 1638 | 25 | + Russia ...........| 436 | 542 | 24 | + + British Colonies .| 558 | 615 | 5 | + British India ....| 418 | 486 | 16 | + Australasia ......| 242 | 302 | 25 | + Japan ............| 196 | 206 | 5 | + Cuba .............| 84 | 116 | 40 | + Mexico ...........| 78 | 115 | 42 | + San Domingo ......| 5 | 10 | 100 | + + Argentina ........| 263 | 353 | 34 | + Brazil ...........| 172 | 214 | 24 | + Chile ............| 98 | 116 | 18 | + Uruguay ..........| 35 | 37 | 6 | + Bolivia ..........| 21 | 24 | 14 | + Venezuela .... | 10 | 15 | 50 | + +#§ 7. Balance of merchandise movements.# The first group evidently +consists of the older, creditor countries which are drawing some of +the income of their investments from abroad each year in the form of +food and of raw materials of many kinds. The second group includes +countries of very diverse conditions, possibly all having some +investments abroad; Italy receives large imports in return for the +services of many Italians working in foreign countries, and the three +Scandinavian countries (especially Norway) carry on a large commerce +for other nations which is paid for in these ways. The excess of +imports in the third group probably is the result of new investments +that were being made in Canada by English and American capitalists, in +Turkey especially by Germans, and in China by Americans and Europeans. + +The countries in the second column are doubtless on the whole debtors, +but in varying degrees. The excess exports of some are insufficient +even to pay all the current interest, and they are borrowing still +more (possibly the British colonies, Japan and several South American +countries); others have ceased to borrow and are simply paying +interest; whereas the United States at least with its excess of +exports was at this time both paying interest and getting out of debt. +With the outbreak of the war in 1914 the United States began rapidly +buying up its foreign-held securities, and events are fast making it +a creditor nation. Its imports must therefore in future more nearly +equal if not exceed its exports, the actual outcome being dependent +as well on various other items in the balance as on those here +considered. + +§ 8. #Cancelation of foreign indebtedness.# In the international +business of any two important countries to-day, such as England and +America, the number of credit and debit transactions is enormous. If +each trader had to attend to the forwarding of the means of payment +for his purchases he would, of course, deduct from the amount of his +indebtedness the amount due him from his foreign correspondent, and +might from time to time "remit" the balance in the form of a shipment +of gold. This simple offsetting and cancelation of debits and credits +would greatly limit the amount of gold that would have to be shipped. +But still, under such conditions, there must be a very large number of +shipments of gold by different individuals, and a large proportion +of these shipments would be going in opposite directions at the same +time. Now a merchant in New York called M may have a balance to pay in +London to X and at the same time a merchant in London called Y have a +balance to pay in New York to a man called N. If M can buy from N his +claim in the form of an order, draft, or bill of exchange, and send it +to X, the latter may through his bank collect the sum from Y. In this +way a further cancelation of indebtedness would occur. + +When all persons having either debits or credits to be paid in New +York and in London, respectively, are dealing with the banks in these +cities, and the banks and special exchange brokers are constantly +buying and selling these bills, a market is created for London +exchange in New York (and conversely in London), and a much easier and +more nearly complete cancelation of indebtedness results. In effect, +all the debits and credits between the two countries are merged into +one big ledger balance, and the international shipment of gold bullion +finally made is just the amount needed to balance the accounts payable +at the time. Industrial indebtedness is represented in various forms: +bills of lading for goods shipped, drafts made by the creditor on his +debtor for goods shipped or property sold, checks or letters of credit +for travelers, bonds and notes public and private. These are the +objects dealt in by the bankers who are the agents to carry on the +work of exchange. + +The balance of foreign exchanges is of essentially the same nature as +the domestic cancelation of indebtedness. It is going on constantly +between the two merchants in the same town, between two banks in +the same town who represent groups of merchants, between men in +neighboring towns, and between distant states like New York and +California.[8] The price of exchange to the individual is reduced +by the specializing of the business in the hands of a few dealers, +permitting the cancelation of indebtedness or offsetting of exchange, +and greatly reducing the amount of bullion to be transported in making +the payments. The cost to the bank of providing this exchange for its +customers varies as conditions change, but in any case is not great, +so that in domestic business when any charge is made it is usually at +a fixed rate, and is mainly for the service. + +§ 9. #Par of exchange.# Foreign exchange from America to Europe is, +however, in two features different from domestic exchange: (a) the +cost of shipment of gold is greater; (b) the monetary units of the two +countries usually differ in name, weight, and fineness, and sometimes +in materials. We may define foreign exchange as the purchase and +sale of the right to receive a given kind and weight of metal or its +monetary equivalent in current funds at a specified time and place. +_Par of exchange_ between two countries using the same metal as +a standard is the number of units of the standard coin of the one +country that contains the same amount of fine metal as the standard +coin of the other country. There is no fixed par of exchange between +gold-using and silver-using countries: par of exchange between them +fluctuates with changes in the comparative values of the two metals. +The _gold shipping points_ for importing or exporting gold are +respectively par of exchange plus or minus the cost of moving the +actual metal. These points vary with means of transportation and +communication. The par of exchange between New York and London being +nearly $4.866 and the cost of expressing and insuring a gold pound +between New York and London being approximately $.02,[9] the shipping +point for the export of gold from New York is $4.886 and for the +import of gold to New York is $4.846. At these upper and lower limits, +there is a motive for shipping gold as a commodity. + +When large sales have been made to Europe and credits are accumulating +in New York and the importation of gold is imminent or already begun, +the claims are bought by bankers in New York at less than par. At such +a time one needing to remit a sum to London can buy exchange for less +than par, for every such draft remitted reduces London's indebtedness +and, by so much, the need of shipping gold to this country. As a +rule then, accumulating credits here mean a low rate of exchange, +accumulating debits a high rate of exchange from this to the foreign +country. + +These are the merest rudiments of the subject. The many problems +arising, such as the adjustment of foreign credits to changing needs, +and such as arbitrage (the readjustment of the rates of exchange +prevailing among different financial centers) make foreign exchange +both a complex science and a difficult art. + +§ 10. #International monetary balance and price-levels.# The balance +of all accounts for or against a country (including new loans, current +interest, and repayments) must thus eventually be settled in money. +This cannot fail to affect the general level of prices in both +countries, tho this is brought about often only in indirect and +gradual ways. The flow of money out of a country causes the loan +market of a country to tighten (interest and discount rates to rise) +in proportion as the reserves of the banks are reduced. Then "general +prices" begin to fall.[10] When prices fall, imports decline, as the +country is not so good a place in which to sell: when prices rise, +imports increase, as it is a better place in which to sell. The +opposite effect is produced on exports, and thus in a short time the +national credits and debits are again brought into equilibrium. A +slight movement of money in either direction is enough to influence +prices and set in motion forces to counteract a further flow of +money. Decade after decade the circulating medium of leading countries +changes very slightly in amount, and the fluctuations in its amounts +during periods of so-called "favorable balance of trade" and of +"unfavorable balance of trade" are only the smallest fraction of the +value of goods passing through the ports of the country. + +It is therefore absurd to imagine, as is sometimes done, that a +country could, by continually importing goods, be drained of all its +money, or that by any possible set of devices it could forever have an +excess of exports to be paid for by a continual inflow of gold. +Long before either of such movements could go far, the automatic +readjustment of prices would inevitably check it, and secure and +retain for each country its due portion of the money. + + +[Footnote 1: See Vol. I, ch. 17, sec. 10.] + +[Footnote 2: See Vol. I, ch. 5, secs. 1 and 7.] + +[Footnote 3: See Vol. I, ch. 6, sec. 11, on the origin of markets.] + +[Footnote 4: See Vol. I, chs. 36 and 37.] + +[Footnote 5: Recall ch. 4, in general, on the nature of monetary +demand.] + +[Footnote 6: See Vol. 1 for numerous statements of the effects of +varying quantities of agents upon the economy of utilization; e.g., +pp. 138, 163, 164, 213, 228, and chs. 34 and 35 entire.] + +[Footnote 7: This theory has usually been presented under the name +of "the doctrine of comparative costs." The word "costs" is very +misleading in this connection because it is now always applied to +enterpriser's outlay. It seems best, therefore, to replace it in this +phrase by the word "advantages." Of course, it _never_ can be true +that an article can be "profitably" imported when its monetary costs +(all things considered) are higher in the exporting than in the +importing country. Indeed, the importation of any article is proof +conclusive that the importer thinks that the monetary costs of +an article would be higher in the importing than in the exporting +country. See further, ch. 15, secs. 11 and 13 (note).] + +[Footnote 8: See ch. 7, sec. 7.] + +[Footnote 9: This varies also with conditions; after the outbreak of +the war in 1914 it was for a time as high as $.05 because of high war +rates of insurance.] + +[Footnote 10: The connection between a high rate of interest and +falling price is a dynamic phenomenon of a very temporary nature. +In long-time static conditions the general level of prices and the +prevailing rate of interest are dependent on entirely different sets +of forces. See on the theory of interest, Vol. I, p. 308. In long-time +movements of prices, in contrast with brief changes due to foreign +trade such as are referred to above, high rates of interest are +connected with rising prices, and _vice versa._ See above, ch. 6, sec. +8, on fluctuating price-levels and the interest rate.] + + + + +CHAPTER 14 + +THE POLICY OF A PROTECTIVE TARIFF + + § 1. Military and political motives for interference with trade. § 2. + Revenue and protective tariffs. § 3. Growth of a protective system. + § 4. The infant-industry argument. § 5. The home-market argument. + § 6. The "two-profits" argument. § 7. The balance-of-trade argument. + § 8. The claim that protection raises wages. § 9. Tariffs and + unemployment. § 10. Exports and exhaustion of the soil. § 11. Protection + as a monopoly measure. § 12. Harm of sudden tariff reductions. + + +§ 1. #Military and political motives for interference with trade.# +The considerations set forth in the last chapter raise a strong +presumption in favor of the sovereign state permitting its citizens to +trade freely across its boundaries, as the best way to further their +own prosperity and, on the whole and in the long run, that of the +nation. Indeed, this presumption and belief has been held by +nearly all serious students of the question, with more or less of +modifications and qualifications, ever since Adam Smith published his +work on the "Wealth of Nations" in 1776.[1] But in conflict with this +belief has been the all but unanimous policy of nations from +early times, throughout the Middle Ages, and down to this day, of +interposing some special hindrances (of varying degrees and kinds) to +this kind of trade. Sometimes this has been done by prohibitions, but +more often by taxes imposed upon either imports or exports. Sometimes +the attempt is made to justify the policy of governmental interference +with foreign trade by arguments which crumble before the slightest +examination, and again it is admitted that free trade is true in +theory, but it is declared to be false in practice. The latter view +is not to be entertained for a moment. If free trade in theory (as an +explanation) is complete and true, it will in practice (as a plan of +action) be sound and workable. In truth, however, the practical policy +of governmental interference with foreign trade has always in part +rested on other than the simple economic grounds. + +Interference with free trade with the foreigner has always been in +large measure due to political motives. In every petty medieval state +or self-governing city, the aim was to make the economic boundaries +coincide as nearly as possible with the political boundaries. Except +for the trade in a few articles of comparative luxury this aim was +at that time nearly attainable. The peasantry surrounding a fortified +town and enjoying its protection were compelled to trade there. Down +to our own time it has seemed to statesmen expedient to forbid or +discourage trade that might nourish the economic power of future +enemies. Sometimes governments have used embargoes, bounties, or +tariffs as weapons to injure the trade of other nations and to secure +diplomatic or commercial concessions. Often they have sought by +tariffs to encourage the building of ships and the manufacture of +armaments and of all kinds of munitions by private enterprise within +their own borders, even when the immediate cost of these products was +greater than if they were purchased abroad. In such cases it is +always a question whether an outright expenditure would not be better, +whether the government could not build its own arsenals and shipyards +more economically than it can foster private enterprise by means of a +protective tariff. However, the political (or military) argument for +protection recognizes that it is in itself a costly (not a profitable) +policy, and that the cost is only justified on the grounds that +military necessity warrants the outlay. + +The military argument as applied to the preparation of ships and +munitions has no application to a tariff on those articles which have +no bearing upon military power. But the most recent application of +science and the mechanical arts to the uses of war has given new +significance to a larger policy of industrial preparedness for +military purposes. The year 1914 doubtless ushered in for the world +a new epoch of protective and discriminatory tariff legislation +determined by political rather than by direct economic considerations. + +§ 2. #Revenue and protective tariffs.# An important distinction in +principle is to be made between a tariff for revenue and a tariff +for protection. A _revenue tariff_ is a schedule of duties on goods +entering or leaving a country, so arranged that the collection of +taxes causes the least possible disturbance to domestic industry. +Speaking generally, the duties may be on either imports or exports; +but, as export duties are unconstitutional in the United States, our +tariff discussions are concerned only with import duties. The most +completely revenue-yielding tariff is one touching only articles +which, even at the higher prices are not in the least to be produced +profitably in the home country. A _protective tariff_ is a schedule of +import duties so arranged as to give appreciably higher prices to some +domestic enterprises than they could obtain with free trade. It shuts +out some foreign goods which would otherwise enter, an in so far it +"protects" the domestic producer from the foreign competitors who +would sell at lower prices than those at which he can or will sell. +In other words, "protection" means governmental interference with the +freedom of trade. + +The distinction between revenue and protective tariffs, thus clear in +principle, is not always easy to make in practice. It does not lie in +the intention of the taxing power, but in the actual effects produced. +Most tariffs combine the characteristics both of revenue and of +protective measures. A tariff that reduces imports but does not +cut them off entirely may be called either a revenue tariff with +incidental protection or a protective tariff with incidental revenue. +The difference is one of degree. But notice particularly that the two +features of protection and of revenue are mutually exclusive. To the +extent that one is present the other is impossible. A tariff rate +that in whole or in part excludes the foreign article to that +extent affords "protection" but does not yield revenue. Whenever the +government collects a cent of tariff taxes, the domestic producer in +so far and as respects that unit of goods is unprotected. Likewise, +whenever any domestic producer enjoys "protection" in respect to any +unit of goods, importation is in so far prohibited and the government +is deprived of any revenue whatever derived from the production and +sale of that unit of goods. + +§ 3. #Growth of a protective system.# The protective policy developed +at first accidentally, as it were, out of the practice of levying +taxes for revenue only. Tolls, dues (or duties), customs (that is, in +former times the customary dues paid by merchants, now the dues fixed +by law), tariffs (that is, schedules or lists of rates of duties) were +at first intended to raise revenues for the sovereign, the city, or +the state. The unintended, and to some degree inevitable, result of +the taxation of goods in commerce, whether imports or exports, is +to prevent and discourage trade and to raise the prices of the goods +imported. Any change in tariff duties, therefore, at once alters +the previously existing adjustment of profits and of industries in a +country. + +The first effect of the tariff is the same as that of any new factor +in enterpriser's cost; the same, for example, as that of a new +domestic tax on an article or as that of a rise of freight rates--the +domestic price of the taxed article tends to rise. Other results then +follow. If the article cannot, even at the higher price, be produced +within the country (as in the cases of oranges, spices, and coffee +in England, Norway, and Sweden), its consumption is reduced. The +lessening of demand may, however, depress somewhat the price in +the producing country. But as such a tariff does not increase home +production of the taxed article, it is therefore for revenue, not for +protection. + +But if the article can be profitably produced in the importing +country at the new price, "home industries" will start. Where the +transportation charges are low, as on the coasts and on the main lines +of railways, some imported goods may be bought, while farther inland +where transportation charges are higher home production of some or all +grades of such goods may take place. If the whole demand at home is +supplied and all imports stop, therewith cease all revenues to +the government from that source. A completely protective tariff is +completely prohibitive. + +Experience abundantly shows that, with a few exceptions, due to +climate and natural resources, it is impossible to put into effect the +most moderate schedule of duties without the increase in price at once +causing some men to shift their occupations, and to begin producing +articles of the kinds that have risen in price. At once appears a +group of "protected industries," the owners of which are dependent for +the safety and profits of their investments, and the workmen in which +are dependent for the security of their present jobs (possibly for +the chance to continue the pursuit of highly skilled trades) on the +continuance, if not the increase, of the existing tariff rates. A +tariff may be adopted mainly from stress of financial need (as in our +own history in 1789 or in 1861), but its modification or repeal cannot +be decided by fiscal considerations. The "incidental protection" it +affords has created a wealthy and influential group of employers and a +large body of employees who are irresistibly tempted to exercise their +influence in politics almost solely in favor of continuing and of +increasing the rates to the sacrifice of the higher civic life of +their communities. Of course the beneficiaries of the tariff usually +believe sincerely that it is indispensable for the prosperity of the +country as a whole, and they can do much to persuade others to +the same opinion. This commercial motive for maintaining existing +protective tariffs explains in large part their wide prevalence, +whatever other reasons may be adduced in their justification. + +§ 4. #The infant-industry argument.# Most free-trade writers concede a +limited validity to the claim that protection may be used to encourage +infant industries and thus diversify the industries of the country. If +the natural resources of a land are adapted to an industry, it may be +called into being earlier by a fostering protective tariff. This is +merely anticipating and hastening the natural order of progress. In +the American colonies the manufactures of such goods as iron, cloth, +hats, ships, and furniture sprang up and continued not only without +"protection," but despite numerous harassing trade restrictions made +in the interest of English merchants. Can it be doubted that many +of these industries would have developed and flourished after the +adoption of the Constitution with no other favoring influences than +those of rich resources and of economy in freights? In the Mississippi +Valley since 1880 natural gas, abundant coal, ore, and timber have +made possible a great growth of industries without protection against +the Eastern states. Industries capable of eventual self-support must +in most cases naturally appear in due time. Economic forces will bring +them out. The protective system has often been likened to a hothouse, +anticipating the season by a few weeks and at great cost. The question +is whether the mere possession of the hothouse is a luxury worth the +price, if meantime the products can be got more cheaply by trade. +English manufactures flourished in the nineteenth century because they +were well established, had excellent coal supplies, great stores of +iron ore, and low-paid labor which did not have the opportunity of +better alternatives, as did the American workman. If America had +imported more (it would not have been all) of her iron and coal, the +English mines would have begun to shown signs of exhaustion earlier, +and America's advantage surely would have asserted itself in time. Her +iron manufactures undoubtedly were hastened--they cannot truly be said +to have been created--by the protective tariff. + +The peculiar advantages of a new country attract labor and +enterprise into a few lines. Industries are forced into an earlier +diversification by tariffs. Which is the better economic situation? +Contrast Iowa, Dakota, and Minnesota, or Kansas, if you please, with +New York and Pennsylvania. Is it so certain that a dense population +congested in cities and crowded in factories and mines is a more ideal +social aggregation than is a community of prosperous farmers? The +smoky industrialism fostered by protection often puts a premium on a +low grade of immigrants, crowds then into city slums and into forlorn +mill towns, and keeps them aliens to the American spirit. It would be +surprising if Americanism on the Western plains were not as sound +as in the crowded cities. But the infant-industry argument appeals +strongly to the enterprise and the speculative spirit of Americans, +who like to do all things rapidly and on a large scale. Every village +aspires to be a great industrial center. Americans are impatient of +the suggestion that things "will come in time"; they like things to +come at once. + +It must, however, be recognized that in a new country there is often +a certain monotony and poverty of life because of the lack of +diversified industries. There are not sufficiently varied avenues for +the expression and use of the manifold talents of the nation. There +are unused materials and opportunities, but the initial expense of +experimentation, the initial difficulties of gathering and training a +working force, are discouraging to individual enterprise, prices being +as they are. A protective tariff is not necessarily and always the +best way, but it is one way of helping private enterprise to establish +and conduct such industries through their initial period. But as has +been pointed out by many writers, the infant-industry argument is +self-limiting, and involves always the assumption that the industries +selected as fit for protection are such as ultimately, and within a +moderately short period, can grow into self-dependence. The infant +must sometime grow to be a man and stand on his own legs, or he is +either a chronic invalid or a degenerate. + +#§ 5. The home-market argument.# The home-market argument seeks to +show a more permanent need for a tariff. At the same time it appeals +to the farmers, whom it has been hard to reconcile to a policy which +in America[2] has been peculiarly favorable to manufacturers. The +home-market argument extols the advantages of having near to the +farms customers for agricultural products, and dwells on the greater +steadiness of domestic trade. War or political changes, it is said, +may change the demand for products. This is true, but no other changes +have affected American agriculture so radically as the peaceful +development of domestic transportation and the opening of the West. + +The main economic claim made in the home-market argument is that the +shipping of food to Europe and the importing of manufactures involve +a great cost for double freights which could be saved by manufacturing +at home. The farmer is supposed to pay this cost. The obvious defects +in this view are: first, there is nothing to show that the freight is +not partly or entirely paid by the European, either the manufacturer +or the food consumer; secondly, home trade "saves the freights" for +the farmer only in case he can buy goods under a tariff with less +of his own labor and products than under free trade. The payment of +freight charges is true economy when the goods can be bought at a +distance on more favorable terms than near home. The freight argument +attempts to prove too much for it condemns every trade within the +country, of goods produced a stone's throw away from the consumer. + +The home-market appeal is strongest when addressed not to all farmers, +but to one class of farmers, those whose lands are situated nearer the +manufacturing cities. As city population grows, some land is converted +from the extensive cultivation of corn and wheat to dairying, fruit- +and market-gardening in the neighborhood of cities, and perhaps at +length is used for factory sites or as city lots. There is, thus, a +partial validity in the argument as applied to a comparatively small +number of farmers, who gain as landlords, not as tillers of the soil. +Even greater gains have sometimes been reaped by the owners of timber +lands, ore mines, coal lands, and other natural resources, the values +of which have been raised by tariff legislation. But unless these +gains come from truly productive additions due to the tariff, there is +no benefit to the community as a whole. + +#§ 6. The "two-profits" argument.# Somewhat related to this idea of +the saving of two freights is the "two-profits" argument. It is said +that the tariff keeps "two profits" at home, foreign trade gives but +one. The word "profits" is here used in the popular sense of gain from +a single transaction. Both parties are said to profit and both profits +are thought to be secured at home when two citizens are forced to +trade with each other. The view that there are "two profits" in a +trade is an advance upon the notion that "one man's gain is another's +loss,"[3] but there is an error in elementary arithmetic here, both as +to the number and as to the aggregate amount of profits. The purpose +of a protective tariff is to compel two of the citizens of a country +to trade with each other instead of trading with two citizens of a +foreign state; the number of profits made by each country is therefore +not increased by substituting domestic for foreign trade. + +What, then, as to individual size and aggregate amount of the profits? +The gain is not the same in all trades; the trade is made if there +is a gain to each party, no matter how small it is; but the generous +"profit" on one transaction where the conditions of the two parties +are very different may be greater than the total of petty gains on a +dozen trades between two traders of evenly matched powers. Indeed, +the greater the difference in the conditions and the capacities of two +groups of traders, the greater is the sum of the profits which they +may secure through the members of each group trading with those of +the other, rather than by the members of each group trading only among +themselves. Can it safely be assumed that every trade with a foreigner +is less advantageous than one with a fellow-citizen? Diamond cuts +diamond, but two Yankees left to themselves surely should not be +worsted in bargains with the universe. If they could exchange to +better advantage with each other they probably would discover it as +soon as the interested manufacturers and political orators who can +prove so eloquently that they know the other man's business better +than he knows it himself. Forcing the home trade by making our +citizens trade with each other whether both wish to or not may be +to the advantage of one citizen, but it is not likely to be to the +advantage of both citizens. + +§ 7. #The balance-of-trade argument.# At the foundation of nearly +all belief in the virtues of a protective tariff will be found the +"favorable balance-of-trade" notion. The ideal of the more thorogoing +upholders of a protective policy is to keep merchandise consistently +flowing out of the country, and to have nothing come in--in any case, +nothing that by any fair amount of effort (whatever that be) could be +produced at home. This is called maintaining a "favorable balance of +trade." Sometimes the emphasis is more on the advantages of an excess +of exports of goods, sometimes more on the importance of the need "to +keep money at home." The simple error in these opinions is clearly +apparent in the explanation of foreign exchanges and of the principles +regulating the international flow of money.[4] + +An interesting commentary on the opinion before us is the fact already +noted[5] that an excess of exports is the usual situation in poor +debtor countries having constant interest payments to meet; while, on +the contrary, rich creditor countries have an excess of merchandise +imports. + +The "favorable balance-of-trade" argument, with the emphasis on money +rather than on goods, is that the protective tariff keeps money at +home which, if trade is free, will be sent abroad to buy foreign +goods, thus impoverishing the country. This doctrine as presented +in the seventeenth and eighteenth centuries in Europe, was known as +_mercantilism_. It had great influence upon the commercial policies +of all the great European nations. A superficial glance at the trade +relations of an old, rich country with a new province seems to give +evidence for such a belief. A richer country that is lending capital +(sent to the debtor country in the form of goods) has at the same time +a larger supply of money. The lack of money and the poverty of the +newer country are looked upon by the protectionist as due to the +importation of goods. The common cause of the imports to newly settled +districts and of their scanty stocks of money, it need hardly be +repeated here, is the comparative poverty of settlers and pioneers.[6] +Often these are paying for imports by means of loans, and in any case +their monetary stocks are not decreased either by their foreign trade +or by their domestic trade with the older and richer parts of the same +country. Europe and the United States, in their trade with China and +South America, usually do not get gold in exchange, but merchandise +of various sorts. It is true that in the trade of England and New York +with great gold-producing districts, such as California, South Africa, +and Alaska, gold is received in return for merchandise, for much of +the gold in gold-producing districts is merely merchandise, and its +export does not drain them of their due portion of money. There was +a time when the states of Kansas, Nebraska, Iowa, and their neighbors +were filled with resentment against the money-lenders of the Eastern +states. There was a widespread belief that hard times were due to an +insufficient currency.[7] + +Attempted action took the form of the greenback and free silver +movements, which were defeated by the opposition of the East, but +there can be little doubt that if the Federal Constitution had +not forbidden it, the discontented states would have established a +protective tariff "to keep their money at home." Few advocates of +protective tariffs are ready to admit that the money stock of the +country is dependent on the general wealth of the country and on the +methods of doing business, rather than on a protective tariff. + +§ 8. #The claim that protection raises wages.# The most effective +popular claim made for protection is that it raises, or maintains, the +general scale of wages in the country. This argument takes two forms: +first, when wages are low in a country it is claimed that a tariff is +needed to raise them; and, secondly, when wages are high it is argued +that a tariff alone can preserve them. In Germany the fear is of the +higher paid and more efficient labor of England. In America, where +general wages at all times have been higher than in England, it was +first argued (in the time of Henry Clay) that because of the greater +cost of production, due to high wages, the tariff was needed to start +certain industries; but after the tariff had long been established +and the old argument had been forgotten (ever since 1865), it has +been urged that the tariff, being the cause of high wages, must +be maintained to protect against the "pauper" labor of the older +countries. The higher wages in new countries where a tariff exists are +always claimed to be the fruits of a protective policy. The true +cause of the high general scale of wages in America is the greater +efficiency of industry under existing conditions.[8] Labor is +surrounded here with advantages in the forms of rich natural resources +and of mechanical appliances such as never before were combined. +Because of the scarcity of workers in particular protected industries, +wages may be temporarily higher in them than in some other industries; +but such workers form a small fraction of the population, and it is +impossible to show that the general scale of wages in all occupations +is raised by the tariff protecting this fraction. + +There is, of course, no question that every tariff change affects +certain enterprises and classes of workmen. Enterprisers already +acquainted with and engaged in a business always may hope to gain by +the higher prices immediately following a rise in the tariff rates +on their particular products. Though they are granted no enduring +monopoly by the protection, they for a time enjoy the advantage of +being on the ground, and may reap the first fruits of the favoring +conditions. The enterpriser usually profits when the price of his +product suddenly rises. Usually skilled workmen are affected slowly by +competition when there is any considerable increase of prices in their +special industries. The important question is, Who bears the burden of +the higher prices that result from a tariff? The burden is very soon +distributed. A part of it may be for a short time borne by the retail +merchants, but ultimately nearly the whole of it must be borne by +their customers, the unfortunate, less favored citizens. The weight +falling on each is usually small, often unsuspected, always hard to +measure. The increased benefit is concentrated in a few industries and +accrues to a comparatively few producers. Here is a recipe for riches: +get everybody to give you a penny; it's so little that no one will +miss it, and it will mean a great deal to you. Something like this +happens in the case of many protected industries; every consumer +of the article pays a few cents more, a small group of wage-earners +temporarily gains, and a few enterprises wax wealthy. + +§ 9. #Tariffs and unemployment#. The claim that a low tariff is bad +for the workers is made with peculiar success in any period when +unemployment is greater than usual. It is vain in reply to show that +again and again equally bad periods of unemployment have occurred when +a high tariff was in force, and that often the most highly protected +industries are most affected. It is vain to suggest that fluctuations +of unemployment are related rather to the rhythm of industrial cycles +and panics, than to any particular level of the tariff, whatever it +be.[9] The fact that at the moment is seen is that here are some men +for the time out of work, and here are some foreign goods coming in. +Of course, what is not seen is that if we stop importing goods we +thereby eventually will stop the exportation of goods of equal value +now being sent in payment and this must throw as many men out of jobs +as we helped into jobs by raising the tariff. But the view easy to +take is the short view, and the ulterior consequences seem to the +popular mind to be vain imaginings. + +§ 10. #Exports and exhaustion of the soil#. It has been ingeniously +argued that a tariff may keep some of the natural agricultural +resources of a new country from becoming quickly exhausted. The export +of food takes out of the soil and out of the country fertile qualities +never to be returned. The shipment of several hundred million dollars +of food products year after year represented a tremendous drain from +the soil of the United States, but this has now largely ceased. +The assumption, however, that the use of the food in this country +preserves the fertility of our own fields is in the main mistaken. The +fertile material in the food for human consumption hauled to a town +five miles away from the field is almost as entirely lost as if it +were shipped to Europe. Engineering skill has as yet succeeded in +returning economically to the fields from which it comes hardly a +fraction as much fertile organic matter as that which flows into the +sewers, that is dumped into river and ocean, and that is buried in +heaps at the borders of our own cities. Artificial fertilizers are +increasingly used, to be sure, but they are obtained in other ways. +On the other hand, the increased use of iron, coal, and timber, as a +result of encouraging manufacturers, has very effectually hastened the +exhaustion of the natural resources of the country. + +§ 11. #Protection as a monopoly measure#. It has rightly been observed +that a new country has a limited potential monopoly in certain kinds +of products and that a tariff may make it effective. The rapid opening +up of America with its rich natural resources greatly benefited +the average consumer in Western Europe, altho it caused a loss to a +special class of landowners.[10] Whether the citizens of the older +or of the newer country shall reap the greater benefit in the trade +depends on the reciprocal demand for the two classes of goods, as was +seen in discussing the equation of international demand. A wide margin +of advantage may go to one party and a narrow margin to the citizen +of the more favored land. To put it concretely: America, having great +natural resources for agriculture, might continue to trade food for +manufactured goods even tho England reaped most of the benefits of the +trade. An American tariff on manufactures from England would, under +such conditions, check the demand for English products and compel some +Americans to leave farming. This reduction of the American supply +of wheat or corn and of the American demand for English manufactures +compels a new ratio of trade (expressed in prices). It is conceivable +that trading fewer goods with a larger gain on each trade would give +a larger total of gain to the favored nation. Thus, foreigners may +conceivably be compelled to pay a part of the tariff duties to +enjoy the favored market. This is but a special case of the monopoly +principle; the government by law artificially limits the supply of +goods offered by its citizens. + +This argument is somewhat subtle, but probably is the soundest one in +the theory of protection. The supposed conditions seldom occur in +a marked measure, but they may exist, and probably have existed +in America. When the great system of internal transportation was +developed in the United States before that of the other new countries +(say from 1840 to 1894), this country had such peculiar advantages for +the production of food that the quantity was enormously increased +and agricultural prices fell.[11] At such a time the tariff may have +worked toward checking the fall and earlier reestablishing a more +favorable ratio. It did this by making prices of manufactured goods in +this country artificially higher and thus tempting men from rural to +urban callings. But the limited application of the principle must be +recognized. The potential competition of undeveloped countries on all +sides, seeking to develop their resources, and profiting by the higher +prices of food in the world-market caused by our tariff, threatens +the peculiar advantages of the favored land. Russia, Argentina, and +Australia have rapidly taken the place of America in supplying food to +Western Europe, in part, no doubt, because we refused to take Europe's +goods in trade. A great nation with its manifold interests is not +eminently fitted to practise the gentle art of monopoly. + +The period in America from about 1840 to 1890 shows certain absurd +contradictions in economic policy. By governmental action, national, +state, and municipal, enormous grants of money and lands were made in +aid of transportation. Canals, roads, and railways were built into +new agricultural territory far faster than was healthy and normal. A +prodigal land policy put a premium upon a wastefully rapid extension +of the farming area. These things were done to favor the agricultural +states, but agricultural prices fell so greatly that our farmers for +a long period were nowhere prosperous, and great numbers of them, +both in the East and in the West, were ruined. At the same time a +high tariff on nearly everything the farmers needed to buy was the +political spoil obtained by the Eastern and Middle states. This +further depressed the condition of the farmers and forced them or +their sons into urban industries. A slower development would have +occurred without the waste of national resources in such conflicting +policies of artificial stimulation. + +§ 12. #Harm of sudden tariff reductions.# It is rarely appreciated how +great is the tactical advantage which the advocates of a high tariff +enjoy in popular political discussion. They can so easily impress the +popular judgment with the evident fruits of their own policy and +with the immediate dangers of the policy of their opponents. When +a protective rate is first applied or is increased, it calls into +existence something visible and tangible, which can be measured in +terms of factories built, men employed, and products turned out. The +increased cost of these results is diffused among many consumers and +reaches them in such indirect ways and in such small increments of +price that they are quite unaware of the way they are affected.[12] + +On the other hand, reduction of the tariff works in a direction the +reverse of the enactment. It may cause local crises and may even bring +on general crises. The benefits of the lower prices are diffused and +lost to view; the immediate injury is concentrated and strikingly +evident. Factories are closed, investments depreciate, laborers are +thrown out of employment. The organic nature of local industry causes +these evils to be felt by many classes. Merchants, professional men, +servants, and skilled laborers, that are tributary to the depressed +industry, suffer. The effects are transmitted to commercial and +financial centres and often credit is much shaken. Then follows a slow +and painful process of readjustment. + +The low-tariff advocates in America undoubtedly have underestimated +these immediate effects. They have been too abstractly doctrinaire, +have argued too absolutely for the merits of free trade to be applied +instantly regardless of the existing distribution of investments and +of occupations. They have opposed one extreme system by another, with +no thought of the inexpediency and injustice of sweeping changes. +There is a strong feeling among business men that any tariff, be +it high or low, is better than a shifting policy. Despite the great +preponderance of domestic production over foreign trade, it is +perhaps too much to say that the tariff is unimportant in our present +conditions. It can, however, be truly said that business can adjust +itself in large measure to any settled conditions and that radical +changes, especially sudden and large reductions, are fraught with +evils. Long before a new tariff law goes into effect, even months in +advance of its passage, while it is merely in prospect, the course +of trade is abnormally affected. If the rate is likely to be raised, +large importations take place under the lower rate, and for a +considerable time after the law goes into effect imports are small, +while prices rise and domestic production gradually increases. But if +the rate is likely to fall, importations are for months meager, stocks +of goods are reduced to the lowest point, and when the lower rate +goes into effect, large importations follow to the injury of domestic +producers. In many cases a year or two of notice, time given to +enterprisers to adjust their business, would probably do away with a +large part both of the serious losses and of the lottery-like gains +that otherwise occur. + +The obvious measure of precaution and of justice would be to put +any new rate into effect gradually.[13] The difficulties are of a +political nature and in the desire of the party in power to "make a +showing" at once of the results of its campaign pledges, in the one +case by starting and stimulating industries through a higher tariff +and in the other by reducing prices to consumers through a lower +tariff. Under the new permanent tariff board, constituted to suggest +tariff changes and to administer the tariff laws, it would be possible +to apply some such feature. + + +[Footnote 1: See above, ch. 2, secs. 12, 13.] + +[Footnote 2: In European countries, on the contrary, the rates that +have been mainly effective have been those levied upon food products, +and the agricultural landholders have been the "protected interests," +such as the England "landed aristocracy," the German agrarian +"Junkertum," and the French peasant landowners.] + +[Footnote 3: See above, ch. 13, sec. 2.] + +[Footnote 4: See ch. 4, sec. 6 and ch. 13, secs. 6-10.] + +[Footnote 5: In ch. 13, sec. 7.] + +[Footnote 6: See ch. 4, secs. 4 and 9.] + +[Footnote 7: That there is a certain measure of truth in this opinion +is recognized in our discussion of the standard of deferred payments, +ch. 6, sec. 9. But the relation of a world-wide appreciation of the +standard money commodity with the burden that this change puts upon +debtors has nothing to do with the question now before us, viz.: +Does a protective tariff enable a country to keep and increase its +proportion of the world's stock of gold; and if it could, would it be +a general benefit?] + +[Footnote 8: See Vol. I, especially p. 228, and chs. 34 and 36.] + +[Footnote 9: See on wages in times of crises, ch. 10, secs. 6 and 7; +and on tariff changes, ch. 10, sec. 14, and ch. 15, sec. 13.] + +[Footnote 10: See Vol. 1, pp. 361 and 443.] + +[Footnote 11: See Vol. 1, p. 436, for average wheat prices in England, +practically in the world-market.] + +[Footnote 12: See above, sec, 8. On the next paragraph, see ch. 10, +sec. 14.] + +[Footnote 13: For example, the maximum alteration in any year might be +limited to 3.65 per cent of the value of the goods and in any case not +to exceed one tenth of the old duty, this change to be applied day by +day. Thus, if, on a valuation of $1000, the duty collected under the +old rate has been $400, and under the new law is to be $290.50, three +years would be required for the full change to become effective, the +reduction each day being $.10 per $1000 valuation. The administration +of such a rule would be simple, and it has been favored by men of +practical commercial experience.] + + + + +CHAPTER 15 + +AMERICAN TARIFF HISTORY + + § 1. Prevalence of protective tariffs. § 2. Specific and _ad valorem_ + rates. § 3. Some technical features of the tariff. § 4. The tariff, + 1789-1815. §5. The tariff, 1816-1845. §6. The tariff, 1846-1860. §7. The + tariff, 1861-1871. § 8. The tariff, 1872-1889. § 9. The tariff, + 1890-1896. § 10. The Dingley tariff, 1897-1909. § 11. Sentiment favoring + lower rates. § 12. The Payne-Aldrich tariff, 1909-1913. § 13. The + Underwood tariff, 1913. § 14. Some lessons from our tariff history. + Note on Tariff legislation and business depressions. + + +§ 1. #Prevalence of protective tariffs.# For a century and a half +most serious students of economics have favored a larger measure of +freedom, if not absolute freedom, in foreign trade. But the actual +practice of most nations has never been in accord with the principles +laid down by the philosophers. Great Britain alone among the larger +countries has, since 1846, steadily pursued a low tariff policy for +revenue only, and her example has been most nearly followed by Holland +and Denmark. Germany, which had always had restrictive duties, adopted +still more protective measures under Bismarck in 1879. France, +Italy, and most of the other nations of Europe have strong protective +tariffs. The United States has followed a restrictive policy since +near the beginning of the last century. The explanation of this +contradiction between precept and practice is not entirely simple. +Great interests are affected by foreign trade and certain of these +interests are able to influence opinion and to dominate legislation. +Free trade is not the most desirable thing for every one. The general +policy of free trade between nations, as advocated by most English +economists since Adam Smith, has usually been rejected by the people +and the legislators of other countries. + +In its details American policy in tariff legislation under the +Constitution has been varied and vacillating. The changes have been +determined in most cases by motives of temporary partisan advantage or +by the political activity of the immediate beneficiaries rather than +by clear knowledge and consistent purpose of the electorate as a +whole. Thus its lessons for the student are largely of a negative +nature, but they well repay serious study. + +§ 2. #Specific and _ad valorem_ rates.# Before entering upon the +history of the American policy let us make clear the meaning of +certain technical terms and explain certain methods which are +frequently referred to. + +Rates (and duties) may be by either specific or _ad valorem. Specific +duties_ are those that are calculated and levied according to some +physical test, as so much per pound, per yard, per hundred-weight, or +per ton. _Ad valorem_ duties are those that are calculated and levied +according to the value of the goods (usually as it was at the place of +shipment) determined by an assessor, by invoice of sale, by statement +of the importer under oath, etc. The actual duty collected on any +article may result from various combinations of the two rates (as, to +take an actual example, $4.50 a pound and 25 per cent _ad valorem_ +on cigars and cigarettes) or _ad valorem_ with a minimum valuation so +that on the cheaper goods the rate is specific. + +Specific rates are more easily applied in administration, not offering +the temptation to undervaluation and misrepresentation that _ad +valorem_ rates do; on the other hand, specific rates do not adjust +themselves to price changes as _ad valorem_ rates do. If the prices of +goods go up the specific rate is relatively less and affords less of +"protection" to the domestic producer; whereas if prices go down (as, +in general trend, the prices of manufactured goods have done most +of the time) the specific duties are relatively greater. To take a +historical example, the specific rate of 6-1/4 cents a yard on cotton +goods in 1816 which was at first in fact only about 25 per +cent, within a few years became about 75 per cent and absolutely +prohibitive. For this reason specific rates have most often been used +in acts intended to increase the "protective" duties and often as a +device for immediately raising rates; while _ad valorem_ rates have +been more often used in acts prompted by the desire for less drastic +exclusion and for a more adequate revenue; but there is no essential +connection between the protective policy and specific rates. Indeed, +in the period from 1897 to 1909, when most prices were rising, many +of the specific rates under the Dingley Act, intended to be strongly +protective, afforded less and less "protection."[1] + +§ 3. Some technical features of the tariff. All goods not subject to +duties are said to be on the _free list_. It is customary to group +articles in _schedules_, of which there are fourteen in the law of +1913, designated from A to N (for chemicals, pottery, metals, wood, +etc.), but the rates are not uniform for all the articles in each +schedule. _Drawbacks_ are a certain amount, the whole or a part, of +the duties that have been paid on imported commodities, which is +paid back by the government on the reëxportation of the goods. +_Compensatory duties_ (or compensatory rates) are those levied on +certain manufactured articles with the purpose of raising their price +as much as domestic producers' costs are raised by a tariff on their +raw materials. Examples are a duty on woolen goods to offset a duty on +wool, or a duty on shoes to offset one on hides. They may be intended +to be partial or complete or more than sufficient, and are likely in +any case to work either more or less to the advantage of the domestic +producer than was intended. It may be that the conditions of supply +are such that the home price of the raw materials is raised little +or none by the tariff while the price of the finished product is +considerably raised, or _vice versa._ + +§ 4. #The tariff, 1789-1815.# The main difficulty of government in +1781-1789 under the Articles of Confederation was lack of the power +to obtain revenues by taxation. The separate states alone could levy +duties, and a good many tariff restrictions on freedom of trade +among them developed in this period. The Constitution established the +principle of entire freedom of trade among the states. The first act +of Congress under the Constitution levied a tariff, primarily for +revenue purposes, but clearly having a protective purpose, in the view +of some of the representatives. However, most of the separate rates, +as well as the general average rate, were the lowest ever levied by +Congress, except that there was no free list and that 5 per cent was +imposed upon all goods not otherwise enumerated. _Ad valorem_ duties +up to a maximum of 15 per cent (that on carriages) were laid upon +certain articles of luxury, and low specific duties on a few articles +such as glass, nails, iron manufactures, hemp, and cordage. + +From 1789 until 1812, thirteen tariff laws, all told, were passed. One +after another many rates were raised to get larger revenues, but some +goods were put upon the free list. The foreign trade, in both imports +and exports, grew largely and with considerable regularity, rising +then rapidly to a maximum in 1807. Then followed troublous times, +with British Orders in Council and our embargo and nonintercourse +acts until 1812, and war until 1815, trade falling off at first to +one-half, and at last (in 1814) to less than one-twelfth of the +former maximum. Just as trade was, in the war period, sinking to the +vanishing point, the tariff rates were doubled in hopes of getting +increased revenues needed for the war, but in vain. + +[Illustration: FIG. 3. IMPORTS INTO THE UNITED STATES. 1821-18565 + +Many statistics bearing upon tariff history are graphically brought +together here. This figure should be carefully studied in connection +with the following sections. Observe how invariably in the years +following a crisis, the amounts of dutiable imports and of duties +collected have diminished, whether the tariff meantime was changed or +not.] + +§ 5. #The tariff, 1816-1845.# Tho rates had been rising, manufacturers +had been making efforts to secure higher rates for protection, even +as early as 1803. Effectual exclusion of foreign goods and consequent +stimulus to the establishment of manufactures in the eastern states +resulted, in the period 1808 and 1815, from the embargoes and the war. +On the return of peace imports were resumed on a large scale and the +call for a higher tariff was loud. In the revision of 1816, rates in +a number of cases were fixed higher than those before the war. Average +rates are said to have been about 20 per cent. The rate on both cotton +and woolen goods was 25 per cent (and the minimum on cotton goods was +a specific rate of 6-1/4 cents a yard). High rates were imposed on pig +iron (50 cents a hundred), hammered bar (75 cents a hundred), and +rolled bar ($1.50 a hundred, equivalent to about 100 per cent _ad +valorem_). Rates were raised on many other articles. The average _ad +valorem_ rates collected in 1821 attained the remarkably high figures +of 36 per cent on dutiable goods, and almost 35 per cent on free and +dutiable together. + +In 1824 in response to the growing sentiment in favor of the so-called +"American policy of protection," many rates were still further +increased, as those on cotton goods and woolen goods (to 33-1/3 per +cent) and some kinds of iron. Cheap wool was now taxed 15 per cent and +that valued over 10 cents a pound at 20 per cent (to be 30 per cent +after 1826). In 1828, in the "tariff of abominations" which evoked +much bitter criticism, the rates on all these goods were again raised, +those on woolen goods being in some cases 100 per cent on the value, +and those on iron being from 40 to 100 per cent on the value, and +duties were levied on molasses, hemp, and flax. The results appear +in the statistics of 1830, showing the average _ad valorem_ rates on +dutiable imports to be nearly 49 per cent, and on free and dutiable +together to be over 45 per cent. This marks a temporary high point in +tariff rates. Revenues were then becoming excessive and that year the +rates on tea and coffee and some other goods were reduced. + +Violent protests, especially from the South, were made against the +protective system, and the tariff became a more important political +issue. Then in 1832 a number of changes were made, mostly downward; +the iron tariff, for example, being reduced to about the level of +1824. Average rates were thus brought down to about 33 per cent on +dutiable goods. The compromise tariff act of 1833 provided for a +process of reduction during a period terminating in 1842, the cut to +be small at first, then to be made more rapidly to bring the maximum +rate on any article down to about 20 per cent.[2] These changes, while +as yet incompleted had, in 1840, brought the average rates on dutiable +goods down to but 30 per cent and on free and dutiable together to 15 +per cent. The 20 per cent rate, however, remained in effect only two +months in 1842, when it was replaced by a tariff with higher rates +distinctly protective, passed by the Whig party and which remained in +force four years. + +§ 6. #The tariff, 1846-1860.# The Democratic party coming into power, +passed the Act of 1846, called the Walker tariff, after the Secretary +of the Treasury. As he was a believer in free trade, this act is often +mistakenly described as a free-trade measure. It was, in truth, far +from that. Most of the rates were indeed lower than those that had +been in force between 1816 and 1846 (with the exception of those +between 1840 and 1842), but still some of the rates were high (a few +as high as 100 per cent) and many of them were strongly protective in +nature. The fact that tea and coffee were on the free list is marked +evidence that considerations of revenue did not dominate. The rate +on cotton goods was 25 per cent and the rates on many of the most +important other protected articles (iron, woolen goods, manufactures +of iron, leather, paper, glass, and wood) were 30 per cent. The +average rates under the act for its last eight years (to 1857) were +on dutiable 26 per cent, on free and dutiable 23 per cent. The country +prospered for eleven years under this tariff. In 1857, rates were +again reduced, the more important protective rates from 30 per cent +to a level of 24 per cent. This time partizan considerations played +no part in the discussion. The revenues of the government had been +excessive and the need of a reduction was admitted by nearly every +one. The average _ad valorem_ rates under the nearly four years of the +act of 1857 were about 20 per cent on dutiable and 16 per cent on free +and dutiable (the lowest in the century between 1812 and 1913). + +§ 7. #The tariff, 1861-1871.# The reduction of rates in 1857 was +made just at the time when the country was at the height of a wave of +prosperity and of speculation which culminated in the financial crisis +of that year.[3] As always at such times, the government's revenues +fell greatly. The first purpose in the revision of the tariff in 1861 +was simply to restore the rates in the act of 1846. But the Morrill +act which became a law just before Fort Sumter was fired upon, +contained many higher rates and its purpose was avowedly protective. +This necessarily involved a sacrifice of possible revenues for the +government.[4] Then from the beginning of the Civil War till its close +some rates were raised almost every month with little scrutiny or +debate. The average _ad valorem_ rate jumped from 19 per cent on +dutiable in 1861 (under the law of 1857) to an average of 35 per cent +in the three years, 1862-1865. + +The most important tariff acts of the war were those of 1862 and 1864 +by which large increases were made on many articles. These tariff +acts were passed in connection with far-reaching and burdensome +applications of internal revenue taxes on many kinds of manufactures. +The tariff rates were primarily intended to offset these taxes, "to +impose an additional duty on imports equal to the tax which had been +put on the domestic articles," as was said by the sponsors of the +bill. These rates were similar in purpose to compensatory rates, and +in many cases they were more than sufficient to offset the internal +taxes. Under the last of these acts the duties collected in the six +years from 1865 to 1870 averaged nearly 48 per cent on dutiable and +nearly 44 per cent on free and dutiable. + +The remarkable fact was that soon after the war the internal revenue +taxes began to be repealed one after another, and by 1872 nearly +all those bearing upon general manufactures (apart from cigars and +alcoholic beverages) were gone. The tariff, however, remained almost +unaltered. This repeal of internal revenue taxation had the same +"protective" effect as raising the tariff rates by so much. As if +this were not enough for the protected interests, in 1867 the duty on +woolens was further raised and in 1870 numerous other increases were +made in the duties having a protective character. Some reductions were +made, but these were almost all on articles of a distinctly "revenue" +character such as tea, coffee, sugar, molasses, spices, wines. +Revenues were superabundant for current expenses of government, and +altho there was a large national debt, hardly any of it was redeemable +at the time. There was therefore need to reduce taxation, but the +attention of the consuming and tax-paying public was distracted by the +somewhat passionate political issues of the day. Besides, the public +had not the technical knowledge or the unified opinion on this subject +to protect itself against the greedy lobby in this process of tax +revision. And so, selfish commercial interests could get nearly what +they asked for in Congress, and the politicians at Washington, who had +come to have a well-nigh superstitious faith in the efficacy of very +high protective duties, could quietly use the opportunity to raise the +people's taxes for the people's good. + +These virtual increases in the protective power of the rates in force +are not evident in the statistics of average _ad valorem_ rates, +because the higher rates in many cases were sufficient to exclude +relatively more of the foreign products to which they applied.[5] The +imports came, by a process of selection, to consist more largely of +goods subject to lower rates. So the year 1868 showed the highest +average rate on dutiable goods (48.6 per cent) of any year after the +act of 1828 until that of 1890, and the rate fell somewhat each year +until in the fiscal year 1872 it was 41.3 per cent. + +§ 8. #The tariff, 1872-1889#. In 1872 the country was again, as in +1857, nearing the crest of a wave of prosperity and of speculation. +Imports and customs receipts attained new high points in our history, +and, despite the enormous reductions of internal revenue taxation, +the government's receipts continued to be excessive.[6] The important +revenue articles, tea and coffee, were then transferred to the free +list, as were also raw hides and paper stock and some other articles; +the rate on salt was reduced one-half and that on coal almost as much. +Many other specific rates were reduced and the _ad valorem_ rates on a +long list of articles were cut to "90 per cent of existing rates." +The effects of these reductions were mingled with those of the severe +financial panic occurring in 1873 and of the depression following, +which reduced especially the importation of luxuries bearing the +higher rates. The average rate of the three (fiscal) years 1873 to +1875 was 39 per cent on dutiable (a fall of 9) and 28 on free and +dutiable (a fall of 16). The ratio of imports entering free, which in +1872 was still only about 1 in 14, became the next year 1 in 4. But +government revenues falling short in 1874, advantage was soon taken +of the circumstance to repeal in 1875 with little discussion the +horizontal cut of tariff rates made in 1872. The specific rates that +had been reduced in 1872 were little changed, however. From 1876 to +1883 (8 fiscal years) nearly a third of the imports consisted of goods +on the free list. The average rate on dutiable was over 43 per cent, +and on free and dutiable was 30 per cent. + +The tariff was a leading issue in the campaigns of 1876 and 1880. In +1876, the Democratic party's platform contained a plank for "a tariff +for revenue only." It was a time of great industrial depression, and +as is usual in such cases a large number of the electors held the +party in power responsible for business adversity (as in turn they +credit it with any more or less fortuitous prosperity). The Republican +candidate Hayes, after a long contest in Congress, was declared +elected by a margin of one electoral vote. His opponent, Tilden had +received a quarter of a million more votes in the country as a whole. +In 1880, when business prosperity was rapidly returning, the party +in power was successful by a goodly margin of votes in the electoral +college, tho having a bare plurality of the popular vote. Garfield, +the Republican candidate, was known as one of the more moderate +protectionists and his opponent, General Hancock, who was without any +political record, declared the tariff to be a "local issue," to be +determined in the Congressional districts. The tariff issue was thus +not very sharply drawn. The tragic death of President Garfield left +no clear leadership. The tariff question from 1876 to 1884 was +politically in the doldrums. + +Yet there was undoubtedly a somewhat growing popular demand for some +moderation of the very high duties. To this demand the friends of +protection who were in power felt compelled to concede something--or +to appear to do so. Congress appointed a Tariff Commission of which +the Chairman was secretary of the wool manufacturers' association, and +after a report the tariff act of 1883 was passed. The net results were +almost nil. Some rates were lowered, while others were raised with a +definite protectionist purpose. The average rates for the next seven +years, 1884-1890, were 45 on dutiable (an increase of nearly 2 per +cent) and 30 on free and dutiable (unchanged as compared with the +period ending 1883). In 1884, the Democratic party elected its +presidential candidate (Cleveland) and a majority of the House, but +as it did not control the Senate it could not pass any of the various +proposed measures for a "reform" of the tariff. In 1888 the protective +principle was a leading issue in the campaign. Altho Cleveland +received a few ten thousands larger popular plurality than he had +obtained four years before, and held the electoral votes of 18 of the +states, he lost New York and Indiana by very narrow margins, a result +in which other issues played a large part. Harrison was elected and +the party favoring a high protective tariff came into power. + +§ 9. #The tariff, 1890-1896#. The tariff act (known as the McKinley +act) of October, 1890, followed. This was a general extension of the +principle of protection. The rates on woolen goods were on the whole +increased and made in more cases prohibitive. The rates on wool were +increased. The rates on iron, which was already highly protected, were +little changed except by the increase of the duty on tin-plates. The +duty on sugar (in the main a revenue duty, yielding $55,000,000 +a year) was removed and a bounty was granted to domestic sugar +producers. In the next three (fiscal) years, 1892-1894, the average +rate proved to be over 49 per cent on dutiable (4 per cent increase) +and 22 per cent on free and dutiable (the remission of sugar duties +accounting for the most of this fall of 8 per cent from the average +under the preceding law--4 per cent fall from the last year of its +operation). Particularly noticeable, however, was the increase in the +proportion of goods entering free, which was nearly 55 per cent of +all merchandise as contrasted with about 33 per cent between 1884 and +1890. + +Again the political weather vane shifted. The month after the McKinley +bill became law, the Congressional elections (November, 1890) returned +an overwhelming Democratic majority in the House, altho this was a +period of business prosperity, a fact usually favoring the party in +power. In 1892, Cleveland, being again a candidate, was successful +over Harrison by a largely increased plurality of the popular vote, +and received almost double the electoral vote of his opponent. +The House was Democratic, and the Senate soon became so. Business +prosperity was rising again to a high level, but there were many +features of financial and speculative weakness in the situation, +intensified by growing fear of a cheap money (silver dollar) inflation +under the act of 1878 providing for the annual purchase of silver. +A financial panic occurred in September, 1893, six months after +Cleveland's inauguration. + +Nevertheless Congress enacted the next year, Aug. 28, 1894, the Wilson +tariff act. The changes made by this legislation were not on the whole +very great, but were nearly all in the direction of the lowering of +the tariff. Most notable was the putting of raw wool upon the free +list. Some rates on woolen goods were reduced, but hardly more than +enough to offset the effects, upon manufacturers' costs, of the +reduction of the tariff on raw wool. Likewise small reductions were +made on cotton and silk goods, on pig iron, steel and tin plate +and many other articles; and larger reductions on coal, iron ore, +chinaware, and glassware. To make up for the expected reduction of +receipts from other sources, a duty was laid again upon raw sugar, +and an income tax law was passed (this soon, however, to be declared +unconstitutional). + +Under this law, for three fiscal years (1894-1897) the average +rates were 41 per cent on dutiable and 21 per cent on free and +dutiable,--pretty high rates. The proportion entering free under this +act was actually less than under the McKinley act, partly because +of the sugar item, and partly, probably, because of general business +conditions. + +§ 10. #The Dingley tariff, 1897-1909.# The campaign of 1896 was waged +almost solely on the issue of free silver. Undoubtedly great numbers +of voters supported William McKinley rather despite of, than because +of, his high protectionist beliefs. But his inauguration was promptly +followed by the passage of the Dingley act of July 24, 1897, which +embodied a marked increase of protective rates. A duty was again +levied on wool, and also on hides which had been untaxed since 1872. +High rates were made for woolens, linens, silks, chinaware, and the +rate on sugar was doubled. Provision was made for some reduction of +rates by reciprocity agreements, but the conditions were so complex +that the effect could not be great. This high protective tariff, thus +enacted without popular discussion, remained almost unchanged for +twelve years, the longest life, by one year, of any tariff act in our +history,[7] The rate under the first full fiscal year of the law's +operation, 1899, was the highest on dutiable in our history, 52 per +cent, and was nearly 30 per cent on free and dutiable. In practical +operation, however, the average rate steadily became more moderate +because of the rapid rise of the general price level that was in +progress throughout this period, amounting to 35 per cent from 1898 +to 1909.[8] The average rate of duties collected for the period of +12 years was 47 per cent on dutiable and 26 per cent on free and +dutiable. It was steadily falling and the last year, 1909, was 43 per +cent on dutiable and 23 per cent on free and dutiable. + +§ 11. #Sentiment favoring lower rates.# While the Dingley act was thus +in operation showing declining average rates, sentiment was developing +in every part of the country in favor of a further moderation of the +tariff. This was due partly to the discontent resulting from steadily +rising general prices, in which change the rise in the prices of food +and of many other necessities was not fully compensated by the rise +of the wages and incomes of the masses. Partly the growth of this +sentiment accompanied the agitation against trusts and the belief +that protective duties in some cases were an aid to the formation of +domestic monopolies. But more fundamentally, this changing sentiment +was the result of the changing industrial conditions in America. The +character of our foreign trade had altered greatly since the early +nineties. We were importing relatively less and less of manufactured +and finished products, and more of raw materials; and we were +exporting less and less of raw materials and more of finished +products. A growing number of manufacturers were feeling the need of +cheaper raw materials and were looking hopefully toward an enlargement +of their foreign trade. + +The Republican platform in 1908, in view of the changing public +sentiment, formulated a new rule for maintaining "the true principle +of protection," namely, that it "is best maintained by the imposition +of such duties as will equal the difference between the cost of +production at home and abroad, together with a reasonable profit to +American industries." This rule is very attractive in its suggestion +at the same time of the idea of a moderation of the tariff and of an +exact practical (not to say scientific) standard for the determination +of the proper rate in every case. + +The rule is, however, fallacious. "Costs of production" mean here +the monetary costs of the enterpriser. Now a first difficulty is that +costs are not uniform for all establishments in any one industry, and +a tariff high enough to protect some is entirely too low to protect +others. As long as a tariff rate is too low to exclude every unit of +the foreign product its importation is conclusive proof that for some +home producers the tariff rates fall short of the "true principle" +(better proof, indeed, than the most elaborate investigation by any +tariff board could be). The indubitable truth is that no trade ever +can take place (in a monetary régime) unless the monetary price is +lower in the exporting than it is in the importing country. This +virtually means that the product cannot be profitably exported unless +the monetary costs of production ("together with a fair profit") of +the article exported are for each party less than those of the other +party in the other country.[9] The so-called "true principle" would +lead thus to absolute prohibition of every article to which it was +applied. + +§ 12. #The Payne-Aldrich tariff, 1909-1913#. In the campaign of 1908 +the Republicans admitted that the protective tariff needed to be +revised, but they declared that it should be revised by its friends. +It was doubtless the general understanding that "revision" in this +promise meant revision downward, tho this was left somewhat unclear in +a campaign wherein the tariff played a somewhat minor part. The tariff +act of 1909 (the Payne-Aldrich act) was the attempt of the successful +party to redeem its promise in this regard. Many changes of rates were +made, both downwards and upwards. It was estimated that rates were +reduced in 584 instances, affecting 20 per cent of imports. These +changes included placing hides upon the free list (before taxed 15 per +cent), and cutting down the rate on leather, shoes, coal, lumber, +iron ore, pig iron, and steel-rails. But on the other hand rates +were increased in 300 instances (including many items in the cotton +schedule). The general belief that little reduction was effected, on +the whole, was confirmed by the experience under the act. As compared +with the last two years (1908-1909) of the Dingley tariff the first +two years of the Payne-Aldrich tariff showed a decline of 1.5 per +cent, and on free and dutiable a decline of less than 3 per cent. +These reductions in the statistical results are no greater than +occurred within like periods while the Dingley act continued in +operation without change.[10] + +No other tariff since "the act of abominations" in 1828 has called +forth such widespread criticism as this one, and the tariff became +a leading issue in the campaign of 1912. After 1910, the House being +Democratic, many bills to reduce duties were presented, and some were +passed by both houses, but all were vetoed by President Taft mainly +on the ground that it would be best to await the report of the tariff +board which had been authorized and appointed for the purpose of +ascertaining the cost of production referred to in the "true principle +of protection." + +§ 13. #The Underwood tariff, 1913#. After President Wilson was +inaugurated, March 4, 1913, the tariff was at once taken up by +Congress. The general features of the act that was passed were as +follows: + +(a) Considerable additions to the free list of raw materials. + +(b) Abolition of compensatory duties corresponding with the old rates +on raw materials. + +(c) Replacement of specific by _ad valorem_ rates in many cases. + +(d) Taxation of plain kinds of goods less than fancy kinds--luxuries +higher than necessities. + +(e) Reduction of rates generally (most of the few increases being to +correct some evident error in the old law). + +(f) Application of the so-called competitive principle to rates +intended to be protective, viz., to leave the rate just barely high +enough to keep out foreign products.[11] + +Articles placed on the free list were raw wool (which had borne a rate +equivalent to about 44 per cent), metals, agricultural implements, raw +sugar (the lower rate to go into effect gradually), coal, lumber, many +agricultural products including live cattle, meats, wheat, corn, +flax, tea, and hemp, and numerous manufactures including boots, shoes, +gunpowder, wood pulp, and print paper. + +Moderate reductions were made in the schedules for chemicals, earths, +cotton goods, and sundries, while rates on various luxuries were +either unchanged or raised. Left almost unchanged were the schedules +for tobacco, for spirits and wines, and for silks (already very high). + +This act was signed October 3, 1913, and had been in operation about +nine months when the great war broke out in August, 1914. What its +effects would have been under normal conditions we can judge little +from the actual experience. The first eight months that the act was in +operation, the _ad valorem_ rate on dutiable goods proved to be 36 per +cent (about 4 per cent less than in the preceding year) and the rate +on free and dutiable together about 14 per cent (over 3 per cent less +than the preceding year). The first complete fiscal year (that of +1915) under the act, the average rate on dutiable goods was 33.5 per +cent and that on all imports was 12.5 per cent. Evidently this is far +from a "free trade tariff." The reduction in the average _ad valorem_ +rate is less than was expected. Many of the reductions had little +effect, the former rate having been much higher than was needed to +exclude the goods. In other cases the old rates were but nominal +and inoperative because they were upon goods regularly exported, +not imported (e.g., farm products, cotton goods, and some other +manufactures). But some of the reductions doubtless will force the +less efficient plants in some industries touched to increase their +efficiency or go out of business. Time, in any normal period, is +needed for adjustment, but an adjustment of a most abnormal kind is +in progress during the war. Imports from Europe have fallen greatly, +while exports are enormously increased. Old industrial establishments +have been converted to different and temporary uses. The conclusion of +the war must bring a new readjustment that must cause a severe shock +to some enterprises--and this must have been so under any possible +variety of tariff.[12] + +§ 14. #Some lessons from our tariff history.# Can we draw from the +checkered course of tariff history in America clear lessons of wisdom +for the future? At least certain negative conclusions may be safely +drawn. It is a history of a vacillating public opinion toward the +policy of protective duties. Always the policy has kept some hold +on public sentiment, but it has varied in strength, now waxing, now +waning. The time of revisions has been determined nearly always by +varying needs of revenue. When more income has had to be raised, this +has nearly always been made the occasion and pretext for increasing +the degree of protection for many industries. This is not at all a +necessary connection, for it would be possible to couple internal +revenue taxes and customs duties in such a way that the rates would go +up and down together and give the varying amounts of revenue +required for the government without appreciably altering the relative +profitableness of various private enterprises. + +Our tariff history is too largely a record of special favors granted +to classes of citizens, to the citizens of certain localities, and to +particular enterprises. This is apparent even in a general survey, but +almost every more detailed examination of particular protective rates +reveals evidence of suspicious and sometimes scandalous personal +influences at work. The protective policy has always professedly +been advocated for the general welfare to raise wages or to make the +country prosperous, but the initiative has always been taken, and +the valiant work in contributing funds for campaign purposes and +in lobbying bills through Congress has been done, by the interested +manufacturers. Even if it were beyond question sound in principle to +exclude goods that can be bought more cheaply by trade, it is very +doubtful whether any net good could have resulted from this policy +as it has been in fact applied and followed. The frequent and +unpredictable changes have been a great evil, and have again and again +brought unmerited losses to the many in business and still greater +and unearned gains to a favored few. It is incredible that such a +hit-or-miss, in large part selfishly determined, policy could have +been an important cause of our national prosperity. The fundamental +causes of the general high wages and popular welfare that we have +enjoyed is to be found rather in our rich natural resources, +our capacity for self-government with free institutions, and the +industrial energies of our people.[13] + +The revision of the tariff of 1913, viewed with non-partizan eyes, +appears to have been carried out, to say the least, as consistently +with regard to its professed doctrine, and as little influenced by the +malevolent arts of the old-time Congressional lobby, as any debated +tariff act in our history. It still contains on the whole a large +measure of protection. Under various pretexts such as the danger of a +flood of cheap goods after the close of the great war, attempts will +be made to make it still more prohibitive. But one lesson of our +tariff history is that such an act should be given a period of fair +trial before extensive changes are made in it. Even further reductions +should be cautiously undertaken and put into effect gradually. If the +attempt is made through temporary rates to reduce the shock of the +trade adjustments, of the "dumping" after the war, then the devising +and administration of such measures should be delegated to an +expert, disinterested, permanent tariff board. The task is to prevent +temporary "unfair competition" and sudden changes, rather than to +raise permanent barriers to fair trade.[14] + + +[Footnote 1: It is evident that it is only through _ad valorem_ rates +that it is possible to compare the average rate of duty for one tariff +act, with that for another. As, however, every tariff act is made up +of both specific and _ad valorem_ duties, it is only at the end of the +year that an average _ad valorem_ rate can be estimated by comparing +the total of duties collected with the total estimated value of the +goods imported. Average _ad valorem_ rates are estimated in this way +both on the dutiable goods alone, and on all goods, free and dutiable +combined. There may be an element of error, even of misrepresentation, +in such estimates. They do not give the simple test of the relative +height of duties, or of the degree of "protection" that we might at +first suppose. Just to the extent that a new and higher rate really +operates to exclude imports (and thus is protective in its effect) the +goods subject to that rate cease to form part of the total imports. +For example, if the average rate of duty were 25 per cent, and a +50 per cent rate on an article were increased to 75 per cent, it is +possible that this rate would prove to be absolutely prohibitive. +This raise of rate, therefore, would tend to reduce the average rates +collected on all dutiable articles. Changes in general conditions +of industry from causes quite apart from the tariff may result in +shifting the proportions of imports that are dutiable so that the +average rates go either up or down while the tariff law has remained +unchanged on the statute book. A failure to consider these and related +facts leads to much confusion in popular and political discussion of +the tariff.] + +[Footnote 2: Usually given as 20 per cent. However a good many rates +under the full operation of the act worked out as 21-1/2 or 23 per +cent, and a few at 26 and at 29 per cent. Besides there were +numerous specific rates, the _ad valorem_ force of which cannot be +determined.] + +[Footnote 3: The political argument that the small tariff reduction of +1857 caused the crisis of 1857 will not bear serious examination. See +below, sec. 13.] + +[Footnote 4: See ch. 14, sec. 2.] + +[Footnote 5: See above, sec. 2, note 1.] + +[Footnote 6: Internal revenue receipts in 1866 had been $309,000,000; +in 1872 they had fallen to $131,000,000, yet the government's surplus +for the three years 1870-1872 was little less than $100,000,000 a +year. This was almost half of the total receipts from customs, which +were $216,000,000.] + +[Footnote 7: Other issues absorbed public attention in this +period--the Spanish war, colonial policy, "imperialism," railway rate +regulation, corporation control, etc.] + +[Footnote 8: See above, sec. 2.] + +[Footnote 9: Compare with ch. 13, sec. 5.] + +[Footnote 10: Probably resulting from the rising prices, as explained +above, sec. 2. For example, in one year, from 1899 to 1900, the +average _ad valorem_ rate collected on dutiable goods fell 3 per cent, +and that on all goods fell 2 per cent; in the two years from 1904 to +1906 the average rates on dutiable fell 4 per cent, and on all goods +fell 2 per cent.] + +[Footnote 11: This "competitive principle" is essentially the same as +the so-called "true principle" of equalizing the cost of production +(see above, sec. 11). It is essentially a prohibitive, not a free +trade, principle. Strictly applied it would cause complete exclusion +of imports. But as applied to selected articles which it is desired +to exclude in order to "protect" the domestic producer, this principle +would simply prevent the rate being placed appreciably higher than +was needed to exclude them. Anything beyond that point but offers +temptation and opportunity for the formation of a monopoly by domestic +producers. Then, too, the rate may intentionally be fixed so as to +make just possible the survival of the most favorably located or most +efficiently operated establishments, while compelling the abandonment +of other establishments. See ch. 14, sec. 3.] + +[Footnote 12: Such changes are logically related to the subject of +financial crises rather than to that of the tariff. See note at end of +the next section.] + +[Footnote 13: See Vol. I, e.g., pp. 228, 431, 445ff, 466, 490, 506ff.] + +[Footnote 14: #Tariff legislation and business depressions.# The +relation between new tariff legislation and the business conditions +following it has been the subject of much debate in political +campaigns. In the few cases where a relationship has been most often +asserted to exist, it is more probable that the tariff change was the +_result_ of business conditions preceding it, than that it was the +cause of the conditions following it. For usually a tariff has been +revised downward because a few years of prosperity with large imports +had so increased customs duties that the government has had surplus +revenues. Just when the tariff was reduced, the conditions were ripe +for a crisis. This happened in 1857 (already in 1856 there had been a +preliminary halt of business), again in 1872, and on a small scale in +1883. But the main reduction resulting from the compromise act of 1833 +did not occur until after the crisis of 1837-39; the Walker act of +1846 was passed just as business was starting upward on a long wave +of prosperity; and the act of 1894 was passed a full year after the +severe crisis of 1893, when business had already entered upon a period +of depression. In none of these cases does it seem reasonable to +attribute business depression to the reduction of the tariff, as +is commonly done in protectionist arguments even to the point of +attributing the panic of 1893 to the reduction of the tariff a year +later! + +At several times the tariff has been raised soon after a crisis when a +good occasion was presented by the need of larger revenues as in 1842, +1860, 1875, and 1897. Business at such times is just at the point +of the cycle when prosperity is due. The higher tariff of 1842 was +succeeded by the low tariff of 1846 without any check to business. The +war obscured the ordinary industrial effects of the tariff acts of the +sixties. The increase in the year 1875 was followed by four years +of hard times and slow recovery. The increase of the tariff in 1890 +occurred as business was nearing the top of the cycle and was followed +by two years of prosperity culminating in the very severe crisis of +1893. The authors of the tariff of 1897 were peculiarly fortunate in +the time of their action, for the country was just fairly recovering +from the very severe crisis of 1893 and prosperity was to continue +(with brief hesitation in 1900 and 1903) until the severe crisis and +panic of 1907. + +The advocates of higher rates are, of course, correct in declaring +that the great business prosperity of the years 1915 and 1916 resulted +from the unexpected demands in foreign trade growing out of the war, +and is not to be credited in large measure to the act of 1913. But +reason requires that the same restraint be exercised in crediting +to higher protective acts the prosperity which has in some--not +all--cases, followed their enactment; and requires further that the +present act be not held accountable for the next reaction in trade, +whenever it may occur, inasmuch as a reaction would be sure to occur +no matter what kind of tariff act we might chance to have at the +time.] + + + + +CHAPTER 16 + +OBJECTS AND PRINCIPLES OF TAXATION + + § 1. Public finance as a division of economics. § 2. The police function. + § 3. Social and industrial functions. § 4. The enlarging sphere + of the state. § 5. Industrial revenues of governments. § 6. Governmental + receipts from loans. § 7. Nonrevenue character of receipts from + loans. § 8. Revenues from taxation. § 9. Forms of taxation. §10. + Defective tax "systems." §11. Various standards of justice suggested. + § 12. Social welfare as the aim. § 13. Principles of administration. + § 14. Shifting and incidence. § 15. Taxes as costs. + + +§ 1. #Public finance as a division of economics.# Men live together +in politically organized societies which employ public officials as +agents to carry on the functions of government. Every governmental +unit, large or small, may be viewed not only as a political body, +but as an economic enterprise. Each has its economic aspects, such +as receipts and expenditures, employer and employee, borrowing and +lending, etc. Each political unit is in this sense "an economy." The +study of the public economy, of the economic aspects of government as +distinguished from its political aspects, constitutes the science of +public finance, an important division, tho not the whole, of political +economy. + +The primary fact determining the public finances is the extent of the +sphere of "the state," meaning by the state the totality of political +powers and functions in a community. There are two typical ideals of +a state, each with corresponding functions: the ideal of the police +state, and that of the social-industrial state. In fact every system +of government provides for the exercise of both functions in some +measure. The police function is primary. All governments alike +exercise it, but they differ most in respect to the degree in which +they exercise the social-industrial functions. + +§ 2. #The police function.# The police function is that of public +defense and the maintenance of domestic order. In family or +patriarchal communities all share a common income and combine in the +common defense, but self-preservation often has compelled such small +communities to form a larger, stronger state for the common defense. +Public defense requires sacrifice of some independence on the part of +the family and of the individual. Personal service in the field gives +place later in some measure to the payment of taxes, so that a regular +income may permit the government to attain a more regular, continuing, +and perfect organization of military forces. + +As political unity and power grow, the citizens need less often +protection against foreign foes, and they need more often, relatively, +defense against the aggressions of some of their own countrymen. The +preservation of domestic order requires police, courts of justice, and +other agencies. The ideal of the anarchist to do without government +is nowhere realized. Everywhere there must be government to preserve +peace and to protect property. Unfortunately, this need grows with the +growing density of population. Crime increases when men swarm in +great cities. The courts which settle disputes between men, and which +interpret their contracts, are agencies of peace, displacing physical +contests. To maintain and operate the various parts of the social +machinery requires ever increasing governmental revenues. From many +causes government has, in modern times, grown increasingly costly. + +§ 3. #Social and industrial functions.# The social and industrial +functions of government seem naturally to grow out of the primary +ones just mentioned. In a democratic society, popular education is +a necessity, as it appears that domestic order is not possible in a +democratic state without intelligent citizens. The system of public +education has, in many states, expanded to include a publicly +supported university as the dominant educational and scientific organ +of the community. Some industrial functions are performed by the +government in connection with the primary needs. Lighthouses are +necessary to guide the navy, but they also serve to guide the merchant +marine and to aid industry. The post was established as an agent +of political and military government to connect the ruler with the +outposts (a fact the name post indicates), but the postal service has +grown in every country to be a great industrial and social agency. +The consular service, originating in the political need of keeping +official representatives in foreign lands, has become a valuable +economic agency; consuls are commercial agents, advancing the business +interests of their countries in all quarters of the globe. + +§ 4. #The enlarging sphere of the state.# A mere police state would +leave to private initiative the provision of every kind of economic +agencies not needed for political government. The state might, for +example, even leave the provision of roads and bridges to private +individuals or to companies, permitting them to charge tolls to obtain +a return on their investment. Whenever a toll-road is made public and +a toll-bridge becomes free, and the state maintains the roads, it is +becoming less strictly a mere police state. Reacting from the ideal +of the police state which was most highly praised in the first half +of the nineteenth century, the functions of government have been +extending in many directions in the last half century. More and more +economic functions are performed through the agency of government. If +we think of an act as done by the government _for_ private citizens, +we call it paternalism; but if we think of an act as done _by_ +citizens collectively _for_ themselves as the best way to get these +things done, we may call it, in a broad sense, socialism.[1] + +Government is in one aspect a direct good to its citizens. In return +for its collective cost men collectively get the enjoyment of social +organization, markedly in contrast with the uncertain ties and hazards +of primitive communities. But government becomes also a mode of social +investment, an indirect agent, a productive enterprise. Wealth applied +through it secures in some cases a greater product than is possible by +individual action. + +But when the government undertakes these various tasks the expense +falls unequally on individuals and affects differently their incomes. +When free schools take the place of private schools, the law compels +every one to contribute to education. To many individuals it is a +matter of indifference whether they pay tuition or taxes, but the +wealthy bachelor sometimes grumbles when forced to help in educating +the day-laborer's family. The average result of a certain social +policy may be right, but individuals diverge from the average and +thus have constantly a motive to attempt to change the limits of +governmental action. Happily the subject is not always viewed with +selfish eyes. The ethical and patriotic thought is not, "How will this +affect my interests?" but. "How will it affect the general interests?" +But as the question of value is always involved men are usually found +favoring or opposing the industrial and social activity of the state +according as it affects their own incomes. Thus the determination of +the sphere of the state is in large part an economic question. + +§ 5. #Industrial revenues of governments#. The costs of government at +any stage are met in varying degrees in one of three ways: (1) from +industrial sources, (2) by borrowing and thus creating a public debt, +(3) from taxation. + +(1) Receipts from industrial sources in the broad sense include all +rents from wealth owned, interest on loans made, and proceeds of sales +from enterprises conducted, by the government. In feudal times, these +were mostly obtained in the form of rents from the private domains of +kings and nobles. In many early and medieval states these sources of +receipts were adequate to the need of government; then they decreased +in many countries, both relatively and absolutely, because of the +sale of publicly owned wealth (lands and mines) and with the recent +extension of the functions of government have again increased very +rapidly. Now industrial revenues come not only from the rents of +forests, mines, docks, lands, and buildings, but from profits in the +operation of industrial enterprises such as waterworks, railways, +mines, and factories, and from interest on funds deposited in banks +or otherwise invested. At present the industrial revenues of the +aggregate governments of the United States (national, state, and +municipal) amount to about a fifth of all revenue receipts. Since +the middle of the nineteenth century the number and variety of the +industrial enterprises undertaken by governments has been steadily +increasing, and this increase has been most marked in the cities. The +change in this respect in the United States, great as it has been, has +been proceeding more slowly than in the European countries. + +In 1913 the receipts of this nature (earnings of departments and of +public service enterprises) were nearly $500,000,000. The larger part +of this sum comes to the national government ($288,000,000), mostly +from the post-office department. Most of the remainder comes to the +minor divisions ($176,000,000), and but little to the states. The +total "earnings" (this means here receipts, not profits) of public +service enterprises in incorporated places were $120,000,000. + +§ 6. #Governmental receipts from loans.# The funds to invest in these +commercial undertakings are originally obtained in nearly all cases +from public loans. Almost every unit or division of government may +become a borrower to provide for its citizens at once certain needed +advantages and improvements when the funds are not at hand and +immediate taxation is deemed too heavy a burden.[2] + +The indebtedness (less funds available for payment of debt) of the +aggregate governments of the United States in 1913 was: + + Nation ................................. $1,028,000,000 + States ................................. 346,000,000 + Minor divisions ......................... 3,476,000,000 + ------------- + Total .................................. $4,850,000,000 + +The larger part of nearly every national debt has been incurred for +purposes of war and preparation for war, while nearly all public +debt other than national has been created for the purpose of peaceful +social and industrial development. The debts of the American states +have partly been made necessary to meet deficits in current expenses, +but largely of late to erect public buildings, purchase forest lands, +improve roads, and construct canals. The minor divisions are counties, +cities, villages, boroughs, towns, townships, school districts, +drainage, irrigation, and levee districts, fire districts, poor-relief +districts, road districts, and various other subdivisions of states +and of counties. Every one of them has more or less legal power to +incur debts and to levy taxes for the purpose of paying the interest +and of repaying the principal. The purposes for which the debts are +incurred by specially organized districts are sometimes indicated in +the names (e.g., drainage, irrigation), while the regular political +divisions of counties, cities, villages, towns, townships, incur debts +for a large variety of objects, such as streets, sewage disposal, +water supply, electric light or gas plants, school houses, libraries, +and other public buildings. Large expenditures for these purposes are +necessary because the local governments are undertaking new functions, +and either existing equipment (such as waterworks systems, and street +railways) must be bought from private companies or new ones must +be built. They are necessary further because the rapid growth of +population calls for an immediate "capital investment," the payment of +which may be, through borrowing, more easily spread over a series +of years (e.g., in the extension of streets and paving, and in the +provision of school houses for the children). + +§ 7. #Nonrevenue character of receipts from loans.# The proceeds +from loans (and certain other items of sales) are called nonrevenue +receipts, because they are but in anticipation of receipts from other +sources. The economic theory of such loans is essentially the same as +that of private loans, but it is the people of the political district +collectively that are the borrowers. To get the present uses of goods +they sell their promise to make future payments totaling a larger +amount. The loan is the present worth of those promises. In the case +of loans made for local purposes, provision is now usually made for +their complete repayment within a definite number of years, +usually 10, or 20, or 30. Meantime interest is payable annually or +semi-annually, and from some source an additional sum is collected +to repay a part of the loan, sometimes by redeeming a certain part +annually, sometimes by accumulating a sinking fund until that amounts +to the whole debt. + +The minor divisions in the United States are thus constantly creating +debts at the rate of about $2,000,000,000 each year and at the same +time paying former debts in instalments, in a total amount somewhat +less than this. In the case of some municipal investments which are +commercial enterprises (such as those supplying gas, electricity, and +water), these annual payments can be made out of the profits; in the +case of others, the payments come from special assessments upon +the owners; and in most other cases they are collected by the usual +methods of taxation. In America, a large part of these costs are, by +the law of special assessments, placed upon the owners of adjacent +lands, whose outlays are usually more than offset by the increased +value of their lands as a result of the improvements. In this case +also, the present investment is in anticipation of the future incomes +which the owners of the improved lands will get.[3] + +§ 8. #Revenues from taxation.# Much the largest part of the receipts +of most governments, apart from loans, and in many cases nearly all +such revenue receipts, come from taxation. Tax (as a verb) meant +originally to touch or handle, then to estimate or appraise, and then +to charge a burden upon some one, especially to impose a payment of +services, goods, or money upon persons or property for the support +of government.[4] _Taxation_ is the legal process of taking income, +services, or wealth from private persons for public uses. + +Taxes are of various kinds, but they always are incomes, or wealth +representing future incomes, transferred from private ownership of the +taxpayers to the government. In rare cases, more than the net current +income of a certain kind may be taken for public uses. As economic +income has many sources, it may be intercepted at many different +points, and taxation may take various forms. The differences are +so manifold that it is difficult to classify particular taxes +satisfactorily. + +§ 9. #Forms of taxation.# The following are the forms of taxation most +frequently referred to. + +(a) The simplest form of tax is a _poll tax_, a uniform amount payable +by every person of the taxable class. This form of tax is being +less and less used in America and now amounts to little more than +$17,000,000,[5] this being only .6 of 1 per cent of the aggregate +taxes in the United States. The national government gets about +one-fourth of this amount from a tax on immigrants and the rest is +collected by (some of) the states, counties, and minor divisions. +Usually, if not always, the poll tax is imposed only upon voters, as a +condition to the right to vote. + +(b) Taxes may be laid upon _incomes_, as they come into the possession +of the owner. Usually, only monetary incomes that arise in commercial +transactions are taxable, and no attempt is made to estimate the value +of psychic incomes. Commercial incomes are more easily measured, but +the omission of the other elements must cause many inequalities in the +burden of the tax as between two individuals controlling equal incomes +of real things. + +(c) Taxes may be on _property_, either general upon all property in +the taxing district, or special, upon certain forms of property. A +property tax may be specific or _ad valorem_, in proportion to value, +as to the method of its determination. Since the value of material +wealth is the capitalization of the rentals at the prevailing rate of +interest, a general, _ad valorem_, property tax, so far as it applies +to material wealth, and if it were accurately assessed, would take +an approximately equal proportion of wealth-incomes. It does not, of +course, touch directly incomes derived from wages and salaries, but it +reduces their purchasing power in many cases. It is in some respects +more searching than a tax on actual rents, for it reaches the +prospective, or speculative, rental. + +(d) Taxes may be on _expenditure_ (sometimes called taxes on +consumption). This is but another mode of attacking income, for in the +long run most income is spent, not always by the individual who earned +it, but by some one, and thus it is reached by a tax on expenditure. +Usually in the United States the tariff duties are accounted to be +taxes on expenditure, as also the internal revenues (also called +excises) of the national government. In time of war, internal revenues +are extended in the United States to a multitude of articles, but +usually they have been limited (with minor exceptions) to liquor and +tobacco. Most of these taxes are in fact levied not at the time of +purchase by the ultimate consumer, but upon the specific goods in +the hands of some merchant or business agency, and some of them are +essentially special property taxes and others are business taxes of +the kind next to be mentioned. + +(e) Taxes may be levied on selected agencies of industry or on the +process of _business_; such are business taxes, licenses, taxes on +investment in business, and corporation taxes. These burdens are +diffused and rest eventually on some income, rarely to be ascertained +exactly. + +§ 10. #Defective tax "systems."# The actual tax laws of each division +of government in a country combine the various forms in different +proportions. Most of the federal taxes are from tariff duties and from +internal revenues; the latter include a variety of special business +and property taxes and, since 1913, the federal income tax. The +largest receipts of states, of counties, and of minor divisions are +from property taxes, some special but most of them general in form. +Among the various states a wide diversity is found. Some use the +general property tax for all the divisions (state and local), while +others (several of the Northern states and California) have separated +the sources of state and local taxation, taxing corporations for state +purposes, and most other forms of wealth for local purposes. Some +states, particularly those of the South, make large use of licenses +and taxes on business both for state and local purposes. The tax +laws of many states have been much modified of late and are still in +process of change. It is only in a loose sense that one can speak of +the tax "system" of any state, made up as it is of so many diverse +elements, each used to tap in some independent way some source of +private income for public purposes. Every tax "system" has grown up +more or less accidentally, guided by no more of a general principle +than the advice of the cynical old statesman--so to pluck the +feathers of the goose that it will squawk as little as possible. Thus, +everywhere, the existing situation must be largely accounted for by +custom and ignorance, by the weakness of some classes and the undue +influence of other classes, rather than by clearly thought out +principles soundly administered. + +§ 11. #Various standards of justice suggested.# There have not been +lacking earnest attempts to arrive at some general principles. Many +standards have been suggested to measure the distribution of the +burden of taxation, such as benefit, equality, and ability. Each of +these terms is capable of various interpretations which have changed +from time to time. The benefit derived by any citizen from most of +the public services evidently cannot be measured with exactness. The +standard of equality cannot be applied in any literal sense to strong +and weak, to rich and poor. It is possible, however, to interpret +equality with reference not to objective goods, but to the psychic +sacrifice occasioned by taxation. Ability is of many kinds and may +be differently understood. Some think ability to bear taxation is +"in exact proportion to the money income"; others believe that it +increases at a greater rate than money income, and favor, therefore, +progressive taxation, that is, higher rates on the larger incomes. + +§ 12. #Social welfare as the aim.# The conflicting interests of +the various classes of taxpayers in each period are to some degree +softened by the prevailing public opinion, sometimes called the social +conscience, and taxes are adjusted according to a vaguely held +ideal of the social welfare. Social expediency, more or less broadly +interpreted, determines who shall be taxed and what social results are +to be sought. The exemptions from taxation in feudal times were great +and, viewed from our standpoint, were inequitable, for the upper +classes escaped while the peasants bore most of the burdens. The +landlords and nobility, who were assumed to be performing important +social functions, generally had outgrown their usefulness in the +period preceding the French Revolution, which swept away many of these +abuses. + +Exemptions from taxation are granted liberally in most states to-day +on some kinds of wealth and to some classes of citizens, because +of their supposed relations to the public interest. Real estate and +equipment devoted to educational, religious, and charitable purposes, +the homes of priests and ministers, homesteads purchased with pension +money, as well as all public lands, buildings, and equipment are +exempt. + +The social interest requires that taxes be both elastic and +productive, so that the needs of the government shall be amply +provided for. The harmonizing of these needs in the laws of taxation +requires a high degree of wisdom, of foresight, and of integrity +in the legislator and in the citizen. No hard-and-fast rule for the +apportioning of taxes can be laid down. The decision must be made in +each generation by the public opinion as to what is most expedient for +the general welfare. + +§ 13. #Principles of administration.# Whatever forms of taxes are +adopted, whether on property or income, whether at proportional or +at progressive rates, their justice and expediency depend largely +on their administration. Principle and practice in this, as in most +affairs, may go far apart. The administration of taxation should +be economical, certain, and uniform. Some laws are more easily and +economically executed than others. The time of collection should be as +convenient as possible for the citizen, and the mode of payment should +be the most simple. The utmost certainty is desirable as to the time, +method of payment, and amount. Taxation that, in its principle, is +variable, shifting, or dependent on personal whim and favoritism, +is despotism. But the greatest evils, in practice, result from the +failures in assessment. The assessment of taxes has to be intrusted +to men with fallible judgment, imperfect knowledge, and selfish +interests. The assessor is as near a despot as any agent of popular +government to-day. Not infrequently men of proved incapacity in every +private business they have attempted are, for partizan or corrupt +reasons, selected as assessors, and are given the power of passing +judgment on the value of millions of dollars' worth of property. Under +the circumstances, evils are to be expected, and they occur. The small +owner often is crushed under the unequal assessment while the large +owner comes lightly off. Political friends are favored, political foes +are made to suffer. Even the most honest and capable of assessors find +in the imperfections of the tax laws[6] an insuperable obstacle to +even-handed justice. + +§ 14. #Shifting and incidence.# The person paying a tax into the +public treasury is not always the one whose income is reduced in +the long run. This is most clearly seen in the case of taxes paid by +middlemen. In most cases the final and regular burden of the tax is +distributed over a number of incomes. The passing on of the burden is +called the _shifting_ of the tax; the final location of the burden is +called the _incidence_ of the tax. The lawmaker cannot tell exactly +where the weight will fall. The principles of value give some guidance +in the inquiry, but the workings of the principle are difficult to +follow. + +Consider a situation where certain taxes have been for some time +levied. They have become a part of the general adjustment of prices. +If paid by any one in business they may be looked upon as a deduction +from the gross proceeds or product of the business, prior to cost, or +as a part of cost.[7] In either case every one choosing that business +does so in the light of this fact. Unless the business promises to +yield as good incomes (wages, profits) as other lines, the number +engaging in it, and the output, must diminish and thus the price of +the product rise, or the cost of the factors fall, or both in some +proportion. The tax on any durative agent or on any established +business thus becomes incorporated after a time in its price and in +the prices of the products, and any purchaser pays a price based on +the net income remaining to the owner of the wealth after the tax is +paid. Viewed in this way, taxes are seen to be borne to some extent +by every one, by those who do not as well as by those who do actually +meet the tax-collector face to face. The citizen with no taxable +property is affected, far more than he realizes, by extravagance of +government and by inequities in taxation, for the effects of most +taxes are diffused so that every self-sustaining member of the +community has some share in them. + + +§ 15. #Taxes as costs.# Now if a new tax is levied, or an old tax +changed in amount or in its incidence, it becomes a new influence in +industry. Some occupations are made more attractive, others less so. +Some places are made more, others less, desirable to live in. +Property thus fluctuates in value, and investments become more or less +remunerative. If the new tax reduces the net income of any productive +agent, it reduces likewise its value, which is but the capitalization +of its net rental. If taxes are taken off of factories and put upon +farm rents, factories rise and farms fall in value in the hands of +their owners. The immediate change in value is much greater than the +annual tax, for if five dollars is to be taken permanently from the +annual rental of the farm, nearly one hundred dollars is taken at once +from its selling value when the prevailing yield on investment is +5 per cent. The rate of adjustment varies greatly under different +conditions, and the inflow and the outflow of labor and capital are +more or less rapid in the various industries. + +Taxes that enterprisers are unable to shift to others are reckoned by +them as a part of their costs of production whenever the conditions of +competition and of substitution make it possible to do so. Every new +tax that curtails the supply of any necessary agent must raise the +price of the products and cause more or less of the tax to fall upon +the consumers. In the Civil War an increase in the tax on whisky +increased its selling price, and distillers who owned stocks on which +a smaller tax had already been paid reaped profits of millions of +dollars. When the tax on tea was increased in England, all dealers +that had accumulated a stock before the law went into effect were +gainers. Every change in taxation inevitably affects, either favorably +or unfavorably, many interests. The chance to anticipate a change in +tax laws or to get, from those in power, information of a proposed +change, makes speculation possible and political corruption +profitable. + +The fact that a change in taxation is a disturbing element in price is +not to be deemed insignificant merely because "all comes out right +in the end." Every change in taxation is an element of uncertainty +in business and increases the fortunes of some men at the expense +of others. Hence no considerable change should be made without good +reasons in its favor. The older taxes have the virtue of stability, +but in many cases they have grown out of harmony with the industrial +conditions. While, therefore, from time to time there is a real need +of a reform in the tax system, it should not be undertaken without +recognizing the many and complex interests involved. + + +[Footnote 1: Meaning here not a certain political party, but a +principle of social action.] + +[Footnote 2: The total debts of the _national_ governments of the +world just before the outbreak of the great war in 1914 were estimated +at about $44,000,000,000. (These figures include the debts of the +separate states in the federal unions of Australia and the German +Empire, and the separate debts of European colonial governments, but +not those of the states of the United States, and in no case including +the debts of minor divisions, the total figures for which are not +to be had.) The new debts created by the war give already more than +double the foregoing total.] + +[Footnote 3: The special assessment is thus in its nature, in part a +private investment. The plan, of special assessments could easily be +applied in many more cases than is done at present.] + +[Footnote 4: There are border-line cases where it is difficult to +decide whether a particular payment to the government in the form of a +fee, price for service (as water rates, etc.), and special assessment +(as for street paving) is in the legal sense a tax or not. Some +courts have, for example, decided that for certain purposes a special +assessment is to be called a tax, and in certain other cases it is +not to be if this would defeat the evident and just intention of the +legislature.] + +[Footnote 5: The figures do not include returns from incorporated +places having a population of less than 2500 where the poll taxes may +be a considerable sum.] + +[Footnote 6: Particularly the difficulties noted in the next chapter, +sees. 2-5.] + +[Footnote 7: See Vol. I, p. 374.] + + +CHAPTER 17 + +PROPERTY AND CORPORATION TAXES + + § 1. Importance of taxation as a public question. § 2. The general + property tax; nature and difficulty. § 3. Ambiguity of the term + "property." § 4. Various temporizing policies. § 5. A consistent policy + of wealth-taxation. § 6. Needed reform of assessment. § 7. Separation of + state and local taxation. § 8. Federal taxation of merchandise in + commerce. § 9. The proposal of the single tax on land values. § 10. + Various reforms in land taxation. § 11. Difficulties in taxing + corporations. § 12. Special taxes on banks. § 13. Special taxes on + insurance. § 14. Special taxes on transportation. § 15. Alternative + policies of corporate taxation. § 16. General plan for corporate + taxation. + + +§ 1. #Importance of taxation as a public question.# The discussion of +taxation has accompanied the growth of free government in England and +America from the time of Magna Charta. The control of the public purse +has been found to give the key to political power, and therefore it +has frequently become the occasion of conflict between the monarch and +the people. But in our own national history since the adoption of the +Constitution, taxation has not had a leading place in politics except +in the one aspect of the tariff. The constitutional question of +states' rights long absorbed most of the interest of citizens and +of legislators. But with the quickened attention of the public to +economic questions, the problem of taxation became of increasing +importance. + +It has come to be recognized that taxation can be made to play, and +is bound to play, a leading part as an agency in the distribution of +wealth, and thus it is the center of much of the ardent controversy +regarding social reform. Ultimately, almost every proposal of social +change and betterment involves some cost. The question then must be +answered. Who is to receive the benefits and upon whom and how shall +new taxes be levied to pay the cost? Further, it is often urged that +this result of taxation in redistributing incomes is in itself (or can +be made) a virtue; and some even see in tax reform the answer to the +largest social questions of our time. We are now to take up a few of +the more important problems of taxation, to see the difficulties, and +to suggest the direction in which their solution is to be sought. The +tariff having been already separately considered, the chief kinds of +taxes we have here to treat are property taxes, general and special, +and inheritance and income taxes. + +§ 2. #The general property tax; nature and difficulty.# The rates both +of assessment and of levy of the general property tax are uniform and +equal in proportion to the value of all (or nearly all) property in +the taxing district.[1] There are always some exceptions of certain +kinds of property, or of the property of certain persons, or of +property and things put to certain uses--public, educational, +religious, and charitable in their nature. + +The federal government levies no general property tax, but the other +branches of government[2] receive about three-fifths of all their +revenues from it. + +At first view nothing would seem to be simpler and juster in principle +than such a plan of taxation, but those who have most carefully +studied its practical operation, almost with one accord, pronounce it +to be "a dismal failure." The chief reason assigned for this failure +has been that the assessment of the tax is imperfect and incomplete. +The usual thought is that if all property could be assessed the plan +would be excellent. Undoubtedly the difficulty of just assessment has +its part in the weakness of the tax, but back of, and more important +than this, is an inherent fallacy in the apparently simple principle +of the tax. + + +§ 3. #Ambiguity of the term "property."# Unfortunately, the word +property is applied, even by the most competent courts, both to the +intangible right of ownership (the fundamental meaning) and to +the concrete thing that is owned, the source of the income.[3] But +evidently the value of the right to the income yielded by a house, for +example, is merely the value of the house. The value of the _property +in the one sense_ (the abstract ownership, the intangible right) is +merely a reflection of the value of the _property in the other sense_ +(the concrete wealth). There are not here two independent bodies of +economic wealth. Whatever value belongs to the one is subtracted from +the other. Nor is it rational to take the paper document called a deed +(which is but the evidence of ownership) and call it tangible property +having a value in addition to the house itself. Yet, in fact, all +these confusions are constantly made in taxation. The term "intangible +personal property" is applied to such things as mercantile credits, +promissory notes, bonds--in general to the right to collect sums +from another person, whether these rights arise out of sales or of +loans--and all are treated as parts of taxable property. Sometimes +the evidences of indebtedness, the promissory notes or the mortgage +papers, are even called tangible property, the same term that +is applied to land, houses, and machinery. By universal practice +supported by a long line of court decisions, these rights (whether +evidenced by paper or not) are made subject to taxation, except as +by piecemeal legislation certain grudging exceptions have been made. +These views and this practice are supported by the popular desire to +tax money-lenders. The result is "double taxation" of many sources of +income. This involves a burden that is ruinous in some cases, both to +borrowers and to lenders, and that tempts in all cases to the evasion +of the tax. + +Take, for example, a house assessed at $10,000 which is owned free of +debt and which has a rental value of $600. At the rate of 1.5 per cent +the tax paid would be $150. Now if the owner borrows $8000 he is still +taxable $150 on the full value of the house, and the lender nearly +everywhere is taxable $120 on the amount of his mortgage. The total +tax payable out of the one source of income, the house, is then $270. +The same analysis will show that any credit is but a contractual +claim upon some other source of income which is, or should have been, +already taxed. + +If one person owns all the capital-value invested in a specific piece +of wealth, no attempt is made to tax both the capital and the wealth; +but if it happens that two or more persons share the capital-value +invested in the same wealth, the attempt is made to tax as a unit the +full value of the wealth and, in addition, some part of the capital +also. It is, however, easy in most cases to conceal this "intangible +property" from the assessor's eyes, and a comparatively small amount +of it is ever taxed. This means inequality and hardship in the +operation of the tax and, as a result, unceasing temptation to perjury +by the taxpayer and to favoritism and graft by public officials. + +§ 4. #Various temporizing policies.# The general property tax in +practice is unjust and demoralizing. What, then, shall be done about +it? Various policies have been followed. One has been to declare that +the law would be good if it could be enforced, but that as in practice +it cannot be, the best thing is to go on as before, catching a few +"tax dodgers," and letting the rest go. Another policy is to hire +"tax ferrets," paying them large commissions to discover cases +where intangible property of this sort has been concealed from the +assessors. This method, no matter how stringently applied, has never +reached more than a small proportion of the cases, and becomes a +potent agency of political favoritism and corruption. + +Another policy is to maintain the general principle, but to make +exceptions here and there. Usually the exceptions are made just at +those points where the law would with earnest effort be most easily +enforceable, and therefore where it has become most inconvenient. As +a result of these changes the state laws display a bewildering and +illogical variety. By constitutional interpretation, United States +notes and federal bonds are exempt from state and local taxation; +generally, by state law, building and loan association and +savings-bank loans are exempt as, in a majority of states, are state +and municipal bonds if held within the state. In at least eight +states, bonds of the state are exempt, but those of the municipalities +are taxable, while in a few states the reverse is the case. In several +states both kinds of bonds when issued after specified dates, are +exempt, but in Ohio state bonds are exempt only if issued prior to +1913. All but seven of the forty-eight states, however, attempt to tax +the resident holders of state and municipal bonds of other states; +but the exceptional states are those in which most of the investors +in this class of securities reside. In many cases private debts +receivable are allowed to be offset against debts payable. In some +states mortgages on real estate are exempted or (in Massachusetts) +treated as an interest in the real estate. Rarely mortgages are +exempted up to a certain amount (in Indiana, to $700, the purpose +being to tempt the borrower to reveal the name of the lender). +Sometimes a special mortgage registration tax, payable but once (in +New York 1/2 of 1 per cent) is levied, and otherwise mortgages +are free from taxation. Small as this rate is, the fiscal yield of +mortgage taxation under this plan exceeds that under the general +property tax. + +By the overlapping of these laws, so contradictory in principle, it +may happen that securities held by taxpayers residing in other states +than those of the issue are taxable two or three or more times; but +few if any loans of this kind are made except by those evading all +taxation. + +§ 5. #A consistent policy of wealth taxation.# These exceptions +still leave the law in its general principles as to the taxation of +intangible property illogical and unjust. A solution can be found only +by abandoning the ambiguous legal concept of property, and making use +of economic concepts. A consistent tax law might take either wealth +or capital as the basis of assessment, but not sometimes the one and +sometimes the other. Wealth is an impersonal basis of taxation; +each piece of wealth might be taxed once as a unit no matter how the +ownership were divided. Or the other alternative might be chosen. +Capital would be a personal basis of taxation; each person's capital +might be taxed no matter from what sources the incomes were derived +(the concrete wealth, of course, then being left untaxed). + +The wealth basis is much nearer to the present general property tax as +actually administered. The assessment of general tangible wealth +would undoubtedly be more easily done than would that of individual +capitals, and likewise be both easier and juster than the present +inconsistent policy. Tangible things are comparatively easy to find, +measure, and evaluate where they are, and if they are all taxed it is +evidently the same as if all the capital values based upon them were +taxed in the owners' hands. The various equitable claims of different +owners in one source of income could be left to adjust themselves +through shifting, mainly in the choice of investments, once the plan +had become generally applied. + +§ 6. #Needed reform of assessment.# The assessment of the present +general property tax is notoriously inefficient and unjust. The root +of most of the present evils (other than those above discussed) is the +method of local election of assessors, which usually is by townships, +but in some cases by counties. The local assessor's estimate of value +is used as a basis for taxation not only for his district but for the +larger units (county and state). Thus every local assessor is tempted +by the conflict of interests not only among the taxpayers in the +district which elects him, but by the conflict of interests between +his district as a whole and other districts. The lower the ratio of +assessment to true valuation in any township compared with that of the +other tax districts, the smaller the proportion of county and state +taxes that the people of the district have to pay. Willingness to +under-assess property often becomes thus the chief virtue of an +assessor in the eyes of his political constituents. This has led in +many cases to absurd underassessment, which boards of equalization +have proved powerless to remedy in any great measure. A sounder plan +would be general state assessment, with a permanent expert board of +commissioners employing a corps of state assessors under the merit +system of appointment. This plan has as yet been applied only to +assessment of railroads and some other public-service corporations. + +§ 7. #Separation of state and local taxation.# For the reason just +indicated the failure of the general property tax has been most +conspicuous where it is used as a basis for state taxation. This has +led some financial students to advocate the plan of separation of +state and local taxation. This means the assignment of certain sources +of revenue (such as corporations and the liquor business) primarily +or exclusively to the state, leaving all real estate and the general +property of non-corporate persons to be taxed by the counties and +minor divisions under the general property tax. The plan has been +increasingly applied in New York, until, in 1906, it became almost +complete. In 1910 the plan was adopted in California; and it is +largely used in New Jersey, Connecticut, Delaware, and Pennsylvania, +and to a small extent in some other states. An efficient state +assessment of general wealth would accomplish most of the advantages +claimed for this plan, while avoiding some of its dangers. + +§ 8. #Federal taxation of merchandise and acts in commerce.# Tariff +and internal revenue duties constitute the two chief revenues of the +federal government. Both of these are mainly taxes on wealth. Unlike +the general property taxes they are not levied upon the main body +of wealth held in possession, but almost entirely upon articles of +merchandise and upon acts in course of trade. Stamps on receipts, +checks, deeds, bills of sale, and licenses on the sale of liquor +and tobacco are taxes on business acts which are necessary to the +acquisition, use, or expenditure of wealth. Goods imported are taxed +at the time of entering the country; domestic products such as cigars, +spirituous or malt liquors, playing cards, and (at times) matches, pig +iron, and other products, are taxed usually at the time of exit from +the factory. It has already been shown that when the tariff duty +prevents the importation of foreign goods and by raising the price +encourages domestic manufacture of the article, there is virtually +taxation of the consumer to subsidize the private manufacturer. A +system of properly adjusted compensatory duties (tariffs and internal +duties combined) which would prevent tariff duties from having any +prohibitive effect whatever could, in a great country like ours, be +made to produce any revenues desired. Such a system, combined with the +federal income tax, seems destined to be the chief dependence for the +national government. + +§ 9. #Proposal of the single tax on land values.# Besides the general +property tax there are found in the country as a whole a large number +of special property taxes. Some of these have been introduced as +substitutes for the general property tax; such is the special taxation +(above referred to) of mortgages, and bonds. Other special property +taxes have been introduced because they were believed to be good in +themselves; such are special franchise taxes on corporations and some +kinds of taxes on land. + +The special taxation of land, or of land values, has been strongly +urged by Henry George and his followers since the publication of the +remarkable book "Progress and Poverty" in 1879. The doctrine there set +forth is that the state should "appropriate land rent by taxation," +should "tax land values, irrespective of improvements." It is +maintained that "a single tax" of this kind would be quite sufficient +for all the purposes of government. The main arguments adduced +for this plan may be reduced to three propositions: first, private +property in land is essentially unjust, because land is made by +nature, not by men; second, the plan would make assessment simple and +certain by limiting it to the unimproved land, and making unnecessary +the more difficult assessment both of tangible improvements and of +intangible personal property; and third, it would work a marvelous +reform in social conditions, abolishing poverty and greatly increasing +production. + +It is impossible within our limits of space to discuss this proposal +further than to indicate that: (1) It assumes an untenable theory of +property.[4] (2) It overlooks the difficulty of distinguishing the +value of the land "irrespective of improvements," from that of the +land as it actually is, a difficulty especially great in the case of +agricultural land.[5] The difficulty is present even in the case of +urban land when the improvements of filling, draining, and leveling +have become incorporated with the site.[6] (3) The plan ignores the +stimulus (motivating force) which private ownership has given and +still gives to the maintenance and fuller productive use of land. +Nowhere has production thriven where the state was the universal +landlord. + +§ 10. #Various reforms in land taxation.# While the single tax plan +is defective in principle, its wide discussion has served to direct +attention toward the need of reform in the taxation of land. Some +proposals looking toward this end are widely favored by opponents as +well as by advocates of the single tax. Such are the following: + +(a) The abandonment of the taxation of mortgages.[7] + +(b) A more correct assessment, in accordance with the present laws, +of lots and lands held for speculative purposes, which in practice are +now greatly under-assessed. + +(c) More adequate special franchise taxation upon corporations for +special privileges in the public highways. + +(d) Exemption, in value equal to the costs, of improvements on land, +such as buildings, drains, fences, and fertilizers, for a limited time +after they are made, perhaps five years. + +(e) The separate assessment of urban lands used as mere building sites +and of the buildings on them. + +(f) Taxation of the increase ("increment") of urban land values, +periodically or on the occasion of transfer of ownership. + +§ 11. #Difficulties in taxing corporations.#[8] Until near the second +quarter of the nineteenth century, business corporations (of which +there were few) were taxed just as was the general property of +individuals. This still continues to be the case in the main in most +of the states. The methods and machinery of assessment were (and still +are) essentially local and simple, and have proved to be inadequate +to reach or justly assess the larger and more complex corporate +enterprises when their equipment and business extend beyond town, then +county and, finally, state lines. Moreover, the corporate forms +of organization presented in complex and puzzling forms the dual +conception of property.[9] Here was the tangible wealth of the +corporation and there were the diffused rights of ownership, the +capital of individual stockholders and bondholders. Confused by this +ambiguity, the men of that time believed (as many still believe) that +there were here two separate and justly taxable funds of value. The +popular will declared (and still declares) that "all kinds of property +ought to bear their fair share of the burdens of taxation." Yet to +apply this principle would obviously be double taxation and result +in confiscation in many cases. Between this doubt and the practical +difficulty of assessment, it turned out that corporate wealth, far +from being doubly taxed, was largely escaping even its due single +burden. + +§ 12. #Special taxes on banks.# Attempts to deal with the difficulty +without clear perception of its cause took the form of legislative +tinkering and patching. Taxes were gathered from corporations by any +device that seemed workable. The banks, being the earlier important +corporations, were first experimented upon. Taxes on capital stock and +on circulation were tried first (in 1805, by Georgia), then a tax on +dividends (in 1814, in Pennsylvania, and in 1815 in Ohio), examples +which were followed or modified by a number of states. After the +national banking system was started in 1864, attempts to tax both the +capital of the banks and the stock in the hands of individuals led to +federal court decisions and then to state legislation by which now in +many of the states the banks are separately taxed on their real estate +and the shares are assessed to the individual holders (by various +rules), but the taxes deducted from dividends and paid by the bank. +There are, besides, special franchise taxes and fees paid by banks in +various states. + +§ 13. #Special taxes on insurance companies#. Insurance companies +present in a striking manner the complexities of the ambiguous +property concept. The assets of the insurance companies (we refer here +particularly to the reserve companies), which belong in equity to the +policy holders (less the claim of the stockholders in the case of +the stock companies), are nearly all invested in stocks and bonds of +corporations and in mortgages on real estate. Now under the general +property tax, strictly interpreted, the policies are assessable +at their surrender or reserve valuation in the hands of the policy +holders; secondly, the securities and credits which compose the assets +are assessable to the company; and, thirdly, the railroads, factories, +and houses, built with the outstanding loans made by the insurance +companies, are assessable as tangible wealth, to the owners. If such +an interpretation were practically enforced it would result in triple +taxation to be drawn from the same economic source, and would be +utterly prohibitive of the insurance business. The enforcement +has, however, been impossible in practice. Insurance companies +have comparatively little tangible wealth excepting real estate +for offices. This is taxed locally. Several methods have been tried +(beginning as early as 1824) to make insurance companies pay taxes +(usually for state purposes) on something besides tangible wealth. A +tax on receipts from premiums proved most workable, first as applied +to "foreign corporations" (that is, to those of other states) and +later, generally, to domestic companies also. Now, amid bewildering +variety and interstate rivalries in tax laws, the most usual rate is +two per cent on gross (in a few cases on net) premiums collected. The +taxes on premiums, with various licenses and fees, now amount to 2.15 +per cent of the total receipts from life insurance premiums in the +United States. This is taxation not on an existing body of accumulated +wealth, but upon the process of accumulation, a tax directly on the +act of saving. A consistent policy of wealth taxation combined with +income taxation would require the abandonment of the present forms of +special insurance taxes. + +§ 14. #Special taxes on transportation.# Another great group of +businesses whose taxation has been especially complex, because they +are distributed throughout different taxing districts, are agencies of +transportation and communication, especially railroad, sleeping car, +express, telegraph, and telephone companies. A state tax on railroad +tonnage (Pennsylvania, 1860) was declared unconstitutional by the +United States Supreme Court. But many other plans have been tried +to compel the railroads to contribute, the chief being by taxes on +dividends, gross earnings, equipment, and valuation of capital stock, +taxed either to the company or to the stock-holders, (Connecticut +since 1849). About a third of the states no longer make the physical +plant the basis of taxation, except that in most of them some part or +kinds of real estate are taxed locally.[10] + +Telegraph companies are still locally assessed in most states, but in +over a third of the states are taxed either on gross receipts, or +on mileage of wire. Telephone companies are similarly taxed, but +sometimes on the number of transmitters, or of subscribers, or on each +plant, or otherwise. In a similar manner, express and sleeping car +companies are taxed, in the same group of states, on mileage, or on +capital stock proportional to mileage, or by license and privilege +taxes. + +In the case of these corporations, and also of various other +miscellaneous kinds of companies, no clear-cut principles serve to +guide. The result is "a chaos in practice--a complete absence of +principle."[11] + +§ 15. #Alternative policies as to corporate taxation.# If the taxation +of corporations is not to continue to be treated in a mere hit-or-miss +manner, with every possible kind of inconsistency among the various +states, some general principles must be recognized and some clear +policy be formulated. But there is no general agreement to-day among +jurists and economists upon a definite and consistent plan in this +matter. + +Two alternative policies appear. The first is to make the scheme for +taxing corporations quite different in principle and plan from +that for taxing natural persons. The assumption in this is that the +"general property tax" is an irremediable failure, and is particularly +inapplicable to corporations. This plan goes along with the separation +of state and local taxation.[12] An unfortunate result of this is to +relieve the great mass of taxpayers of the state from, any apparent +and measurable part of the tax burden for state purposes and thus to +separate responsibility and power in state government. This policy +nevertheless is favored by some of the leading authorities on finance. + +The other policy is to tax the wealth and business of corporations +(excepting those enjoying special privileges) in essentially the +same way as other wealth and business. The improvement of corporate +taxation would thus be but a part of the transformation of the +"general property tax" into a general tax on tangible wealth.[13] +If first there is recognized the error of assessing the equitable +ownership interests in addition to the body of wealth, and secondly +there is created an efficient agency of assessment, the taxation of +corporations can be logically and easily brought into accord with a +harmonious system of state and local taxation.[14] + +§ 16. #General plan for corporate taxation.# The main features in such +a plan of reform would be as follows: + +(a) Assessment of all wealth by a state agency, with expert nonlocal +assessors, appointed and serving only under the merit system. + +(b) The assessment of the value of each enterprise and body of wealth +as a unit for the whole state, and apportioned to the minor divisions +as the basis for levying local taxes. + +(c) Apportionment of the total value in the state among the localities +by general rule, in the case of transportation and transmission +companies, by mileage with due regard to the presence of local real +estate and of special industrial equipment such as repair shops and +power plants. + +(d) Taxation of interstate enterprises only in due proportion to the +whole business, by mileage or other rules; inter-state comity to be +further developed in this matter. + +(e) Account to be taken, in assessment, of various factors determining +the earning power, such as good will, patents, and other monopolistic +elements, pertaining to and helping to determine the value of the +tangible plant of the enterprise. + +(f) Account to be taken of the market value of securities and notes +owned by a corporation, in determining the taxable value of the whole +business, but these not to be treated as a separately assessable +"property" (in addition to the tangible plant). + +(g) Exemption of the holders of securities and evidences of +indebtedness of corporations.{15} + +(h) Treatment of special privileges granted to public-service +corporations for the use of streets and public highways on the +principle of rent-payment to the community rather than by levying a +percentage on an assessment. + + +[Footnote 1: For example, the constitution of Alabama declares: "All +taxes levied on property in this state shall be assessed in exact +proportion to the value of such property," etc. And the constitution +of Indiana declares: "The general assembly shall provide, by law, for +a uniform and equal rate of assessment and taxation of all property, +both real and personal, excepting," etc. Similar statements occur in +most state constitutions.] + +[Footnote 2: The general property tax in the United States +constitutes: + + Of the revenue receipts of the states 38 per cent. + Of the revenue receipts of the counties 76 per cent. + Of the revenue receipts of the incorporated places. 60 per cent. + +The total amount collected in this way in 1913 was over +$1,083,000,000.] + +[Footnote 3: See above, ch. 2, secs. 2, 3, and reference there to Vol. +I.] + +[Footnote 4: See above, ch. 2.] + +[Footnote 5: See Vol. I, pp. 116, 117, 145, 445-455.] + +[Footnote 6: See Vol. I, pp. 117, 146, 453.] + +[Footnote 7: See above, sec. 4.] + +[Footnote 8: No reference is made in what follows to fees payable but +once for the incorporation of new companies or at times of increasing +the capital stock of an old one, variously called taxes on corporate +charters, license taxes, incorporation fees, organization fees, and +charter fees.] + +[Footnote 9: See above, sec. 3.] + +[Footnote 10: E.R.A. Seligman, "Essays on Taxation" (1895), p. 156.] + +[Footnote 11: Seligman, op. cit. p. 136.] + +[Footnote 12: See above, sec. 7.] + +[Footnote 13: See above, sec. 5.] + +[Footnote 14: The assessment feature of this proposal is exemplified +more nearly than anywhere else, tho still imperfectly, in the "Indiana +plan," in which, however, the true concept of property is recognized +only in so far as the shares of corporations of which all the wealth +is taxed are not assessed to the shareholders.] + +[Footnote 15. This need not prevent a supplementary system of +graduated taxation on incomes. See below, ch. 18, sec. 10.] + + + + +CHAPTER 18 + +PERSONAL TAXES + + § 1. Inheritance tax laws. § 2. Fiscal importance of inheritance taxes. + § 3. Income taxes; general nature. §4. Income taxation by the states. + § 5. History of federal income taxation. § 6. Events leading up to the + law of 1913. § 7. Main features of the law. § 8. Exemptions and + stoppage at source. § 9. The graduation principle. § 10. A system of + taxation. + + +§ 1. #Inheritance tax laws.# There remain to be considered at least +two important forms of taxation that are essentially _personal_ in +their unit of assessment, in contrast with the foregoing which are (or +should be, if consistent) essentially _impersonal_[1] These are the +inheritance and the income taxes. + +Until 1916 little use had been made of inheritance taxation for +federal purposes. In that year, however. Congress passed a law which +was expected to obtain about $20,000,000 a year from inheritances. + +Forty-one states in America have inheritance tax laws (in 1915) +which apply generally to property passing either by will or under the +intestate laws of the state. The tax is for state purposes. These laws +differ in many ways, but are nearly all alike in certain respects: + +(1) In applying to the separate legacies rather than to the estate as +a whole.[2] + +(2) In taxing legacies to relatives in the direct line at a lower +rate (or even exempting them entirely) than those to collateral +relatives.[3] + +(3) In exempting legacies below a certain amount.[4] + +(4) In having rates progressing with the size of the legacy; (this +feature is less general, but is prominent in most of the later laws). + +§ 2. #Fiscal importance of inheritance taxes.# The fiscal importance +of inheritance taxes has been comparatively not very great (except in +New York State), but it has rapidly grown. In 1903 the receipts from +this source (in 27 states) were over $7,000,000; in 1913 they were (in +35 states) $26,000,000. The spread of inheritance taxes and the higher +and progressive rates applied are an expression in part of the need +of additional revenues and in part of the growing popular concern +regarding the concentration of wealth. Yet the actual legislation is +something of a compromise between fiscal policy (to get revenues) and +social policy (to reduce or to distribute the larger fortunes).[5] In +New York legacies of over $1,000,000 are now taxable at 4 per cent +to relatives in the direct line and to all others at 8 per cent. In +Washington the tax to relatives in the direct line is but 1 per +cent, but to others it may go as high as 12 per cent on legacies over +$100,000. In Wisconsin, somewhat similarly, the tax may rise to 15 per +cent on the excess above $500,000. + +§ 3. #Income taxes; general nature.# All taxes, whether assessed upon +the capital value of goods or not, come out of (reduce) the incomes +now or later available for individuals. But there are various ways +of attacking incomes, i.e., of apportioning the tax burden. Income +taxation is that form in which the basis of the assessment and levy +is the income of the taxpayer as it arises (not accumulated wealth, +or capital, or business processes, or expenditures). Of the various +conceptions of income[6] the one mainly employed in income taxation +is monetary income arising in the course of business, supplemented +occasionally (but not consistently) by some items of material income +that are expected to come to the person. There is not in the long run +such a contrast between wealth taxation and income taxation in their +ultimate burden and effect as is usually supposed. + +Indeed wealth (or capital) taxation as applied to accumulated wealth +is more far-reaching than income taxation, for it falls upon the +present worth alike of monetary and of psychic incomes (e.g., the +value of a house whether it is let to a tenant or occupied by the +owner). But, on the other hand, income taxation attacks directly the +monetary incomes from labor, coming as wages, salaries, fees, and +profits in business. This feature goes naturally with the fact that +the income tax is essentially a personal tax, grouping the items of +assessment about a person, whereas the "property" taxes are mainly +(tho not consistently) impersonal, making the piece of wealth the +primary object of assessment. This summation of each person's income +makes income taxation peculiarly suitable for progressive taxation +with the social-welfare motive of equalizing the distribution of +wealth. It is doubtless this technical assessment feature, rather than +any essential advantage as a mode of taxation, that has led to its +recent growth in popular favor. + +§ 4. #Income taxation by the states#. Income taxes have been used +widely in European countries, but not so much in the United States. +Numerous attempts have been made by the states to tax incomes, but +with small results. Personal incomes, when sought by local assessors, +proved to be most elusive. There are (in 1913) but seven states with +anything resembling a personal income tax.[7] These are Virginia, +North Carolina, South Carolina, Mississippi, Oklahoma, Massachusetts, +and Wisconsin. Of these states Wisconsin has the most recent law, and +one the widest in its application and the most important fiscally. The +law applies a progressive rate to all incomes (with exemption of +$700 from wages and salaries) and contains elaborate provisions for +corporate taxation. The proceeds are distributed 10 per cent to the +state, 20 per cent to the county, and 70 per cent to the municipality +in which the tax is collected. In the six other states the tax is on +incomes only exceeding a certain amount (North Carolina, $1000, the +other states from $2000 to $3500 exemption); some apply to incomes +from any source but others do not apply to incomes from property +otherwise taxed. The total receipts from these state income taxes in +1913 were but $314,000. + +§ 5. #History of federal income taxation.# The income tax seems +destined to play a more important part in the fiscal system of the +federal government. Until 1913, however, its part had been small. It +began to be used under the law of 1867 (when the law passed in 1861 +was replaced before it went into effect). This was repeatedly amended +and finally repealed in 1870, to continue in force until the year +1872. The rate was 3 per cent on the excess of incomes over $600, and +5 per cent on the excess over $10,000. This law was repeatedly +upheld by the United States Supreme Court as not in conflict with +the Constitution. Its fiscal results were not large, as it was never +effectively administered. + +The next income tax law was that of 1894, enacted in connection with +the tariff revision of that year. It was declared unconstitutional +before it had gone into effect. The main ground for the decision was +that a tax on incomes from rent of land as well as on incomes from +personal property is direct, and must therefore be apportioned among +the states according to population. + +In the active discussion of social legislation in the years following +this decision public sentiment developed favoring a renewed attempt to +get such legislation by amending the Constitution. This was shown by +the remarkable fact that a bill for the sixteenth amendment to +the Constitution was passed unanimously by the Senate, and almost +unanimously by the House. It was ratified by three-fourths of the +states and became a law in 1913.[8] + +§ 6. #Events leading up to the law of 1913.# Meantime, in 1909 and +excise tax law had been passed, applying to corporations in a manner +not open to the objections found by the Supreme Court to the law of +1894. The Democratic party, which had passed the law of 1894, was +pledged to the passage of an income tax law when it came into power +again in 1913. The reduction of the tariff, as well as growing +expenditures, moreover, made necessary the development of new sources +of revenue for the national government. In other countries the income +tax had been found to be a part of a system of taxation especially +valuable as "a balance wheel" to equalize the revenues and +expenditures. It was deemed by some to be an additional advantage of +an income tax that it would make the richer citizens better realize +the nature and burden of public expenditure. Most other federal +revenues, being derived from the tariff and from taxes on merchandise, +are borne mainly by the purchasers and consumers. + +An income tax was opposed as sectional taxation by many in the Eastern +states where the owners of most of the larger fortunes reside. But to +this Senator Elihu Root replied that the states where there was +the greatest ownership of wealth pay the largest taxation under any +scheme, and ought to. + +§ 7. #Main features of the law.# The law as enacted[9] imposes (a) +a "normal" tax of 1 per cent on the entire net income of every +corporation (engaged in business for profit); + +(b) a "normal" tax of 1 per cent on the excess above $3000 of every +unmarried individual's income (or $4000 for husband and wife, as +indicated in the next section); (c) an "additional tax" (often called +a super-tax) ranging from 1 to 6 per cent on individual incomes of +larger amounts than $20,000. There are thus eight classes of persons, +those entirely exempt, those paying only at the normal tax rate, and +six different classes paying a super-tax.[10] + +A person with an income of $1,000,000 thus pays $60,020, this being +the amount indicated, $25,020 for the first half million plus 7 per +cent on the second half million. + +§ 8. #Exemptions and stoppage at source#. There are various +exemptions, the first being that of $3000 on every individual income +and of $4000 on the aggregate income of husband and wife living +together.[11] Among other exceptions are sums paid for taxes (except +assessments for local benefits), necessary business expenses, losses +sustained, and (for the normal tax only) those parts of individual +incomes derived from corporations which have paid the tax on them. + +The difficulty of getting an honest and complete assessment of incomes +is great. All taxation is deemed by the taxpayer to be "inquisitorial" +in some degree, and this is particularly true of an income tax. In +England had been developed the plan called "stoppage at source." In +our law the taxation of corporations at the rate of the normal tax, +while requiring them to report the names of those receiving dividends +and interest payments, affords an ingenious way of checking up the +returns of individuals in respect to a class of investments which is +steadily increasing in importance. + +§ 9. #The graduation principle#. The most disputed feature of the +income tax is the principle of graduation, or of progression. It is +upheld in part because in this case it but offsets _regression_, that +is relatively heavier taxation on the smaller incomes, in the case of +the other kinds of taxes (tariff, property taxes, etc.). It is urged +further that those of larger incomes, especially the largest, have +marked advantages over others in making investments. Further it is +urged that the higher the income the less does a certain rate cut into +"the amount necessary for good living" (as was said in Congressional +debate). This is in accord with the psychological principles of +choice, of value, and of diminishing gratification. Finally, there is +a widespread approval of the progressive rate just because it in so +far acts as a leveling influence upon fortunes. The "additional" tax +is already important fiscally, yielding over one-half of the total +paid by individuals and one-fourth of the total from corporations and +individuals. + +The income tax returns for the first ten months of the law (March to +December, 1913) showed 356,598 taxable individual incomes, equal to +about 1 per cent of the taxable population (considering minors to be +usually not taxable). Even this proportion, small as it is, is much +larger than that of the European countries having a general income +tax. + +The first ten months' yield (March 1, 1913, to December 31, 1913) was +over $60,000,000. A remarkable fact is that 21 per cent of all taxable +incomes (not persons) were in the single Borough of Manhattan (the +main part of New York City). The receipts from the income tax in +1913 were nearly 10 per cent of the ordinary receipts of the federal +government, and about 2 per cent of total revenue receipts of all +branches of government, the income taxes paid by individuals being +about 1 per cent of the same total, and the super-tax about 1/2 per +cent of the same. + +The receipts from the income tax during the fiscal year ending +June 30, 1915, were $80,000,000, of which $39,000,000 was paid by +corporations and $41,000,000 by individuals. Of the latter sum, over +$24,000,000 was from the super-tax. + +§ 10. #A system of taxation.# The task of reforming and developing the +various kinds of taxes and of uniting them into a just and consistent +plan for each of the divisions of government in the United States is +a vast and difficult one. There are many conflicting interests among +states, between states and nation, among the various minor political +divisions, and among individuals and classes. There are also +conflicting opinions regarding many features of the possible practical +plans. Because of these it is safe to predict that progress will not +be made quickly, steadily, nor always directed toward a clear ideal. +If progress is to be rapid, the public must, however, have consistent +principles by which its steps may be guided. In the foregoing kinds of +taxation are the various elements which may be united into a system of +taxation. It is useful to consider how this might be done. + +At the basis of the whole tax structure is taxation, by value, of +concrete wealth at the place where it is situated (_in situ_). This +should be regardless of the distribution of ownership or of the +residence of the owner. The present misnamed "general property tax" +already presents the main outlines of this form of taxation and the +general changes necessary in law and method of assessment have been +indicated above.[12] Corporation taxation may be adjusted to this +either by separate treatment and assignment to state purposes only, +or more simply for most states, by assimilating it with the general +taxation of wealth and allotting due shares of the proceeds to the +various taxing divisions.[13] The national government can, because of +its exclusive power of levying tariff duties and also because of +its exclusive control over interstate commerce, reach the tax-paying +ability of the nation effectively by a combination of tariff and +internal revenue taxes. These become a part of business costs, and are +diffused over the whole population in general prices.[14] + +This system of impersonal wealth taxation may then be supplemented by +personal taxation, applied through inheritance and income taxes. These +forms of taxation extend over and reach many of the same persons and +incomes as do ultimately the impersonal taxes. But the summation +of personal incomes gives the necessary condition for applying the +principle of progression so far as this is, by public opinion, deemed +desirable either for fiscal or for social reasons. + + +[Footnote 1: See above, ch.17, sec. 3, note, and sec. 5, on this +distinction. The poll tax also is personal: see ch. 16, sec. 9.] + +[Footnote 2: In Utah the tax is 5 per cent on all estates over +$10,000.] + +[Footnote 3. Exception, Utah.] + +[Footnote 4: Exceptions are Missouri, New Hampshire, Vermont, +Virginia.] + +[Footnote 5: It would be more consistent with the purpose of +equalizing fortunes to vary the rate not according to the size of the +legacy but according to the size of the fortune which the legatee has, +or would have, after receiving the legacy.] + +[Footnote 6: See Vol. I, p. 26.] + +[Footnote 7: In addition, certain items of receipts of companies +or incomes of individuals are arbitrarily defined as property for +purposes of taxation in a few cases in about fifteen other states. See +Wealth, Debt, and Taxation, Report of the Bureau of the Census, 1907, +p. 622.] + +[Footnote 8: Article XVI. The Congress shall have power to lay and +collect taxes on incomes, from whatever source derived, without +apportionment among the several states, and without regard to any +census enumeration.] + +[Footnote 9: It constitutes sec. 2 of the tariff act of 1913 entitled +"An act to reduce tariff duties and to provide revenue for the +government and for other purposes."] + +[Footnote 10: This may be seen in the following table: + Normal Rate on excess Total + tax on in next class tax on + lower Nor- Addi- upper Total rate + limit mal tional limit per cent + Under $3,000 0 0 0 0 0.00 to 0.00 + $3,000-$20,000 0 1 0 170 0.00 to 0.85 + $20,000-$50,000 170 1 1 770 0.85 to 1.54 + $50,000-$75,000 770 1 2 1,520 1.54 to 2.02 + $75,000-$100,000 1,520 1 3 2,520 2.02 to 2.52 + $100,000-$250,000 2,520 1 4 10,020 2.52 to 4.00 + $250,000-$500,000 10,020 1 5 25,020 4.00 to 5.00 + In excess of $500,00 25,020 1 6 upwards 5.00 to 7.00 + +By legislation in the summer of 1916, after the foregoing was in type, +the "normal" rate was doubled and the additional rates were raised.] + +[Footnote 11: The exemption is $3000 for each if they are not living +together. Thus the law offers a reward of $20 to make marriage a +failure.] + +[Footnote 12: See above, ch. 17, sec. 5.] + +[Footnote 13: See above, ch. 17, secs. 15, 16.] + +[Footnote 14: See above, ch. 15, sec. 14, first paragraph.] + + + + +PART V + + +PROBLEMS OF THE WAGE SYSTEM + + + + +CHAPTER 19 + +METHODS OF INDUSTRIAL REMUNERATION + + § 1. Workers subordinate in early societies. § 2. Workers in the Middle + Ages. § 3. Growth of the wage system. § 4. Practicability of the + wage system. § 5. Time work. § 6. Task work. § 7. Piece work. + § 8. Premium plans. § 9. Aim of profit-sharing. § 10. Examples of + profit-sharing. § 11. Difficulties in profit-sharing. § 12. Defective + theory of profit-sharing. § 13. Purpose of producers' coöperation. + § 14. Limited success of the plan. § 15. Its main difficulty. + + +§ 1. #Workers subordinate in early societies#. As far back as the +history of settled and populous communities can be traced, the masses +of workers have been subordinate. Civilization began with direction, +with obedience to superiors on the part of the mass of men. Even in +the rudest tribes, the women and children were subject to the will of +the stronger, the head of the family. Among the Aryan races the family +system was widened, and the patriarch of the tribe secured personal +obedience and economic services from all members of the community. +Chattel slavery, the typical form of industrial organization in early +tropical civilization, seems to have been one of the necessary steps +to progress from rude conditions; students to-day incline to view it +as an essential stage in the history of the race. But as conditions +changed with industrial development, chattel slavery became an +inefficient form of industrial organization and a hindrance to +progress. + +§ 2. #Workers in the Middle Ages#. Serfdom for rural labor and many +limitations on the workman's freedom in the towns were the prevailing +conditions in medieval Europe. Serfdom was both a political and an +economic relation. The self was bound to the soil; the lord could +command and control him; but the serf's obligations were pretty +well defined. He had to give services, but in return for them he got +something definite in the form of protection and the use of land. +Between the lord and the serf there continued an implied contract, +which passed by inheritance from father to son, in the case both of +the master and of the serf. In the towns conditions were better for +the free master class of the artisans who owned their tools and often +a little shop where they both made and sold their products. But the +mass of the workers, shut out from special privileges, bore a heavy +burden. There were strict rules of apprenticeship; gild regulations +forbidding the free choice of a trade or a residence; laws against +migration into the town; settlement laws making it impossible for +poor men to remove from one place to another; arbitrary regulation of +wages, either by the gilds in the towns or by national councils and +parliaments, forbidding the workmen to take the competitive wages +that economic conditions would have forced the employers to pay; +combination laws forbidding laborers to combine in their own interest. +These conditions prevailed even in the periods and in the countries +often referred to as particularly favorable for the working classes +(such as England in the fifteenth century). + +§ 3. #Growth of the wage system#. Throughout the Middle Ages these +conditions were gradually changing, and the changes were hastened +by the discovery of America, by the social unrest accompanying the +Reformation, and by other forces. Servile dues in the rural districts +were, by the sixteenth century, commuted for cash payments in England +and had begun to disappear in the other Western countries of Europe. +The agricultural work was done partly by the peasant landowners, +partly by yeomen farmers on their own land, and partly by laborers +hired by landowners or by tenant farmers (enterprisers with some +capital for equipment). The growth of commerce and of the mechanical +trades in the towns required larger ships, factories, and shops, +and increasing investments. This required in the towns an increasing +proportion of hired laborers having little or no capital invested +in industry, and living on wages. This change went on more and more +rapidly with the introduction of machinery in the eighteenth and +nineteenth centuries, and "the wage system" grew steadily to be a more +and more important part of the whole economic structure.[1] + +§ 4. #Practicability of the wage system#. This change has brought with +it grave problems of social organization and social welfare, which it +is not the place here to discuss. But whatever be the difficulties of +the wage system it has certain practical merits of workableness which +account for its progress and dominance.[2] The larger the market and +the longer the waiting period in industry, the greater the element of +uncertainty and financial risk. Under the wage contract the employer, +as the one best prepared to do it, takes the risk as to the future +selling price of the product; the worker gets in a definite sum at +once the market value of his services. Wage payment, therefore, is +a form of insurance to the workingman; he gets something definite +instead of taking chances he is ill prepared to take. Wage payment is +a form of credit to the laborer whose labor is applied to producing +the goods for customers distant in time and in place. The employer +advances to the workman the present value of the future sale, +discounting it at the prevailing rate of interest. + +Wage payment implies a contract by which the employee on his part +agrees to render service and the employer on his part agrees to pay +for it. The methods of determining and measuring the amount of service +of the employee are called "methods of industrial remuneration." The +many varieties may be grouped in two classes: time payment and piece +payment, corresponding with the two modes of measuring labor, time +work and piece work. + +§ 5. #Time work.# Time work came first and was long almost the only +method. In time work the employee is paid by the hour, day, week, +month, or year, as the case may be. This is very satisfactory for +small enterprises, where the master works with his own hands alongside +of the employee, overseeing him, teaching him, and stimulating him by +his own presence and example of industry. This method prevails still +in nearly all farming work, in many kinds of manufacturing, in most +transportation, in clerical positions in trade, and in general where +the employee must perform a variety of tasks. + +Considering a brief period, it might seem that in time work the worker +is paid by time regardless of his effort or performance. However, +in every industry there is a recognized, fairly definite standard of +accomplishment for those getting the regular market rates of wages, +so that the time-standard implies some performance- or piece-standard +also. But this is judged by the employer only in a general way, and +very commonly men of different degrees of efficiency continue for +some time to receive the same money wage. Still, where any differences +become noticeable to the employer in quantity of work, quality of +work, or personal qualities of honesty, reliability, and good temper, +the better workman is likely to obtain a better position, higher pay, +more regular employment, or some other form of reward. The employer is +more likely at the end of any period of employment, to discharge the +man who falls short either in quantity or quality of work, and to +retain and advance the better worker. The method of time-payment does +not directly tempt the workman to slight the quality of his work by +haste. It does not keep constantly before the worker the thought of +his own interest in rapid work, often with an accompanying nervous and +mental strain. In most occupations, therefore, the workers prefer time +work. It does not take exclusive account of the quantity of material +product, but leaves place for estimating various personal qualities of +the employee which are of value in a business. + +§ 6. #Task work#. There are thus both advantages and disadvantages +in time work, and their relative importance varies in different +industries and industrial conditions. Especially is the difficulty +of supervising workers and of ensuring the performance of a certain +standard, or minimum, amount and quality of work great in larger +enterprises. Various methods of measuring the performance of the +worker directly by some other than the time-standards have been +developed. All of these, in a general way, involve the piece work +principle. + +Task work is nominally time work, with a penalty if a certain amount +of product is not turned out within a given period. The agreement may +be that if the specified task is not done within the regular time, +it must be completed in overtime without additional pay. This is also +called "doing a stint." This method has been extensively used in +the ready-made clothing business in America, and is to some extent +involved in many cases of wage payment in manufacturing. + +§ 7. #Piece work.# Piece work of the simpler, or ordinary kind, is +that where the payment varies just according to the amount of the +product, by some physical measurement, as yards of cloth woven, number +of pieces turned on a lathe, or amount of type set by a printer. +Usually careful inspection by some agent of the employer serves to +keep the quality up to a certain standard. The rejected pieces are not +paid for, and sometimes also the workmen are required to pay for the +materials wasted by their poor work. Piece payment is convenient for +home work, such as that of rural peasants weaving cloth for commission +merchants or as that of tenement workers in cities. It is also +employed very widely in the larger factories in textile and mechanical +industries. Selling on commission is a form of piece work. + +In piece work the motive to activity is ever present to the worker, +and almost always the worker turns out a larger product when paid by +the piece than when paid by time. The employer benefits by the more +efficient use of his machinery and equipment even when the price per +piece is not reduced with the larger output per worker. The worker's +earnings may increase rapidly under this plan, but as the manual +dexterity acquired is usually of a very special kind which can be used +only on one particular machine, the worker has little opportunity to +resist a cut in his wages. For this reason and because of the undue +strain upon the worker that often occurs, piece work is in many trades +not favored by the workers.[3] + +§ 8. #Premium plans.# Various modifications of piece work have been +developed of late, all involving the features of a minimum task and +of a premium for performance beyond that point. These plans are called +"premium plans," "progressive wage systems," and "gain sharing." One +of the first of these, Halsey's premium plan, fixes a standard time +for a job and if the worker falls short of, or merely attains to, +that standard he gets the regular pay; but if he takes less than the +standard time he receives a fixed premium per hour for the time saved. +For example, if the standard time is 10 hours for a $3.00 job and the +premium for speed is ten cents per hour, the worker would receive 20 +cents premium if he did the work in 8 hours ($2.40 +.20, total $2.60), +and 50 cents premium if he did it in 5 hours ($1.50 + 50, total +$2.00). His average wage per hour thus rises as his speed increases; +it becomes 32.5 cents per hour when the job is done in 8 hours, and 40 +cents per hour when the job is done in 5 hours. The reduction of cost +per job to the employer evidently would be 40 cents in the first case, +and $1.00 in the second. This is Halsey's plan, by which the worker +gets one-third and the employer two-thirds of the time saved. + +The same plan has been applied (Weir's method) with a premium that +equally divides between the workman and the employer the time saved. +By Rowan's method the premium is not a fixed sum but a percentage of +the standard rate per hour equal to the percentage of reduction in +time consumed. For example, if in the foregoing example the time were +reduced 20 per cent (to 8 hours) the premium would be 20 per cent of +30 cents, and the workman would receive 36 cents per hour. By this +plan the premium becomes less for the later reductions than in either +of the other plans. The utmost possible wages would be double the +standard rate. + +A number of other variations have been worked out by the promoters of +recent scientific management, and are known as Taylor's, Gantt's, +and Emerson's plans. The authors of all these plans agree as to +the importance of fixing the standard rate so that it will leave a +possibility of considerable improvement with unusual effort, and of +leaving the standard rate and premium unchanged as long as no new +process or new machinery is introduced into the business. If this is +not done the employees lose faith in the plan and refuse to make the +necessary effort to earn the premium. Most of these plans of +payment recently have been connected with experiments and studies in +scientific management to reduce the time and increase the ease of the +operations. + +In a variety of ways a bonus or a premium may be paid for quality, or +for economy in the use of materials (as to a fireman for using less +coal), or for various other results. Every business has its peculiar +conditions, which make certain results especially desirable, and +certain methods of reward practicable. In some industries, for +example, the various plans of piece work and of premium payment are +applied to groups of workers (as in collective piece work), the total +payment being then divided among the members of the group in some +agreed proportion. + +§ 9. #Aim of profit-sharing.# Profit-sharing is rewarding the laborer +with a share of the profits in addition to his usual contract wages. +Payments by the piece and premiums for output are solely dependent on +the efforts of the particular workman (or collective group), but +in the plan of profit-sharing a premium is given in addition to the +regular wage if, at the end of the year, the business as a whole has +yielded a profit above a certain amount. Profit-sharing is not merely +a gift; it is done usually in accordance with a definite promise in +advance. The employer adopting the plan does not intend to lose by it. +His purpose is to stimulate the industry of the workers, thus reducing +waste and cost of labor and supervision, and thereby increasing +profits. He offers to divide with the workman the additional profits +which are expected to result from their efforts. There is, in every +factory, greater or less waste of materials, destruction of tools, and +loss of time, that no rules or penalties can prevent. If the worker +can be made to take a strong enough personal interest he will use care +when the eye of the foreman is not upon him. The product also can +be slightly increased in many ways by the workman's exertions or +suggestions. In some cases the quality of the work cannot be insured +by the closest inspection as well as it can be by a small degree +of personal interest. Either responsibility for the fault cannot +be fixed, or the defect is one not measurable by any easily applied +standard. Strikes may be averted, good feeling promoted, and +contentment furthered if the interest of the worker can be made to +approach, and in large measure to become in harmony with, that of the +employer. The economic result of the plan, if it can be made to work, +should be to reduce the costs of these establishments below what +they are. The crucial question is whether profit-sharing alone in any +particular case will insure that the costs will be less than those of +competitors, thus giving a source out of which an increased amount, +really a wage, can be paid to the laborer. For the amount of profits +is affected not only by the amount of output, but also by a number of +other things that are quite outside the control of the workmen. + +§ 10. #Examples of profit-sharing.# The profit-sharing plan seems +first to have been successfully tried in Paris, in 1842, by Leclaire, +a house-painter. In house-painting there is often a great waste +of materials and time by men working singly or in small groups in +different parts of the city. By this new method Leclaire enlisted the +aid of the workmen, reduced the costs, and increased the profits. It +is a remarkable fact that the plan has been continued successfully by +the same firm to the present time. It has been tried in many hundreds, +possibly thousands, of cases, and is operating in some form or another +in more than a hundred firms in Europe and America. The most notable +examples of profit-sharing in the United States are the Pillsbury +Mills in Minneapolis, Procter and Gamble's soap-factories, in +Ivorydale, Ohio, the Nelson Mfg. Co., in Leclaire, Ill., and the Ford +Automobile Works, in Detroit. In some cases both manufacturer and +workmen value the system highly. It probably has its greatest success +when applied in prosperous establishments where profits are regular +and large, and where a steady working force is especially desired. +The proportion of business done in this way is not large. One hundred +firms is a very small fraction of 1 per cent of the total number of +firms in Germany, France, England, and America. A still more important +fact is that true profit-sharing has spread little since 1890, tho +various practices have developed under that name. The most noteworthy +of these is the selling of stock, usually at a somewhat lower price, +to the employees of a corporation so that, as stockholders, they may +have a motive to work for the success of the company (e.g., the United +States Steel Corporation). This method as applied to a select few +of the employees, who are advanced to official positions in a +corporation, is very widely adopted. + +§ 11. #Difficulties in profit-sharing.# It seems at first difficult to +explain this comparative failure of a plan that looks so attractive +in spirit and of which so much was hoped. Yet objections come from +the side both of the workman and of the employer. The workman lacks +knowledge of the business and is suspicious of the bookkeeping. If +at the end of the year the books show no profits, the workman loses +confidence, considers the plan to be mere deception, and rejects +it. The working of the plan remains in the employer's hands, and the +workman really is not a partner in the business. Moreover, the plan +puts a limitation upon the workman's freedom to compete for better +wages by changing his place of work. It is indispensable to make +length of service in some degree a condition to the sharing of +profits. Workmen, coming and going, cannot be allowed to share; the +percentage given to the others increases with length of employment. +Whenever men are thus practically subject to a fine (equal to the +amount of shared profits) if they accept a better position, there is +danger of a covert lowering of wages. The plan tends to break up the +trade-unions, which is one of the reasons that the employers like it, +and is the main reason that organized labor opposes it. + +The employer on his part objects to the interference with his +management, the troublesome inspection of the books, and the constant +complaints of the workmen. He dislikes to have the profits known; if +they are large, the advertisement of success invites competition; if +they are small, publicity may injure credit and depress the value of +the enterprise. In view of all these difficulties it is not surprising +that while the plan often starts promisingly, it usually fails after a +short trial. Business methods are severely subject to the principle of +the survival of the fittest. Through competition and the survival +of the firms that adopt improvements, better methods must eventually +supplant poorer ones. If a method fails to spread when it has been +tried for seventy-five years and all are free to adopt it, the strong +probability is that it has serious defects inherent in it. + +§ 12. #Defective theory of profit-sharing.# It is usually better +to make wages depend on the worker's efficiency rather than on the +profits of the whole business. The strongest motive to efficiency is +present when reward is connected immediately and directly with effort, +not with some result only slightly under the worker's control. Any +change in the amount of profits is only partially and indirectly +related to increased effort of the worker. The "profits" may be +nothing, tho all the manual workers may be exerting themselves to the +utmost. The wage bill is but one of the groups of costs. Profits are +the net result of many influences. Chief among these is the skill in +planning and conducting the business. This function of management is +either performed by the same person that is carrying the financial +risk, or by some salaried employee selected by him. It is this +management function the reward of which should, in theory, be made +to vary with the amount of profits; and in fact such an arrangement +(managerial profit-sharing, so to speak) is undoubtedly in operation +in thousands of cases, but is not included in the usual conception of +profit-sharing. Many salaried managers are in receipt of a share of +profits and are gradually acquiring an interest in partnerships or a +larger share of ownership in the enterprise for which they work. But +ordinary profit-sharing is not in accord with the general trend +toward the centralization of responsibility in the hands of competent +managers, ensuring to the worker a definite amount in advance, as +high as conditions make possible. The system of premiums, or bonus +payments, for output, where it can be safeguarded against abuses, +gives in most cases better results and is rapidly spreading. It is +sounder in conception and works better in practice as a method of +remuneration for most of the workers. + +§ 13. #Purpose of producers' coöperation.# Since the early part of the +nineteenth century many well-wishers of humanity have cherished high +hopes that the whole wage system might gradually be replaced by +the plan of producers' coöperation among workingmen. Producers' +coöperation is the union of workers in a self-employing group, +performing for themselves the enterpriser's function. The workers hope +to get what seems to them to be a needless drain of profits into the +pockets of the employer and unnecessarily high salaries to managers. +To do this they must perform the enterpriser's function as to +investment and risk. Collectively or through their representatives +they must undertake to furnish capital and management as well +as hand-work. The capital may be supplied either by the members, +individually or collectively, or may be borrowed from outsiders, +who are thus merely passive investors. Usually the return to capital +invested by members is limited to 5 or 6 per cent, so that this part +of the capital likewise is treated as a passive investment, and all +the real variable profits are distributed to the members as wages. The +hope has been as in profit-sharing to increase the amount of profits +through the stimulus the plan might give to the workers and by saving +in friction, disputes, and strikes. + +§ 14. #Limited success of the plan.# Practically the plan has been +made to work in a comparatively few simple industries. The most +notable example of successful coöperation in America was in the +cooper-shops in Minneapolis. There were few and uniform materials, +patterns, and qualities of product, few machines and much hand-labor, +simple well-known processes, a simple problem of costs, a sure local +market. After more than thirty years the main shop was still in +operation, but with a membership of the older men and with no growth, +A number of the less skilled workers receive ordinary wages. In +America a few of the productive coöperative companies are found +operating small factories. In England, there have been numerous +successful societies, but all in small enterprises, mostly connected +with agriculture. Within the whole field of industry, this method +of organization makes little if any progress. Most experiments have +failed and the successful ones have become or are tending to become +ordinary stock companies with most of the stock in the hands of a few +men. Therefore, whether losing or making money, they nearly all cease +to exist as coöperative enterprises. This result has disappointed the +hopes and prophecies of many well-wishers of the working classes. + +§ 15. #Its main difficulty.# The main difficulty in producers' +coöperation is to get and retain managerial ability of a high order. +Failure to do this results in inability to maintain and keep in +repair the equipment and to pay the ordinary returns to the passive +investment, and financial failure follows. There is no touchstone for +business talent, no way of selecting it with any certainty in +advance of trial. This selection is made hard in coöperative shops +by jealousies and rivalries, and by politics among the workmen. A man +selected by his fellows finds it difficult to enforce discipline. In +coöperation there is occasionally developed good business ability +that might have remained dormant under the wage system; some +work-men showing unusual capacity cease to be handicraftsmen. But the +unwillingness on the part of the workers to pay high salaries results +in the loss of able managers. Having demonstrated their ability, the +leaders go to competing establishments where their function is not in +such bad repute, and where they are given higher salaries, or they +go into business independently, being able easily to get the needed +backing from passive capitalists. + +Coöperative schemes thus suffer from the workers' inability to +appreciate the functions of enterprise and management. Most men make +a very imperfect analysis of the productive process. They see that +a large part of the product does not go to the workmen; they see the +gross amount going to the enterpriser, and they ignore the fact +that this contains the cost of materials, interest on capital, and +incidental expenses. Further, they fail to see that the investment +function is an essential one. The theory of exploitation, as +explaining profits, is very commonly held in a more or less vague +way by work-men. With a body of intelligent and thoroughly honest +work-men, keenly alive to the truth, the dangers, and the risks of the +enterprise, coöperation would be possible in many industries where +now it is not. Producers' coöperative schemes usually stumble into +unsuspected pitfalls. When a heedless and over-confident army ventures +into an enemy's country without a knowledge of its geography, without +a map, and without leaders that have been tested on the field of +battle, the result can easily be foreseen. + +The coöperative principle has been embodied much more successfully +and on a larger scale in America in the form of producers' selling +organizations or of consumers' coöperative stores. As, however, both +of these forms of organization have been developed in America more +largely by farmers than by wageworkers, the discussion of them may +better be undertaken in connection with problems of rural organization +rather than with those of labor. + + +[Footnote 1: See Vol. 1, pp. 227, 318, 322; also above, ch. 2, sec. +14.] + +[Footnote 2: See e.g., Vol. 1, p. 329, on selection of managed and of +managers.] + +[Footnote 3: See below, ch. 20, sec. 6.] + + + + +CHAPTER 20 + +ORGANIZED LABOR + + § 1. Changing relations between employers and wage-workers. § 2. + Need of common action among wage-workers. § 3. Functions of labor + organizations. § 4. Types of labor organizations. § 5. Statistics of + labor organizations. § 6. Collective bargaining. § 7. Limitation of + competition among workers. § 8. Strikes in labor disputes. § 9. Frequency + and causes of strikes. § 10. Picketing and the boycott. § 11. Effects + of organization upon general wages. § 12. Competitive aspect of + organization and particular wages. § 13. Monopolistic aspect of + organization and particular wages. § 14. Open vs. closed shop. §15. + Political and economic considerations. §16. The public's view of unions. + § 17. Future role of organization. + + +§ 1. #Changing relations between employers and wage-workers.# The +"organization of labor," or the "labor movement," so striking a +feature of the world to-day, is of comparatively recent origin. It did +not begin and advance _pari passu_ with the beginning and early growth +of the wage-system as above briefly described.[1] In anything like +its modern form the labor movement dates from the early years of the +eighteenth century. Much of the largest part of its history in all +countries, excepting England, is after 1860. Why was organization +among the workers so long delayed after wage-payment became common, +and why when it once appeared did it spread so rapidly in some +directions, and why is it still limited in the main to certain fields +of industry? These three questions are but one question in three forms +and to answer one fully would be to answer all. + +The modern trade union appeared in England shortly before the +industrial revolution,[2] and has extended as fast and as far as +the same stage of industrial development has been attained in other +countries. The effort of wage workers to organize themselves appears +everywhere to result from the separation of the economic and personal +interests of employers and workmen. As the control of industry became +more concentrated in larger units with the advent of power machinery, +the feeling of economic unity among the different ranks of industry +was further weakened. The average workman had less opportunity of +becoming a master, an employer. In the days of the old hand industry, +master, journeyman, and apprentice worked side by side at the same +bench. Almost every apprentice might hope to become some time a +master, and many a one did so. To-day most wage-workers in large +establishments have no hope of rising out of their positions. The mere +largeness of an establishment forbids also the personal acquaintance +of employer and workman. As a result of these changes, the workmen +become more "class-conscious" of their position as wage-workers and +the employers in many establishments take the attitude of buyers of +labor as a mere ware. When the employer then feels the pressure +of competition he is more likely to force the lowest wage that is +possible and to compel the workers to accept less favorable conditions +than if he were in more personal relations with them. Where the +immediate direction of an establishment is intrusted to paid managers +who are responsible to stockholders, the managers' success is judged +almost exclusively by the dividends they succeed in earning. Hence +they are under stronger and more persistent temptation than are active +owners to drive hard bargains with their employees. Many examples +might be found where managers and resident directors have wished to +pursue a more liberal policy than absentee shareholders would permit. + +§ 2. #Need of common action among wage-workers.# These same industrial +changes caused employers, even earlier than it did employees, to have +something of a "class-conscious" feeling, which tempered the spirit +of their mutual competition, especially in bidding for the services +of workers. The smaller the number of employers the easier it is by an +understanding to suppress competition on their side. If there is only +one factory of a kind in a town the employer is able at times to drive +a harder bargain with his employees. Especially in times of industrial +depression is a change of employment difficult for the laborer, +involving for him much trouble and loss of time and money in moving. +But it is possible to exaggerate the degree to which competition among +employers of labor is weakened to-day. In the long run and at many +points competition must be felt in all such cases. The notoriously +unfair employer will find his workmen drifting away, his working-force +reduced in number and quality at times of greatest need, and his evil +reputation going abroad among workmen. A better realization of this +fact has led many employers to pursue a farther-sighted policy that +fosters a better understanding and a kindlier feeling on both sides of +the labor-contract. + +Another effect of the growing size of business units is to give the +workers less personal acquaintance with each other. When they are +unorganized they have less unity, common opinion, and power than the +workers in the old-fashioned shop with its close personal acquaintance +and ready interchange of views. In the wilderness of a great modern +factory a worker may be unknown in name and interests to the man +touching elbows with him. Moreover, in America, differences in +nationality and in speech among immigrant workers often effectively +prevent a common feeling of their interests and assertion of them. +There is an analogy between these conditions and the political +conditions that early led simple democracies to give way to +representative governments. So long as a community is small and men +know each other personally, popular government may exist without +complex machinery, but when numbers become larger, public opinion can +be concentrated and made effective only by delegating the functions to +elected representatives. + +§ 3. #Functions of labor organizations.# Out of these conditions have +grown the various kinds of labor organizations. Their first object +is to maintain and increase wages. Closely connected with this is +the remedying of various abuses in respect to methods of payment, +measurement of the output, and conditions of work. Almost coördinate +with the aim of higher wages of recent years has been that of the +shorter work day. Labor leaders have frequently asserted when the two +demands have been made together, that a reduction of hours is the more +desirable. Better conditions of safety and sanitation in their work +were not the first thought of laborers when they organized. As a +result of habit and ignorance (widely prevalent at that time) they +were remarkably unconcerned about this matter. Reforms in this +direction at the outset had to come largely from sympathetic +observers, the "philanthropists," often described as sentimentalists. +But the modern, more enlightened, labor movement has better ideals +and policies in respect to the safety, sanitation, and decency of the +working places. + +Labor organizations have also secondary objects of very great +importance. They are nearly always in some measure mutual-benefit +associations, and provide in varying degrees insurance against +accident, sickness, death, or lack of employment. All unions in a +measure serve their members as employment bureaus, and some make this +am important feature. Through trade-papers, correspondence, traveling +members, and in meetings, information is exchanged regarding +conditions of employment in various parts of the country. Labor +organizations by means of their discussions and through their special +periodicals are a strong educational force in matters political and +economic. The local labor organizations often come to be the center of +the social activities and interests of many of their members, and even +of all the members of their families. The organizations thus serve the +functions of social clubs, of literary societies, and of civic centers +for their members. + +§ 4. #Types of labor organizations.# Among the many organizations of +wage-earners three main types may be distinguished: the labor union, +the trade union, and the industrial union, tho often they are all +spoken of as trade unions without distinction. A labor union admits +all classes of wage-earners and even business and professional men +into the same local chapter. The "Knights of Labor" is the most +notable example that America has seen of this type. The national +organization was composed of local chapters, to membership in which +every one was eligible excepting bankers, lawyers, gamblers, and +saloon keepers. Organized as a single local chapter in 1869 it grew +very rapidly until it attained its maximum membership of 600,000 in +1886. From this point it rapidly declined in membership, and since +1900, altho its organization is still maintained, has been of very +little influence. + +A trade union is an organization of wage-earners in the same +handicraft or occupation. Unions exist among workers in all the old +distinctive handicrafts, such as the printers, stone cutters, cigar +makers, carpenters and in many other groups such as musicians and +retail clerks. The local chapters in many cases have been long united +in national unions (often international, including the United States +and Canada). + +An industrial union is one that seeks to unite all workers employed in +the same class of establishments regardless of their craft or the +kind of work they do. The most notable examples are the United Mine +Workers, the Brewery Workers, and the Industrial Workers of the World. + +In 1881 a number of national trade unions united for certain purposes, +to form the American Federation of Labor with a membership of about a +quarter million workers, which has steadily increased since that date. +The American Federation of Labor now includes also some important +unions of the industrial type. Several strong national trade unions +(the most important being the brotherhoods of railroad employees) are +not affiliated with the American Federation of Labor. + +§ 5. #Statistics of labor organization.# The ratio of organized +workers to the population is estimated (figures for 1910) to be +highest in the United Kingdom, being nearly 7 per cent; it is next +highest in the German Empire, being nearly 6 per cent; whereas, in the +United States, it is but 2.3 per cent. This difference is largely due +to the much greater relative importance of agriculture in the United +States. + +The total membership of trade unions in the United States and Canada +is estimated to have been in 1910 about 2,200,000, of which only +about 100,000 were in Canada. This was 5.5 per cent of all persons +(38,130,000) gainfully employed, or 6.8 per cent of male employees, +and 9 per cent of female employees. Organization was very weak (less +than 1 per cent) among the workers in a group of industries occupying +nearly one-half of all workers, including agriculture, the hand +trades, oil and natural gas, salt, and rubber factories. Organization +was not of large extent (1 to 10 per cent) in other groups of +industries occupying more than one fourth of all workers, including +those engaged in producing quarried stone, food stuffs, iron and +steel, metal, paper and pulp, stationary engineers, in public, +professional, and domestic service, and in clerical work. Organization +was of much greater strength, including 10 per cent or more of the +workers, in the remaining industries and occupations. + +If deduction be made of the employing and salaried classes, about +7.7 per cent of all persons occupied were organized. If, further, +deduction be made of agricultural, clerical, publicly employed, +commercial and domestic workers, about 16 per cent of the remaining +13,760,000 persons are organized (of women 3.7 per cent). Among the +occupations most highly organized are those of railway conductors (87 +per cent) and engineers (74 per cent). In the building trades about 16 +per cent are organized, of granite cutters 69 per cent, masons 39 per +cent, plasterers 32 per cent, carpenters 21 per cent, and painters 17 +per cent. Similar striking differences appear among the occupations in +the printing industry; of stereotypers 90 per cent are organized +and of compositors only 35 per cent. These figures point to inherent +differences in the conditions favoring organization. Even in the same +craft a high degree of organization may be found in the cities and +little or none in the smaller towns (e.g., in the case of the printing +and building trades in general).[3] + +§ 6. #Collective bargaining.# The fundamental policy of trade unions +is the substitution, for the individual wage bargain, of collective +bargaining between the delegated representatives of the working men +and the employer, or group of employers, or their representatives. +The wage-earners bargaining collectively may be those of a single +establishment, or of a group of establishments in the same locality, +or of a wider territory even national in extent. Accordingly, they are +represented in the negotiations by trade-union officials with +narrower or wider jurisdiction. Employers in some cases had tacit +understandings with each other before laborers were organized. But in +many cases the individual employer was at a marked disadvantage after +the organization of his employees. The result has been the rapid +spread of employers' organizations, so that in industries where +laborers are highly organized, two-sided collective bargaining has +become more and more usual. + +A large part of the effort of trade unions is directed toward ensuring +the use of collective bargaining. This is the purpose of many of +their demands, even of some that hardly appear to have any such +consideration. Collective bargaining practically necessitates the use +of "the standard rate," since only with reference to some standard +rate, a market price for labor, is it possible for a wage contract to +be made by labor officials for a group of men. The standard rate may +be a piece price or a time price, and in many cases the unions strive +to secure the latter as more convenient for their purposes. The +standard time rate usually is but a minimum and many of the more +skilful workers receive wages above the minimum. But the standard +minimum tends to become also the maximum in many cases, the more so +when the union has succeeded in enforcing a pretty high standard rate. + +§ 7. #Limitation of competition among workers#. In order that +the representatives of organized laborers may act effectively in +collective bargaining the first condition necessary is that a +large proportion, if not all, of the workers of the trade in the +establishments concerned shall be organized. A common sense of wrong +is one of the strongest motives to bring workers together, and +has prompted the origin of many a local chapter. Then constant and +strenuous efforts are made to bring workers into the organized ranks. +Experienced organizers knowing all the arts of persuasion devote their +whole time to this task, being paid regular salaries. When friendly +argument fails, threats may be used and sometimes personal violence. +The public opinion and class feeling fostered among members of an +organization in times of difficulties are analogous to the sense of +patriotism in the nation at large and at times may displace it in the +hearts of organized laborers as is seen in opposition to the militia +and to the maintenance of order in times of strikes. The most +effective of all peaceful methods if petty persecution rising at times +to social ostracism. The individual who declines to enter the union is +denounced as a traitor to his fellow workers and is made to feel their +scorn. The use of the union card to be carried by every member to show +whether he is in good standing is an effective way of enforcing these +measures. Finally, where all these measures fail, pressure may be +brought upon the employer to get him to force unwilling workers into +the union.[4] + +Further to give control over those working in a trade and to +reduce competition among workers, unions often limit the number of +apprentices and determine who shall have the privilege of learning the +trade. By a variety of regulations they limit the output and in many +cases (tho less frequently now) have opposed the use of labor-saving +machinery. Further to enforce these policies they seek to have each +special kind of work controlled by a special union. This gives rise +to disputes between rival unions and causes annoyance and loss to the +workers themselves, to the employers, and to the general public. + +§ 8. #Strikes in labor disputes.# A strike is a concerted stopping of +work by a group of employees to enforce a demand upon the employer. A +lockout is an employer's closing of his shop because of a disagreement +with his employees. The strike is, in its direct and indirect, +immediate and ultimate, effects the most important weapon of the +organized wage-earners in their relations with their employers. To +newly organized laborers the union appeals mainly as an instrument for +striking, for threatening the employer, or for making him suffer to +compel him to accede to their demands. The effectiveness of a +strike lies in the loss it threatens or occasions in the stopping of +machinery, the ruin of materials, the loss of custom, and the failure +to complete contracts that have been undertaken. + +The employers will often, to break a strike, pay to others for a time +more than the current rate of wages. The success of the strikers being +dependent on their ability to keep the employer from filling their +places, their energies are bent upon that end. The losses that strikes +cause to workers in stoppage of wages, to employers and investors in +destruction of plant and in suspension of profits, and to the public +in the interruption of business, aggregate an enormous sum. The direct +losses to employers and strikers in the 20 years between 1881 and 1900 +have been estimated to have been nearly $500,000,000, a large sum, but +amounting to less than 1 per cent of the wage-earners' incomes. It +is, however, impossible to estimate at all exactly losses that in many +cases are indirect and intangible. The strikers are concerned in each +case not with the balance of total losses and total gains to society +as a whole, but with the net gain that they expect to accrue in the +long run to themselves. Viewed in this way it is true that there are +various indirect benefits in strikes that are not easily calculable, +particularly the advances of wages made by employers to avoid strikes +which they know will otherwise occur. In regard to the wisdom of any +contemplated strike, opinion is always somewhat divided, as it is in +regard to the value of strikes in general. + +§ 9. #Frequency and causes of strikes#. Strikes were relatively +decreasing in number from 1880 to 1900, but from 1901 to 1905 the +annual average was more than twice as large as in the preceding +decade. On the whole, strikes have been more numerous in periods of +business prosperity when there was a better chance to get concessions +from the employers. But they occur also in the periods following +crises, when the workers seek to minimize cuts in wages and to prevent +the depression of working conditions. More broadly viewed, strikes +appear to accompany readjustments to dynamic conditions. As wages as +a rule rise more slowly than general prices,[5] it was to be expected +that the period since 1900, in which the general price level was +rising at the rate of about 3 per cent a year, should have been marked +by increasing resort to strikes. + +The immediate causes of strikes have been changing in relative +importance. In 1881, at the time of the very rapid organization of +unions, over 71 per cent of all strikes were directly connected +with wage demands (61 per cent for increase and 10 per cent against +reduction). But in 1905 the total for these causes was only 37 per +cent, whereas the proportion of strikes for reduction of hours nearly +doubled (from 3 to 5 per cent) and the proportion of those concerning +recognition of unions and union rules increased fivefold (from 6 to 31 +per cent). Ultimately nearly every demand of the laborers is +related to the question of wages; but these figures show that when +organization is new this relationship is more immediate, whereas +later more effort is directed toward securing the stronger strategic +position that comes with recognition of the union. + +§ 10. #Picketing and the boycott#. Picketing by strikers or their +friends is intercepting and accosting all persons approaching or +leaving the place of work, to inform them of conditions and to +dissuade them from working there. When peaceable means fail, often +there is recourse to violence both against the employer and his +property and against nonstriking workers. Indeed, many persons declare +that peaceable picketing is impossible, and it surely is difficult +to attain in view of the temptations of human nature under the +circumstances. + +Almost always connected with a strike is the practice of the boycott, +which is a combination of wage-earners to cut off an employer (or +group of employers) from business dealings. The boycott is found +in varying forms and degrees, broadly distinguished as simple and +compound-boycott. In simple boycott only persons directly interested +in the trade dispute refuse to deal with the boycotted person. The +question arises as to who are to be deemed directly interested, +whether it includes only the actual strikers in a particular +establishment, or whether it includes organized workers in sympathy +with them. The latter case is presented when an "unfair" list is +published in labor journals. It seems that only the former case is a +really simple boycott. The use of the simple boycott, the refusal of +a person, or even of a conspiring group of persons, to deal with a +person with whom they have an industrial dispute, appears to be a part +of the elementary rights of personal liberty. Beyond that point the +boycott is compound in varying degrees.[6] It is the compound form +which is usually referred to in discussion and in court decisions on +the subject. It is the compound boycott that has been described as "a +combination to harm one person by coercing others to harm him." The +compound boycott, as experience shows, has moral limits as well as +legal limits. It is doubtful whether the boycott can be extended at +all beyond the first degree of personal relations without becoming +antisocial, whether it is the weapon of organized workers or +of organized wealth. The endless-chain boycott, a measure of +excommunication without limit, pronounced against an offending +employer, non-union workers, and every one in any way befriending +them, is an effort to drag every one else into a dispute that is +primarily a private matter. + +§ 11. #Effects of organization upon general wages.# The crucial +economic problem in connection with trade unions is not as to their +methods (that being rather a political problem) but as to their effect +upon wages. There must be distinguished two questions: first, as to +their effect upon the general level of wages; and next, as to their +effect in raising the wages of the organized laborers alone. As to the +first, the thought has sometimes been expressed by sympathetic social +students outside of trade-union circles that but for the organization +of labor wages in America would be no higher than they were in 1850. +This seems to be assumed in much of the argument of labor leaders, +for they speak as if all wages, but for trade unions, would be at the +starvation level; and they credit everything above that level to the +work of the union.[7] This claim is peculiarly effective in America, +where wages are and always have been relatively high. But proof of the +claim is lacking. As we have seen, even now fewer than 1 in 16 of +all gainfully employed, and fewer than 1 in 12 of those working for +contractual wages are organized. On no principle of value could +the mere organization of one-twelfth of the wage-earners, without +permanently withdrawing them from the labor market, explain the +relatively high wages of the other eleven-twelfths. In many lines +where labor is not organized, as in teaching, clerical, professional, +domestic, and agricultural services, wages have risen as much or even +more than in most of the organized trades. The underlying economic +forces determining the general level of labor-incomes in a country +are much more fundamental in nature than labor unions or protective +tariffs.[8] The trade-union authority already cited seems in another +passage to admit a view not essentially unlike that just expressed +when he says: "Capital is increasing faster than population.... It +seems therefore merely in obedience to natural laws that wages should +rise." + +The only reasons ever suggested for thinking that the organization of +one-twelfth (or any larger proportion of the wage-earners) could in +any general way raise the labor-incomes of those remaining unorganized +are: first, that organized labor sometimes leads the way in securing +favorable legislation; and, secondly, that if organized workers +get higher wages this sets a standard which it is easier for the +unorganized then to attain. Both of these suggestions may have +some little validity in special cases, affecting slightly a small +proportion of the unorganized workers, but neither touches fundamental +causes of general high wages. Whereas, it is clear that when the +unorganized laborers constitute the main body of consumers for the +products of organized labor (and this unquestionably is in large +measure the case) any increase in wages that can be secured through +organization by a portion of the workers must, in part, be subtracted +from the "real" incomes of the unorganized workers. The employer is +middleman, not to a great degree the ultimate consumer of labor.[9] +Some part, it is true, of the higher wage might be taken from profits +or from wealth-incomes, but this would still leave the unorganized +workers the losers. + +§ 12. #Competitive aspect of organization and particular wages.# +A different question is presented as regards the influence of +organization upon particular wages, and primarily upon the wages of +organized labor. The trade-union authority before cited says, "Where +there are no unions wages should be lower. This is exactly the case." +And he quotes: "Wherever we find union principles ignored, a low rate +of wages prevails and the reverse where organization is perfect." But +he later explains in part this difference: "The union men are the best +workmen and often employers pay a man more than union wages. This is +not surprising as no man can be a union carpenter unless he be in good +health, have worked a certain number of years at his trade, be a good +workman, of steady habits and good moral character." If this be true, +as doubtless it is to some degree in many trades and places, it is +in accordance with competitive principles that, as the elite of the +trade, the organized laborers should get higher wages than those +outside the unions. Moreover, the unions exist mainly in the more +populous places where costs of living as well as wages range higher +than in the small towns and in the rural districts. A comparison +merely of wages in money in such cases is misleading as to the +conditions of real income. Further, a higher standard of output +prevails in the cities where organization is greatest, and older men +and the less efficient that are unable to "keep up the pace" drift +away into unorganized shops or to villages where no standard union +rate is in force. So far as unions help to develop the intelligence +and promote the sobriety and efficiency of their members, they are +a positive economic force making for higher wages. The book before +quoted expresses, somewhat vaguely, an opinion in accord with these +facts when it says: "It is an error to think that the trade union +seeks to determine the rate of wages. It cannot do that. It can do no +more than affect them." And so, with organization as well as without, +the wages of individuals and of classes of laborers are determined by +the general principles of price as applied to their services. Where +neither the employer has a monopoly in his business nor the organized +laborers have a monopoly of the labor supply, there is two-sided +competition in the labor bargain, and organization may help to raise +particular wages inasmuch as it acts in the competitive ways above +mentioned and as it helps to restore to the laborers a truer equality +of competition. + +§ 13. #Monopolistic aspect of organization and particular wages.# The +action of organized labor is not, however, limited to the competitive +field, above discussed. Wages in particular industries may, by +the action of trade unions be raised and maintained above a true +competitive rate. This of course can be done only in accordance +with the principles of the service-value to the consumer and of +service-price in the employment-market. The supply of labor is in a +variety of ways artificially limited by the efforts of the unions. It +may be done temporarily by striking when a failure to fill orders will +cause the employer exceptional loss. Violence in strikes and boycotts +is often the desperate attempt to create and assert a measure of +monopoly power where of itself it does not exist, i.e., where other +workers stand ready to take the jobs at the prevailing rates of wages. +Monopoly is created if apprentices are limited to fewer than in the +long run would be attracted into the trade by the prevailing wages. +It is created if the unions artificially limit output to less than +is consistent with the health of the worker. Monopoly is created if +unions strong enough to keep "scabs" from getting work, fix their dues +high or put other obstacles in the way of increasing the membership. +Probably the most striking cases of high wages for organized labor are +of this kind. The element of labor-monopoly evidently is mingled in +all degrees from the slightest to a very great amount, in particular +economic situations. + +§ 14. #Open vs. closed shop.# The question of labor monopoly is +involved in the very crucial question of the closed vs. the open shop. +A closed shop (or union shop) is a shop in which no non-union men may +be employed, even at union wages. Its existence is evidence that the +union is strong enough to compel the employer to act on this principle +and thus virtually to force all his employees into the union. The +refusal of a demand for the closed shop is often the ground for a +strike. Where this is so unions usually assert that the closed shop +is essential to the existence of the union. If union and non-union men +work side by side there are many ways in which the employer is able +to discriminate so as gradually to break down the union. If business +slackens, the union man may be the first to be discharged; if any +preference is given it is to the non-union man. While this may be +true, it would seem, on the other hand, that an unmodified closed +shop, with the conditions of membership in the control of the union, +creates a distinct monopoly of labor leaving the employer helpless in +any wage dispute and enabling the union to enforce its every demand +regardless of the competitive conditions of the labor-market for that +class of services. + +§ 15. #Political and economic considerations.# The question here takes +on a broad aspect, Is the closed shop, and are the other policies of +trade unions, morally right; and ought they to be legally sanctioned? +The answer to such questions is not for the economist alone to give. +The questions involve other than economic considerations. They involve +moral and political considerations--not merely existing formal law, +but the fundamental issue of personal liberty and of interference with +the liberty of some citizens by another group acting without political +authority. For example, if a workman is unable to earn the standard +rate[10] and is not permitted to take less, he is forced to move to a +place where there is no union, or is forced out of the trade entirely. +In the latter case he probably is compelled to take a lower wage +than he could get in his regular occupation. Likewise, this change +artificially increases the pressure of competition and reduces the +wages of others in the occupation to which he turns. So in the case of +persons prevented from becoming apprentices in a trade, or kept from +taking work by threats, or by the dread of boycott, or by the fear of +violence, in any degree however slight, there is present an element of +personal coercion by the organized laborers. This is the price others +are made to pay for a favorable effect on the wages of the organized +laborers. Now the strictly economic question concerns merely the part +as to the effects upon wages, and the economist (as such) is going +outside of his special field when he pronounces on the moral rectitude +(and the desirability in law) of such acts and policies. One who fully +shares the feelings of the organized workers will believe that the +winning of a strike or the general improvement of the strikers' +condition is so important that it outweighs the evils to other +individuals and to society as a whole. Indeed, to one in that state +of mind the evils appear very small or nonexistent. The economist can +only issue the warning that the commonest illusion he encounters +is the belief of each class--commercial, banking, manufacturing, +wage-earning--that what is for its particular interest is, in a +peculiar manner, for the general interest, so much as to justify +favoring legislation or special exemption from the general law, or +even sheer lawlessness. + +§ 16. #The public's view of unions.# We may, however, observe the view +of the onlooker striving to be impartial. The attitude of the public +in labor disputes, and particularly in regard to the closed shop, is a +vacillating one. The general public sympathizes in large measure with +the unions in their efforts up to a more or less uncertain point; +but the public does not like to see organized labor with the power to +dictate terms absolutely to the employers any more than it likes to +see employers crush the union. The unions are effective in varying +degrees in strengthening the bargaining power of the workers, and +accordingly the results vary not merely in degree but in kind. The +public wishes to see "fair play," and up to a certain point the +union is a device to get fair play. In truth, what is in the public's +thought, somewhat vaguely, is approval of unions so far as they go +to establish a real equality in competitive bargaining with the +employers, but disapproval where the power of the union gets greater +and becomes monopolistic. It is at this point that organized labor +loses the sympathy of most of "the general public" outside of unions. +When the union tries to force a higher wage than the market will +warrant, when it strives not to establish but to defeat competition, +the public condemns. It sees, tho not quite clearly, that such action +makes an unstable equilibrium of wages which tempts to constant +friction and discord with employers and with unorganized laborers. It +sees also that if the unions force a wage higher than a fair and open +market affords, this is rarely done at the expense of the employer; +that in the long run it is at the expense of the purchasing public +itself, including the unprivileged workmen.[11] + +In accordance with these facts and opinions there has developed, at +least in one respect, a pretty definite conviction on the part of the +public regarding the closed shop, namely: the closed shop should go +only with the open union. A union under the closed shop policy is +exercising a quasi-public function, that of controlling the industrial +action of private citizens against their will. The union therefore, in +this view, must cease to be a purely private, voluntary organization, +and become in some respects subject to public regulations as to +its internal rules and administration. This view, however, is very +unacceptable to the leaders of organized labor in America, and there +the question now stands. + +§ 17. #Future role of organization#. In the light of the principles of +wages it appears that organization most easily gains results, and +the most stable results, when wages are below or near the competitive +rate. An earnest effort on the part of the workers is necessary for +them to get the share that true competition would accord them, but +the attempt to force wages beyond that point must be the occasion +of increasing friction. With so modest an ideal however, as the true +competitive wage, organized laborers and their leaders cannot be +expected always to be content. + +Aside from its effects upon the wage-bargain, unionism finds +its greatest justification is in its unspectacular fraternal, +mutual-benefit, and educational functions. The chief forces favorable +in the long run to wages that can be affected by organization are +domestic peace, order, and security to wealth; honesty and good faith +between man and master, in law-maker and in judge; efficiency and +intelligence of the workers; and far-sighted social legislation. Some +of these contribute to greater productiveness, others to a fairer +distribution. In all these ways organized laborers have made valuable +contributions, unfortunately neutralized in many cases by a narrow +class outlook. Organized labor is here to stay for a long time to +come, and as the elite of the wage-earning class it should, and +probably will, be an increasing force for political betterment and for +social welfare in the republic. + + +[Footnote 1: See ch. 19, secs. 1-3.] + +[Footnote 2: See Vol. I, p. 459.] + +[Footnote 3: See _Quarterly Journal of Economics_, May, 1916, article +by L. Wolman.] + +[Footnote 4: See below, sec. 14, on the closed shop.] + +[Footnote 5: See Vol I, pp. 223-224, and above, ch. 6, sec. 12 and ch. +10, sec. 7.] + +[Footnote 6: The "unfair list" is usually given as a form distinct +from either the simple or compound forms. The "fair list" published +either by labor journals or by a consumer's league is not declared to +be a boycott.] + +[Footnote 7: In a book by an English trade-unionist, Trant, reprinted +and circulated by the American Federation of Labor as representing its +theory and claims, all the advances that have been made in wages are +said to be due to the trade-unions.] + +[Footnote 8: See Vol. I, pp. 227, 439, 466, 467, 504-507; and above, +ch. 14, sec. 8.] + +[Footnote 9: See Vol. I, pp. 217, 222-223, 352, 356.] + +[Footnote 10: See above, sec 12.] + +[Footnote 11: We are expressing here the general opinion, not +pronouncing a final justification of competition as a rule of conduct. +On this something will be said later, in ch. 31.] + + + + +CHAPTER 21 + +PUBLIC REGULATION OF HOURS AND WAGES + + § 1. Spread of the shorter working day. § 2. The shorter day and + the lump of labor notion. § 3. Fewer hours and greater efficiency. § 4. + Child-labor. § 5. Child-labor legislation. § 6. Limitation of the working + day for women. § 7. Limitation of the working day for men. § 8. + Broader aspects of tins legislation. § 9. Plan of the minimum wage. + § 10. Some problems of the minimum wage. § 11. Mediation and voluntary + arbitration. § 12. Compulsory arbitration. § 13. Organized labor's + attitude, toward labor legislation. § 14. Organized labor's opposition to + compulsory arbitration. § 15. The public and labor legislation. §16. + The public and compulsory arbitration. + + +§ 1. #Spread of the shorter working day.# Since about 1880 a shorter +working day has been one of the prime objects of organized labor in +America. Notable progress was early made in some trades, reducing +hours from 11 to 10, or from 10 to 9, and in a few cases from 9 to 8. +In the building trades in the cities, especially, the eight-hour day +has come to be well nigh the rule. In 1912 it was estimated[1] that +1,847,000 wage earners were working in the United States on the +eight-hour basis; of these 475,000 were public employees. A large +proportion of the remainder were women and children whose hours were +limited by law, or were men working in the same establishments with +them. Since that date the eight-hour day has been more widely adopted +both through private action in many establishments and by legislation. +The year 1915 witnessed an especially rapid spread of the eight-hour +day. + +§ 2. #The shorter day and the lump of labor notion.# The shorter +working day is advocated by most workers in the belief that it will +result not in less pay per day, but in even greater pay than the +longer day, even if the output should be decreased. This view is +connected with the lump of labor notion.[2] It assumes that men will +work no faster in a shorter day, and that there is so much work to be +done regardless of the rate of wages; and concludes that the shorter +day will reduce the amount of labor for sale and cause wages to rise. +To the extent, however, that laborers, as consumers, mutually buy each +other's labor, evidently this loss due to curtailing production must +fall upon the laborers as a class. The workers nearly always call for +the same daily pay for a shorter day, which means a higher wage per +hour. If wages per hour increase less than enough to make up for the +fewer hours,[3] the purchasing power of the workers must be reduced. +If the output per hour is increased proportionally to the pay per +hour, the existing wages equilibrium would not be disturbed. But if +the output increases not at all or in less than the proportion of +the increase in pay, there is an inevitable disturbance of the wage +equilibrium. In a competitive industry this would compel a speedy +readjustment of wages downward. If a certain group, or large number, +of workers were to begin turning out only 80 per cent as large a +product as they did before while getting the same money wage, the +costs per unit would be thereby increased. Prices must rise or many of +the establishments must close, and then prices would rise as a result. +This must throw some of the workmen out of employment and create a +new bargaining situation for wages. If the general eight-hour day were +applied to every industry and to all wage workers at once, then +all workers and all employers in the industry would be in a like +situation. But at once there must occur changes of consumers' +choices in a great number of ways. If there are one fifth fewer goods +evidently at least one fifth of the consumers must go without. This +would largely be the wage workers. The things of which wage labor +makes up a large part of the costs will rise in price relative to +the things of which self-employed labor and of which materials +and machinery make up a relatively larger part. This must compel a +reduction of the demand for the products of wage labor relative +to other things, and be reflected to labor in a lower wage. This +reduction would not necessarily be just in proportion to the reduced +output (that is, say, 20 per cent if from 10 to 8 hours, or 11 per +cent, if from 9 to 8 hours). It might even be more, but probably would +be somewhat less. In any case, both the money wages and the real wages +of laborers, either in the particular trade or generally, must be +reduced by a general reduction of hours that results in a decreased +output. In such cases, even when the workmen by a strike or general +movement secured the same wage scale for a day of fewer hours (a +higher wage per hour), they would be unable to hold it excepting where +they had monopolistic control of the trade. + +In a period of rising prices due to an increasing supply of gold, the +readjustment of wages (per hour) away from an artificially high level +down to a competitive rate goes steadily on. Even when money wages +remain the same their purchasing power declines at such times, and +this serves soon to bring the high money wages into accord with the +lower value of the services.[4] + +§ 3. #Fewer hours and greater efficiency.# Quite contrary to the +foregoing view is the claim that in the shorter day the rate of work +is so increased that the output is at least as large as in the longer +day, or even larger. A faster working pace is possible with a shorter +day, particularly in those operations calling for physical or mental +dexterity. This view is less attractive to the workers than the +preceding one, but is more acceptable to the employers and to the +public. The change undoubtedly has resulted in many cases in the +manner indicated, and could be made to result so in many other cases +by applying the methods of scientific management. But it is a change +which cannot be repeated indefinitely and under all conditions with +like favorable results. Whether in any particular case it can be, +depends in part on the length of the working day at the start. Such an +increase in output might occur in a change from exhausting hours, as +from 12 to 10, and again from 10 to 9, and yet not be possible in a +change from 9 to 8. Moreover, the speeding up of the workers beyond +a certain point may have had physiological effects outweighing the +benefit from shorter hours. It is now said that with the increase of +automatic machinery there are more and more workmen who much of the +time have merely to watch the machine-tool run, and occasionally +adjust the material. There has, however, been collected a notable +body of evidence to show that, in many industries and in different +establishments using much machinery, a reduction of hours to a number +as few as eight has been followed by the increase of the output per +worker, or by improvement in the quality of work, or by improvement +in the management, resulting in a reduction of the cost of production. +This is often sufficient, or more than sufficient, to compensate for +the shorter time. Wages have remained as high as, or higher than, +before, and employment has been more regular. So far as this result +is due to the individual worker, it is explained by the same evidence +referred to below[5] as bearing upon the health of the worker. +This evidence tends to prove that with longer periods of rest and +recreation the worker lives in a physical and mental condition fitting +him far better for his work, and for continuing his working life. + +§ 5. #Child-labor.# All the foregoing arguments are weighed in terms +of private incomes and of the value of the products, whereas the main +considerations that have of late been influencing legislation and +judicial decision in favor of shorter hours have been those of public +welfare. The legal limitation of working hours is being treated +primarily as a health measure, into the judgment of which is more and +more entering a broader conception of the happiness, morality, and +opportunities for good citizenship for the worker and his family. + +In agricultural conditions, such as have prevailed generally in +America, there is little need of limiting the hours of work and the +age at which children may begin to work. The barefoot boy trudging +over clover fields to carry water to the harvesters may be the +happier, healthier, and better for his work. Child-labor in +agriculture has never become a social "problem" so long as the +children work with their own parents at their own homes; but the labor +of children for wages, especially in gangs on large farms (as in +beet cultivation and cranberry picking) or in canning factories, +has exhibited evils as pronounced as any in urban manufacturing +conditions. + +The evil of forcing children into factories was early recognized. +The most obvious evils of child-labor are neglect of the child's +schooling; destruction of home life; overwork, overstrain, and loss of +sleep, with resulting injury to health; unusual danger of industrial +accidents; and exposure to demoralizing conditions. The usual +assumption that the worker is able to contract regarding the +conditions of labor on terms of equality with the employer is most +palpably false in the case of children. The child, subject to the +commands of his parents and guardians, is not a free agent. Lazy +fathers are tempted to support themselves in idleness on the wages +of their young children. Often poverty leads the parents to rob their +children of health, of schooling, and of the joys of childhood. The +competition of child-labor also depresses the wages of adults, and +thus the evil grows. + + +§ 5. #Child-labor legislation.# The limitation of hours was first +applied to children working in English factories early in the +nineteenth century and thence has extended throughout the world, +tardily following the spread of the factory system. The first American +law of the kind was in Massachusetts, in 1842, limiting to 10 hours +the labor of children under twelve years of age in manufacturing +establishments. All the earlier state laws established low minimums of +age and high maximums of hours, and were poorly enforced for lack of +adequate administrative machinery, this in turn being the result of +lack of active public interest. In all these respects many states +gradually improved their child-labor laws in the latter part of +the last century, and much more rapidly since 1903. Now the maximum +working day for children in about one half of the states is 8 hours, +in one quarter is 9 hours, and in one quarter is 10 hours (and in +a few southern states, 11 hours). Night work by children is very +generally forbidden (in about forty states). During the same time the +minimum age has been pretty generally raised to fourteen years for +factory work, with higher ages (sixteen, eighteen, or even twenty-one) +in some states for certain occupations dangerous to health or morals. +In addition to these general limitations, special provision is made +for individual examinations to determine whether the child is mentally +and physically fit to work and has met the requirements of the +compulsory education laws of the state. + +The most important child-labor legislation in recent years was the +enactment of the long debated national child-labor law (passed +in August, 1916). This prohibits the interstate shipment of goods +produced in factories wherein any child has, within thirty days, been +employed under unfavorable conditions as to hours and time of work as +specified in the act. The passage of this act was the culmination of +years of efforts in and out of Congress. + +Child-labor legislation viewed as a merely negative policy is not of +great moment. Its real significance is to be judged only in connection +with the broader social policy of protecting and developing all of +the children of the nation to be healthy, intelligent, moral, and +efficient citizens. Children growing into blighted and ignorant +manhood and womanhood are threats to society. + +§ 6. #Limitations of the working day for women#. But little later than +the limitation of child-labor usually comes some legislation to limit +the hours and conditions of employment of women. The grounds of this +policy are that women likewise are less able than men to protect +themselves in the labor contract, that they are physically weak and +are peculiarly exposed to certain dangers to health, that as future +mothers they need protection for their own and the public welfare, and +that in the period of maternity the dangers are especially great. The +work of women in factories operates in some ways to depress the wages +of men, and it is harmful in its effects upon the home and family +life. At present five states limit the hours of women to 8 a day, +twelve to 9 a day, fifteen to 19 a day, four to 11 or less a day. A +number of states forbid the work of women in designated places of work +such as saloons, mines, or where constant standing is required. Only +as late as 1911, in America, has legislation, now in four states, +given maternity protection, as is now more fully provided in European +countries in connection with systems of health insurance. + +In all of the great industrial countries of Europe night work by +women is restricted (prohibited between 10 P.M. and 5 A.M. or yet more +narrowly limited); but legislation along this line is found in only +eight American states. + +§ 7. #Limitations of the working day for men#. The general assumption +made in law has been that the adult male worker is competent to judge +of the working conditions, hours of labor, and wages, and is capable +of protecting his own interests sufficiently by his power of refusal +to accept employment. The legislatures have, much more tardily than in +their legislation for children and for women, acted contrary to this +assumption, but, when this has been done, the courts in America +have vigorously asserted the general doctrine and denied the +constitutionality of the laws. However, some exceptions were made in +legislation, and, after much apparent hesitation and vacillation, were +allowed by, the courts to stand, and these have now grown in number +until they form an impressive total. + +These exceptions have come in various ways. There is first, the +eight-hour limitation in public employment, required in federal +employment in 1868, really effective since 1892, and now in force +likewise in about two thirds of the states. In almost the same +jurisdictions--national, state and municipal--eight hours is the legal +day on work done in private business for the governments. Work on +railroads and street railways, particularly in the direct operation of +trains, such as the work of dispatchers, signal men, and trainmen, +is subjected to a large variety of regulative measures, hours being +limited in some cases to 8, in others to 9, 10, 12, or 16, and in +a number of cases a specified minimum number of hours of rest is +required after the maximum hours of labor. These laws are primarily +for the protection of the public, but they afford a protection to the +employee much needed, as many well-authenticated cases of excessive +and exhausting hours demonstrate. + +The limitation of hours has very recently been extended to many +private businesses in which exceptional conditions exist affecting the +health of the workers or the safety of the public. This development +has occurred almost entirely since the United States Supreme Court in +1898 (Holden vs. Hardy) sustained a Utah statute limiting to eight +the hours of labor in underground mines. Now 8 hour laws in certain +specified cases are found applying to mines, smelters, tunnels, and a +variety of other kinds of work, and in a few cases the limit is 9, 10, +or 11 hours. + +§ 8. #Broader aspects of this legislation#. The subject took on a new +aspect when the legislature of Oregon, in 1913, declared broadly that +"no person shall be hired, nor permitted to work for wages, under +any conditions or terms, for longer hours or days of service than +is consistent with his health and physical well-being and ability to +promote the general welfare by his increasing usefulness as a healthy +and intelligent citizen," and fixed ten hours as the limit of work +consistent with such a measure of health and welfare, in work in any +mill, factory, or manufacturing establishment. This law was sustained +by the Supreme Court of that state and was carried on appeal to +the United States Supreme Court.[6] In support of the law there was +presented a voluminous brief giving a most impressive body of evidence +from scientific and from practical business sources, to show the many +evils, popularly unsuspected or underestimated, that result from long +hours even in industries of no exceptional hazards.[7] Physiological +and psychological tests demonstrate that the fatigue following more +than a moderate working period not only reduces immediate efficiency, +but so poisons the system that greater liability to accident, disease, +intemperance, immorality, and premature decay, results. + +Two main purposes appear somewhat intermingled in this legislation +in limitation of hours. The first purpose is to protect the public +directly where the safety of others is dependent on the health and +efficiency of the worker. The second purpose is to protect directly +the worker's health and welfare, that policy being recognized to be +in the long run the best likewise for the public welfare. In legal +reasoning it is being recognized that the individual wage-worker, even +the adult male, is not in a position to judge the number of hours he +ought, for his own good, to work, and is unable to fix the length of +his own working day. As a matter of economic theory, the usance of a +child, a woman, or a man, is merely that kind and amount of +service that can be given out by each without repressing the normal +possibilities of growth, reducing the normal health and vigor, or +shortening the normal period of healthy productive human existence.[8] +It is becoming a general social policy to prevent the abnormal strains +of industry that cause the unnatural deterioration of the human factor +in industry. A wage-worker may be permitted to sell his daily _net_ +fund of working power--his usance--but not his life. + +§ 9. #Plan of the minimum wage.# Even more recent than the legislative +regulation of hours downward is the attempt to regulate wages upward +in the case of certain low-paid wage-workers. The modern[9] movement +for the minimum wage began in Victoria in 1896, and it soon extended +to nearly all the other Australasian states. Great Britain applied the +plan in 1910 to industries in which wages were exceptionally low. The +plan was first adopted in the United States by Massachusetts in the +year 1912, tho in an emasculated form, and spread so rapidly that at +the end of 1915 it was found in at least 11 states. Minimum wage +laws usually lay down "a living wage" as the standard to be used, +and either prescribe a flat rate of wages, or, more often, leave the +decision in each case to the wage commission established to administer +the law. + +Generous sympathies have guided this movement of which much has +been hoped and which, on the other hand, has always had its adverse +critics. The most that can be claimed for it by its friends after more +than twenty years of experience, is that the "dire predictions" have +not been verified. In truth it would seem that the plan as yet has not +been tried on a scale that could yield very large fruits either +for good or for evil. The persons whom it is sought to aid are only +selected groups of the lowest paid workers, generally limited to +minors and young women, who in many cases are those of immigrant +families in urban districts. A large volume of discussion on this +subject has developed, mostly of an _a priori_ nature, of which we may +here touch only a few of the salient points. + +At first glance the principles involved in the legislation limiting +hours and those in minimum wage legislation may seem to be the same. +But an important difference soon appears. In the former case the evil +is that of a too long working period, injurious to health, and this +can be reached directly and stopped by an efficiently administered +law. But in the latter case the real evil is industrial weakness and +incapacity such that the workers are unable to command "a living wage" +in a competitive market. A minimum wage law, by itself, neither cures +the industrial incapacity nor ensures employment to the industrially +weak at any wage. The law does not attempt to compel employers to +employ at the legal minimum wage every one who wishes to work; it +merely declares that the employer shall _not_ employ any one whom, in +his employ, he finds to be not worth that high a wage. + +§ 10. #Some problems of the minimum wage#. Unless the demand for a +particular kind of service is absolutely inelastic (a rare if not +impossible situation in a large market), there must be fewer jobs +for the less capable workers at high than at low wages, other prices +remaining the same. Further, some of the less capable workers must be +crowded out of such jobs as remain; for an artificially higher wage +attracts into an occupation some from other occupations before paid +more highly. It seems to be admitted by the friends of minimum wage +legislation that this result is logically to be expected and that to +some degree it appears. Of course it is never possible to tell to just +what extent workers have been and are being excluded in this way from +any particular establishment or occupation. Forbidden to earn what +they can, the poorer workers must become dependent on charity. It +may be said, and perhaps truly: better this than underpaid labor +destructive to the health of the workers and evil in its competitive +effects upon other wage workers. + +In most discussions of the wages of women there is a ready confusion +of sympathetic ideals of what one would like to see with the cold +facts as they are. Women's services (especially those of young women) +have increasingly of late been coming upon the labor market in such +a way as to cause abnormal congestion in a few occupations. Employers +have not caused low wages in these cases. Partly these occupations +are the clean, light, and agreeable ones, partly they have a relative +social glamour, largely they can be followed for a few years near the +home of the worker, nearly always they may be undertaken with brief +training and little skill. Investigation has shown that at least +eighty per cent of this group of girl workers live at home. A wage +that is amply a "living wage" when used as a pro-rata contribution +to an American family income is frequently insufficient for the girl +living "independently." Such a girl is, under the conditions, unable +to earn a living in her chosen occupation, and it may be better to +recognize that fact and to deal with such individual cases as appear +among the one fifth of all girls employed. + +The one unquestioned service of the minimum wage law is that of +diagnosing the evil of low wages rather than in remedying it. +The minimum wage law brings to light the industrial incapacity of +particular individuals to earn a living wage. The direct remedy is to +abolish the incapable workers or their incapacity by such methods +as regulating foreign or cityward immigration, custodial care of the +physically, mentally, and morally weak, vocational guidance, and +more effective measures of industrial education. Alongside of the +abnormally low paid occupations or elsewhere in the industrial +organization are other occupations in which with, or often +even without, special training, the sweated workers could get, +competitively, more than the minimum wage, if they could, or would, +qualify for the work. + +§ 11. #Mediation and voluntary arbitration#. The labor controversies +in which the public has the largest interest as a third party[10] +are those which result or may result in strikes. The public interest +becomes acute when a strike results in interference with the +individual freedom of other workers and of nonparticipants, when it +causes a blocking of the highways and disturbance of the peace, and +when it prevents the regular production and transportation of the +commodities which the public consumes. The public, therefore, has +steadily become more interested in all methods and agencies designed +to conserve better relations between employers and wageworkers, and to +diminish or, if possible, to do away with strikes when individual and +collective bargaining between the two parties fail. + +_Mediation_, or conciliation, is the effort of a third party to get +the two parties to a trade dispute to come together to agree peaceably +upon a settlement. Mediation may be voluntarily undertaken in a +particular case by any citizen or by a public official, usually the +executive (mayor, governor, or President); or it may be by a regular +public state or national commission charged with this duty (as in some +17 states). + +_Arbitration_ is the decision, by a disinterested person (or +commission) to whom it is submitted, of the exact terms, after a +provisional settlement of a dispute. It is voluntary when the parties +agree in advance to accept the verdict, and compulsory when they are +compelled by law to submit to arbitration and abide by the verdict. + +Some provision either of voluntary private or of public agencies +to mediate between the parties in labor disputes and to facilitate +voluntary arbitration has been made of late in most communities of the +civilized world, including 32 of our states, and the nation as a +whole particularly in respect to disputes between railroads and train +operatives engaged in interstate commerce.[11] No one objects to +them, and they accomplish much good, but fail oftenest in the greater +emergencies because of the unwillingness of one or the other party +to submit the case, or because of lack of any power to enforce the +decisions. + +§ 12. #Compulsory arbitration#. The serious question in the subject of +arbitration concerns the introduction of the principle of coercion by +government, in compulsory arbitration. This, in principle, is pretty +radically different from voluntary arbitration, for as it denies to +the parties the right to settle their dispute by private agreement, +it becomes in effect the legal regulation of rates of wages and +conditions of work. In principle this was involved in the legal +regulation of wages in England from the fourteenth to the nineteenth +centuries. The plan is closely approached in the industrial courts +that are now provided in a number of European countries for a cheap +and expeditious settlement of small disputes regarding trade matters, +arising in the relations between employer and employees. The new +modern development began when New Zealand passed a compulsory +arbitration act in 1894, followed to some extent since by all the +other Australian states, largely through the action of the Labor +party. Through the operation of its act New Zealand came to be called +the "land without strikes," tho the description was inaccurate, +especially after 1907. The Canadian Industrial Disputes Act of 1907 is +an example that has had influence upon public opinion everywhere, and +has been followed to some extent in recent legislation in New Zealand, +America, and elsewhere. It involves the compulsory principle in a +limited degree, making it unlawful in public utilities and mines to +change the terms of employment without thirty days' notice, or to +strike or lock-out until after investigation and hearing before a +board to be nominated for the purpose. The Colorado Act of 1915 goes +even beyond the Canadian act in its scope. The plan seems destined to +have wider applications and a larger development in the not distant +future. Let us note the general attitude of the various interests +concerned. + +§ 13. #Organized labor's attitude toward labor legislation#. Labor +organizations hitherto have been in their legal nature almost entirely +private and voluntary. They are seldom incorporated and are rarely +even recognized in any way by legislatures and by courts, which deal +merely with the members as individuals.[12] Their private character, +combined with their limited membership as compared with the total +population, leaves them without the power to accomplish legally by +themselves the results which they desire in their own interest. Hence +they are tempted at times to usurp public authority over the field of +private rights in industry.[13] In other cases, when they have come +to the end of their unaided powers, they invoke the aid of the law to +accomplish their objects. But the appeal of organized labor to the law +is special and qualified, being confined to cases where the actions +of others are controlled to the advantage of the union, such as +regulating the work of women and children, controlling the acts of +employers in respect to construction of factories, and limiting the +length of trains. This does not imply a peculiarly selfish attitude +on the part of organized labor. Action together in any social group +always develops in men their loyalty and spirit of coöperation without +always making them more considerate to those outside of their group. +Indeed, often men acting through their chosen officials, private or +public, are more selfish collectively than they are individually. +The leaders of any group of men, whether of wage workers, merchants, +manufacturers, or political constituents, find it necessary to +show that the interest of their supporters rather than a broader +"sentimentality" is uppermost in their thought. And further, the +jealousy of any limitation of their power is as powerful a motive in +one group of men as in another. All are made of the same human clay. +But the stronger and more successful a labor organization is, the +more vigorously do its leaders resist any legislation that limits the +functions and field of action of the labor leaders, or that settles +labor troubles in a way that makes the voluntary labor organization +less necessary to the individual worker. Of course self-help, as a +spirit and as a policy, is a virtue, if it does not sacrifice the +rights of others. But if the facts above suggested are borne in mind +they will help to explain the otherwise often puzzling attitudes of +organized labor toward different measures of social legislation. + +§ 14. #Organized labor's opposition to compulsory arbitration.# +Organized labor in America has attained to a highly influential +position. On the whole it constitutes an "aristocracy of labor," +consisting largely of skilled workers that obtain a wage exceeding +that of unskilled workers to a degree not seen anywhere else in the +world. In this they have been favored by a combination of conditions +which it is not possible to describe briefly; suffice it here to say +that organization is itself not the whole explanation, but only +a small part of it. That organized labor, officially, is strongly +opposed to compulsory arbitration in America, is thus perhaps +sufficiently to be understood on the principle of "Let well enough +alone." When in August, 1916, a strike on the entire railroad system +was threatened by the four railroad brotherhoods, and some action was +proposed in the form of the Canadian act, the trade-union officials +issued a statement containing these words: "Since the abolition of +slavery no more effectual means has been devised for insuring the +bondage of the workingman than the passage of compulsory investigation +acts of the character of the Canadian Industrial Disputes Act." Within +less than a week the brotherhoods called off the strike after Congress +had passed an act giving the men immediately the eight-hour +day--a substantial part of what they had asked--and providing for +investigation, by a commission, of the effects of the rule. This is +compulsory upon the railroads but it is not compulsory upon the men to +accept these terms. + +§ 15. #The public and labor legislation.# It has come to be recognized +that in every serious labor dispute, especially in such as develop +into strikes, those concerned are not merely the two parties, +employers and employees, but a third party, the public, consisting of +every one else whose interests are not directly or indirectly bound up +with one of the other two parties. The line of demarcation is not easy +to draw exactly. An individual may be divided in sympathy, inclining +to the one party perhaps because of some personal friendships or class +loyalty or to the other party because of material investments, while +in the main having interests distinct from either. But wherever +the public is drawn in as a party, it includes far more persons +and embraces far larger interests than does either of the other two +parties or than do both of them together. The public becomes a party +primarily because it consists of the purchasers and consumers of the +products, who are deprived of the usual supply of goods, more or +less essential to their welfare or even to their existence. With the +increasing division of labor and complexity of industrial organization +more and more kinds of business have, in a greater and greater degree, +become "affected with a public interest." The public becomes an +unwilling party, therefore, in every serious labor controversy. + +In order that any kind of labor legislation shall be enacted, it is +necessary (so far as we have a government by public opinion) for a +majority of the public to be convinced that the conditions are such +as call for governmental interference. It becomes so convinced in +two broadly distinguishable classes of cases: one, when the masses of +unorganized workers are too weak to secure for themselves conditions +of work and wages consistent with health and morality; and the other, +when strong bodies of organized workers, in their attempts to win +their ends in an industrial dispute, exceed their private rights and +invade the public welfare. + +§ 16. #The public and compulsory arbitration#. Where the railways are +owned and operated by the state (as is now the case pretty generally +except in America and Great Britain) the question of the "right to +strike" arises from time to time, in critical forms. The logic of the +situation compels even those officials that are of the labor party or +are most favorable to labor, to maintain an uninterrupted service on +the public railways. The experiences of that nature in France and in +Australasia have been notable. Nowhere in the United States has the +principle of compulsory arbitration been adopted, but at the time of +the great anthracite strike, in 1902, public sentiment grew strong in +favor of it. As a result of the intolerable conditions in the mines of +Colorado was passed the compulsory investigation act of 1915 in that +state. In 1916 the threat of a general railroad strike brought from +many quarters strong expressions of condemnation in principle, of the +strike as a method of settlement of wage disputes on the railroads. +And in the end the organized laborers themselves accepted, apparently +with much satisfaction, a law involving the legal fixation of wages +and the principle of compulsion as applied to the employers. + + +[Footnote 1: By the Secretary of the American Federation of Labor.] + +[Footnote 2: See Vol. I, pp. 458-467.] + +[Footnote 3: For example, increase less than 25 per cent per hour in +changing from a 10 hour to an 8 hour day.] + +[Footnote 4: See above, ch. 6, sec. 12.] + +[Footnote 5: See especially, sec. 8.] + +[Footnote 6: At this writing the case, Bunting vs. the State of +Oregon, is still undecided.] + +[Footnote 7: Published as "The case for the shorter working day," by +the National Consumers' League, see especially pp. 621-892.] + +[Footnote 8: See Vol. I, pp. 135 and 197.] + +[Footnote 9: Much public regulation of wages occurred in Europe until +near the end of the eighteenth century. In England this was done +mainly by the justices of the peace and, in the main was directed +toward limiting the demands of the wage-workers.] + +[Footnote 10: See below, sec. 15.] + +[Footnote 11: By the act of 1888, the Erdman act of 1898, superseded +by the Newlands act of 1913, and supplemented by measures for +mediation by the Department of Labor.] + +[Footnote 12: The few exceptions to this statement are mostly recent; +such as the recognition of the unions in New Zealand in 1894 as +parties in the plan of compulsory arbitration, and in Great Britain +in 1909 as agencies through which unemployment insurance may be +administered.] + +[Footnote 13: As appeared in ch. 20.] + + + + +CHAPTER 22 + +OTHER PROTECTIVE LABOR AND SOCIAL LEGISLATION + + § 1. Evils of early factory conditions. § 2. Improvement of factory + conditions. § 3. Limitation of the wage contract. § 4. Usury laws. § 5. + Public inspection of standards and of foods. § 6. Charity, and control of + vice. § 7. City growth and the housing problem. § 8. Good housing + legislation. § 9. General grounds of this social legislation. § 10. + Training in the trades. § 11. Prevalence of unemployment. § 12. Evils of + unemployment. § 13. Definition of unemployment. § 14. Individual + maladjustments causing unemployment. § 15. Maladjustment of wages + causing unemployment. § 16. Individual maladjustment in finding jobs, + § 17. Public employment offices. § 18. Fluctuations of industry causing + unemployment. § 19. Remedies for seasonal fluctuations. § 20. Reducing + cyclical unemployment and its effects. + + +§ 1. #Evils of early factory conditions#. The time is but brief in +the life of nations since the main manufacturing processes, now mostly +conducted in great factories, were carried on in or near the homes +of the workers. This change has been reflected in the meaning of +"manufactures," which first meant literally goods made by hand but now +conveys the thought of goods made by machinery. The craftsmen worked +alone in their own homes or with the help of their wives and children. +If the master craftsmen had other helpers these were usually lodged +and fed in the homes, and were taught by the side of the masters' own +families. The old English law of master and servant was the labor law +of that time as, to some extent, it still is to-day in Great Britain +and America. The living and working conditions of the wage-workers +were in general the same as those of the master himself and of his own +family; and this was the best possible guarantee that the conditions +would be kept up to the best standards of that time. The same change +in industrial relations that led to the rise of the organized labor +movement[1] revealed new and often horrible neglect and evil in +and about the factories. They had been erected with no thought of +sanitation, safety, and decency for the workers. + +§ 2. #Improvement of factory conditions#. Legislation to remedy these +evils began in England a century ago, and the English code of factory +laws, regulating the construction and operation of factories and +providing for their inspection, has become voluminous. It has been +copied, and in some respects improved, by all of the great industrial +nations. This is true in America of the manufacturing states, tho the +agricultural states have still very few such regulations. As a result +of these measures, accompanying and stimulating an enlightenment +of the employers' self-interest, there has been a very remarkable +improvement in such matters in recent years. In many American +factories erected in the last quarter-century the conditions as to +lighting, heating, ventilation, stairways, fire-escapes, protection of +the workers against accidents, and lavatory and sanitary arrangements, +are better than the best conditions ever existing in domestic +manufactures. A somewhat corresponding improvement has taken place on +railroads, in mercantile establishments and, perhaps less, in mining. + +Factory legislation often has been opposed by employers because of the +expense it causes; but if the regulations apply to all factories, the +expense becomes a part of the cost of production and is shifted, like +the other expenses of production, to the general body of consumers, +of which the employers form only a small part. Much of the recent +progress in some establishments has, however, gone much beyond the +requirements of any existing laws. Many employers recognize that it is +costly and unprofitable to themselves to allow their workmen to be in +surroundings that reduce their vitality and efficiency, such as do the +conditions mentioned at the close of the preceding section. + +§ 3. #Limitation of the wage contract#. In general the law does +not attempt to interfere with the making, by individuals, of such +contracts as they choose to make. Its main function is to interpret +and enforce the contracts that are made. But there has been an +increasing group of exceptions to this general statement. It was +forbidden even by the English common law for wage-workers under +some conditions to sign away their right to claim damages in case +of accident, and many recent statutes have added more specific +limitations in this respect.[2] Legislatures and courts have been +particularly watchful of the interests of children, who are usually +deemed incapable of entering into contracts binding them to their +injury. Sailors, likewise, have been somewhat exceptionally treated, +because, journeying far from home, they are under the often despotic +control of their employers. The English courts may even change the +contract if the sailors have been coerced by their masters. + +Laws regulate the form, time, and methods of payment in manufactures +and mining. Companies sometimes keep stores and pay the workers in +mines and factories in goods instead of money. Such a store in the +hands of a philanthropic employer might easily be made, without +expense to himself, a great boon to his workmen, giving them the +benefits of consumers' coöperation. But the usual result is told +by the fact that such stores are often known as "truck stores" and +"pluck-me stores," and heartily disliked by the wage-workers. They +are most often found where some one large corporation dominates in +the community, as in a mining district, and the workers are in a very +dependent condition. If the higher prices demanded practically lower +real wages, it would seem that the worker had an immediate remedy in +his power to demand higher money-wages. Recognizing that this is for +the most part an illusion--for it is just in such places that the +conditions for free competition are least present--the law in many +states prohibits these stores. It regulates also the measuring of +work, fixing the size of screens and of cars used in coal-mining. +The law is especially favorable to the hand-laborer in regard to the +collection of his wages, requiring monthly or fortnightly or sometimes +weekly payments. Mechanics' liens give to workmen in the building +trades the first claim upon the products of their labor. + +§ 4. #Usury laws#. The limitation by law of the rate of interest that +may be charged affects many persons outside the ranks of wage-workers. +Usury laws are found almost universally in civilized lands. By usury +was formerly meant any payment for the loan of goods or money; now it +means only excessive payments. In former times moralists and lawmakers +were opposed to all usury or interest. The reason for this attitude +is not hard to find.[3] Most loans were made in times of distress. The +sources of loanable capital and the chances of profitable investment +were few. But for the last four centuries there has been on the +question of usury a gradual change of opinion, beginning in the +commercial centers and progressing most rapidly in the countries +with the most developed industry. A moderate rate of interest is now +everywhere permitted; but in all but a few communities the rate that +can be collected is limited by law, and penalties more or less severe +are imposed upon the usurious lender. + +Usury laws are practically evaded in a number of ways within the +letter of the law.[4] Many persons maintain that they do more harm +than good even to the borrower, whom they are designed to protect. In +a developed credit economy, where a regular money-market exists, they +are superfluous, to say the least, as most loans are made below the +legal rate. Such laws, however, have a partial justification. In a +small loan market they to some extent protect the weak borrower at the +moment of distress from the rapacity of the would-be usurer. There +has been great need to check the rapacity of the "loan-shark" in the +cities. Usury laws are fruits of the social conscience, a recognition +of the duty to protect the weaker citizen in the period of his +direst need. Their utility is diminishing; and at best they are only +negative in their action, preventing the needy borrower from borrowing +when his need is acute. In many European countries a more positive +remedy has been found in the provision of public pawn-shops. In +America a very little has yet been done in this way, and that mostly +by private philanthropy.[5] + +§ 5. #Public inspection of standards and of foods#. The determination +and testing of standards of weights and measures has long been a +function of government. English laws of the Middle Ages forbade +false measures and the sale of defective goods, and provided for the +inspection of markets in the cities. Usually, the self-interest of +the purchaser is the best means of ensuring the quality of goods; +but personal inspection by each buyer frequently is difficult and +time-consuming, requiring special and unusual knowledge of the +products and special costly testing apparatus. The states and the +nation undertake, in some cases, therefore, to set minimum standards +of quality, and to enforce them by governmental inspection. Government +coinage had its origin in this need. + +This policy is applied, however, mainly to commodities affecting +health; its application to art products, except to protect the +morality of the community, would be difficult or unwise. Recent +legislation in many lands and in all of the American states has +developed greatly the policy of insuring the purity or the safety of +many articles consumed in the home; notable is the Federal Pure Food +and Drug Act of 1906. The federal law levying a tax on oleomargarine, +however, was designed as protective legislation in the interest of the +farmer. Public regulation and inspection sometimes raises the price, +but the cost is small compared with the convenience and the benefits +resulting to the citizen. + +§ 6. #Charity, and control of vice#. The public relief of the +defective classes, insane, feeble-minded, and paupers, is a part +of the social protective policy. The public interest undoubtedly is +served by having these suffering classes systematically relieved, but +the extent and nature of the provision are questions ever in debate. +Still more debated is temperance legislation, both as to licensing and +as to prohibiting the liquor traffic. Nowhere is the manufacture and +sale of intoxicating liquor treated quite like the traffic in most +other goods, because it is recognized that the public interest is +affected in a different way. While it is beyond question that society +should protect itself and its innocent members against the drunkard, +it is more doubtful whether it owes to the man, for his sake, +protection against his own blunders. Not even the gods can save the +stupid. Temperance legislation is strongest in its social aspect. The +opponent of it usually champions the individualist view; its partizans +uphold, in varying degrees, the social view. + +Similar questions arise regarding lotteries, gambling, betting, and +horse-racing. When a man backs a worthless horse against the field, +money probably is transferred from the stupider to the shrewder party. +The philosopher may say that the sooner a prodigal and his money +are parted the better; but the broken gambler remains a burden and a +threat to honest society. Gambling, lotteries, and speculation cause +embezzlement, crime, unhappy homes, and wrecked lives.[6] Here are +to be found with difficulty the true boundaries between ethics and +expediency. A busybody despotism may protect the fool, but it thereby +helps to perpetuate and multiply his folly; yet if the fool is left +alone, he too often is a plague to the wise and the virtuous. + +§ 7. #City growth and the housing problem#. In 1790, of our population +only 3 per cent lived in cities of over eight thousand inhabitants; +in 1900 the percentage was 33. Then the largest city (Philadelphia) +numbered 50,000; in 1910 the largest city (New York) numbered +5,500,000; that is, 110 times as large 120 years later. The total +number of persons living in cities of 8000 had increased in more than +double that ratio. The rapid growth of cities brought with it many +evils. Considered in their more material aspects, nearly all of these +are summed up in the expression "the housing problem." + +As population grows denser in cities, land rises in value, yards and +gardens narrow and then disappear, light, sun, and air are shut out, +and cleanliness, decency, and home life become more difficult and, +for many, impossible. The residents gradually group themselves in +districts corresponding to their economic incomes, and the poorer +parts of the population become tenement dwellers in the neighborhood +of factories or become segregated in "slum" districts of unsanitary +and dilapidated houses. + +§ 8. #Good housing legislation.# Two policies are open under +these conditions. The one, always followed for a time, is to leave +individual self-interest unguided to solve the problem. If the tenant +agrees to rent a disease-breeding house, he is the first to suffer. +The interests of investors, it is said, will supply as good a house +as each tenant can pay for. The other policy now adopted is to set +a minimum standard of sanitation and comfort, in respect to plans, +lighting, materials, and proportion of lots to be covered, to which +standard all builders and owners must attain. Complying with the legal +requirements, they are left free to collect whatever rent they can +get. As one bad building may bring down the rent of all on the street, +such legislation may sometimes be in the interest of the body of +landowners as against the selfish desires of some individuals. Mainly, +however, the regulation is in the interest of the tenants and of +society as a whole, and against that of the landlords. The rents +from slum property are threatened, hence the strong opposition always +manifested against tenement-house legislation by some landlords, +architects, and contractors, who fight it as an interference with +their interests and as a confiscation of their property. It is not +unlikely that this policy has the effect of making rents too high for +some poorer tenants and driving them into the country. But this result +is not so undesirable. Moreover, the control and inspection of housing +conditions has in a few states been made statewide to reach even "the +country slums" which lately have been recognized to exist. Enlightened +sentiment to-day favors efforts to destroy the breeding-places of +disease, misery, and crime, no matter where they may be. + +Property owners are in many communities no longer left free to +determine height of buildings, appearance, or even the uses for which +houses may be erected in any district. American cities have still much +to learn in this regard from the example of many European cities which +have developed the art of city planning with wonderful results in +beauty of landscape and of architecture, in practical economy for +business, and in the health and welfare of the mass of the people. + +§ 9. #General grounds of this social legislation#. Why are not such +matters as we have been discussing safely left to individuals? It is +for the interest of every one that his back yard should not be a +place of noisome smells and disagreeable sights. But men are at times +strangely obstinate, selfish, and neglectful, and through one man's +fault a whole community may suffer. The refusal of one man to put +a sewer in front of his house may block the improvement of a whole +street. The heedlessness of one family may bring an epidemic upon an +entire city. There must be a plan, and by law the will of the majority +must be imposed upon the unsocial few. Where voluntary coöperation +fails, compulsory coöperation often is necessary. Thus health laws, +tax laws, and improvement laws regulate many of the acts of citizens, +limit the use of property, and compel men to better social courses +against their own wishes and judgments. + +All such laws as these are protective legislation, in that they depart +from the rule of free trade taken in its broadest sense. It does +not follow, however, that all these laws stand or fall together. The +justification of such measures is limited and relative, and therefore +of varying strength. All protective measures are alike in that +the free choice of one citizen is forbidden by law in the supposed +interest of some other citizen who is to be "protected." While the +purpose of the tariff is economic and political, in a large majority +of social laws the moral purpose is fundamental. It is the demand of +humanity that competition be placed upon a higher plane. Most social +legislation is to protect the weak from being forced into contracts, +or from living in conditions injurious to their welfare and happiness. +The justification for these limitations upon the right of private +property, upon the free choice of the individual, upon "free +competition," must be found in the social result secured. The best +test of social protective laws is their contribution to a higher +independence and to a freer competition on a higher, more worthy, and +more humane plane. + +§ 10. #Training in the trades#. Free elementary and secondary +education has become the all but unquestioned public policy in the +American commonwealths. The main motive for it has been the belief +that education in books is a necessity for good citizenship in a +republic. At the same time it has been thought that the training of +the school would help the child to earn a living. This appears to have +been true so long and so far as it was combined with, or supplemented +by, industrial training on the farm, in the home, and through +apprenticeship in the manual trades, as once was so prevalent. But +industrial conditions have changed. Most of the old-time education +of the schools has now little relation to the industrial life of the +great majority of the children, for few enter clerical or professional +callings. Germany was the first nation to recognize the new +educational need (in fact, never as urgent there as here) and to +provide for systematic and efficient training in all the industrial +arts. Since the beginning of the century the American public has been +awaking to the needs of the situation. We appear to be on the eve of +a great development in industrial training that will equip youth for +more efficient life in business and in the home, either in rural or in +urban conditions. + +§ 11. #Prevalence of unemployment.# Many other forms of social +legislation on behalf of the common man might well deserve, did +time and space permit, a larger measure of the economic student's +attention. However, excepting the subjects treated in the next two +chapters, the one remaining that is most important at this time is the +problem of unemployment. + +In every country and at all times where the wage system prevails, some +wage-workers, now more and now less, are "out of work" and unable to +get it. The proportion that they constitute of all workers cannot, +with the aid of any existing statistics, be exactly told, nor +can exact comparisons be made between different countries. Of +the magnitude, importance, and difficulty of this "problem of the +unemployed" there is, however, no question. It is greatest, speaking +generally, in manufacturing industries, tho, among the various kinds, +great differences in this respect appear. In 1900 the United States +census reported that of all persons in gainful occupations 2.5 per +cent had been unemployed more than half the year, 8.8 per cent from +three to six months, and 11 per cent one to three months, a total of +22.3 per cent more than one month.[7] In 1911 in a large group +(nearly all) of the manufacturing industries, the minimum number of +wage-earners employed (in January) was 13 per cent below the maximum +(in November). In some the difference was much greater (e.g., 24 +per cent in the iron industry, 63 per cent in the brick and tile +industry). Statistics of unemployment among trade-unions in New York +and Massachusetts indicate that the annual average of unemployment is +between 12 and 15 per cent. In some years upwards of 10 per cent +of all the working time of the wage-earning population is lost by +unemployment. + +§ 12. #Evils of unemployment.# A considerable part of the total in +an ordinary year may be set aside as "normal" in the sense that it is +allowed for in the wage-workers' plans;[8] and a part of it may even +be desirable. Yet there remains an inconceivable sum of suffering in +the lives of the workers, and an enormous economic waste of +productive energy not only for them but for the whole community. +The irregularity, and occasionally the excessive duration, of these +periods of unemployment too often makes unemployment not a beneficent +vacation (comparable to shorter hours), but a period of tragic +anxiety, demoralizing and unfitting for return to work. Irregular work +is generally recognized to be a greater cause of poverty and of actual +pauperism than is a low wage regularly received. + +§ 13. #Definition of unemployment.# Unemployment is the state of a +wage-worker for the time out of a job. But this definition needs to be +further explained and limited if it is to be useful in the discussion +of unemployment as an evil calling for social remedy. There must be +set aside the cases where the lack of a job is due to one rest day +in seven and to legal holidays, a total of nearly 65 days in most +American states; to the worker's being on strike; to temporary +sickness; finally, and more difficult to distinguish, that due to +continued disability, physical, mental, or moral, to do the work up to +an acceptable standard and to retain a job in the occupation chosen +by the applicant. The first cannot be called a problem, and the others +constitute the problems of strikes, of industrial sickness, and of the +unemployables, respectively. + +There still remain some unanswered questions such, for example, as: +whether in seasonal trades (e.g., teaching, or the building trades) +allowance should be made for normal vacations and for slack times, +not to be counted as unemployment; and whether lack of work at one's +principal occupation is ever or always unemployment when the person is +actually employed or can get work at some lower paid employment. The +more frequent answer to these questions is in the negative but this +in some cases is almost palpably absurd. Further study is necessary to +work out a generally acceptable concept of unemployment. + +§ 14. #Individual maladjustments causing unemployment.# The cause +or causes of the evil must be ascertained before a remedy can be +intelligently applied. It is pretty generally agreed that unemployment +is essentially a problem of maladjustment of the labor supply, and not +that of an absolutely and permanently redundant supply. That is, there +is, under static conditions, work for all to do at various rates of +wages that would bring about a value equilibrium of services.[9] The +maladjustments are either of an individual or of a general character. +Individual maladjustment may be due to a mistake in choosing an +occupation (e.g., through the vain ambition of one unfitted to be +an artist, actor, lawyer, or teacher); or to failure to acquire by +adequate training the necessary skill; or to loss of capacity by +accident, old age, or failure of mental or moral powers; in all +of which cases the problem verges upon or becomes that of the +unemployable. The "can't-works" and the "won't-works" must be divided +from the "want-works." If there is any remedy in such cases it must be +through re-education, personal reform, or change of occupation. + +Many persons look upon this type of cases as almost wholly accounting +for the problem of the unemployed. They are confirmed in this opinion +by the fact that the out-of-work group in any trade at any time is, on +the average, the least efficient group of workers in the trade. This +results from selection by the employers. This selection is due to +the _relative_ not to the _absolute_ efficiency or inefficiency of +workers, and must result whenever there are any discoverable economic +differences in the workers (all things considered) that are employed +at the same wage. This would continue even tho the poorest workers +were to raise their efficiency above that of the best men now +retained. "Personal inefficiency" may explain a chronic low wage or +absolute unemployability in a particular case, but it does not +explain intermittent lack of work for those willing and able to work. +Unemployment is a social problem and not merely an individual problem. + +§ 15. #Maladjustment of wages causing unemployment.# It seems +highly probable that the artificial maintenance of a wage above the +competitive, or value-equilibrium, rate of the individual, whether +this be done by sympathy, by custom, or by the action of trade unions, +must cause some maladjustment of workers in relation to available jobs +and thus increase unemployment. To doubt this is again to maintain +the absolute inelasticity of the demand for labor with changes in its +price.[10] If the true equilibrium wage in a certain industry were +$3.00 a day, then a wage of $4.00 a day would attract to the trade +more than enough workers to meet the demand for labor in normal +periods (unless entry to the trade is controlled by monopoly power), +and at length the losses from unemployment would balance the day-wages +received in excess of the rate obtaining elsewhere for that quality +of labor. Any artificial obstacles to change of occupation or to +concessions in the kind of work done and in the rate of wages must +operate to increase the maladjustment. So far as this maladjustment +occurs, it may cause unemployment neutralizing the apparent gain +of higher day-wages obtained by monopoly power. The very inertia of +wages, however, in new price situations[11] makes the wage-workers +resist more vigorously such a policy of wage concessions. Moreover, +the difficulty here indicated is more particularly one occurring +in static conditions and is to be distinguished from the dynamic +maladjustments next to be considered. + +§ 16. #Individual maladjustment in finding jobs.# Another kind of +individual maladjustment is the failure of the jobless man to connect +with the manless job. A certain amount of this maladjustment must +exist in the most stable industries and in the most settled industrial +conditions. Fluctuations occur in the market demand for the products +of various establishments, requiring the taking on or laying off of +some men. Fluctuations occur in the plans both of employers and of +wage-workers as a result of age, of removal, for reasons more or +less non-economic, of desire to change occupations, of variations in +health, and of countless other causes. The needs of the employer for +a worker, and of the worker for a job, are mutual. To a large degree +these various fluctuations are mutually compensatory, workers going +and coming, orders increasing here and decreasing there. Total jobs +and total workers capable of filling the jobs, are at any moment in +normal times equal quantities, if they can be brought together. But +almost everywhere is lacking a real labor-market. The substitutes +for it are largely ineffective: trade-union action, employers' +associations, "want ads," cards in shop windows, weary walks from door +to door, lines of waiting men outside of factories, private employment +agencies. At their best the private employment agencies perform +valuable services within limited fields, but they are uncoordinated, +and utterly inadequate to meet the chief need, and at their worst they +are the instruments of great abuses against the unemployed. + +§ 17. #Public employment offices.# Vigorous efforts to create local +"free employment offices," or "labor exchanges," began in a number +of countries about 1895. The movement gained headway in the next ten +years and has since steadily grown. In Germany the chief exchanges +have been founded and conducted by the municipalities (while others +are controlled by the unions and by groups of employers) and have +remained largely decentralized, tho coöperating to some extent through +voluntary state conferences of officials of the exchanges, and since +1915 required to report to the imperial statistical office. The total +number of exchanges in Germany (in 1915) was nearly 3000. The general +results have been remarkably good, altho not completely satisfactory. + +Every industrial country of Europe has done something of this kind. +Great Britain, however, after some experiments with a similar +local system, established in 1909 the first national system of +"labor-exchanges." In America the movement is developing in three +directions, through municipal, state, and federal offices. These are +united (since 1913) in an "American Association of Public Employment +Offices." In 1915 there were known to be 99 state and city employment +offices distributed through 30 states, besides federal offices +operated in 18 cities in connection with the Bureau of Immigration. +The clearly recognized task is now to coördinate these various +agencies into an efficient national system, eliminating partizan +politics and elevating the management of all branches to the plane +of professional service. Through these agencies can be operated an +industrial service, analogous in function to the weather bureau, and +reporting from day to day the pressure of demand and the prospects for +labor in the various parts of the country. The economic results of +a complete, exclusive, and efficient service of this kind would far +exceed its legitimate cost to the community. + +§ 18. #Fluctuations of industry causing unemployment.# Any one of the +maladjustments in employment thus far considered may occur at a +given moment, in static conditions of industry. But there are +also maladjustments resulting from more general industrial changes +throughout a period of time. The two main types of these are seasonal +and cyclical changes, the one occurring within a year, and the other +occurring within the longer period of the business cycle. At the +downward swing of these seasonal and cyclical changes the number of +would-be workers exceeds the number of jobs [12] and the resulting +unemployment is greatest when the minor and the major swings are both +downward, about midwinter in a period of industrial depression. Thus +in 1893-94, and to a lessening degree in 1894-95, 1895-96; in 1907-08, +and 1914-15. Of course employment offices alone are no remedy for the +exceptional difficulties of such times, and the individual, whether he +be an unfortunate "out-of-work" or a more fortunate well-wisher, feels +helpless in the face of the overwhelming burden of distress. Such +a situation is declared by the radical communists to spell the +bankruptcy of the wage-system; while the most conservative students +of the subject confess that this periodic chaos in the labor market is +the strongest indictment of, and involves the gravest dangers to, the +existing economic and social order. + +§ 19. #Remedies for seasonal fluctuations.# But of late there has been +a growing hope that an answer may be found to this economic riddle of +the Sphinx. A number of different measures are being experimentally +tested and applied. Many years of effort will be required for the +perfecting of these plans separately and collectively. Some of these +plans may be here indicated, however briefly. To remedy seasonal +fluctuations within the establishments output may be regularized by +taking orders in advance; by producing various products successively +in the same factory; by overcoming weather conditions as has been done +successfully in brick and tile making, ditch digging, and building +operations; by transferring workers from one department of an +establishment to another; by improving the employment departments so +as to build up a more stable force, thus reducing the great expense +of "hiring and firing" and the loss through training "green hands"; by +varying the length of the working day while keeping the same working +force throughout the year; by coöperating with other industries +to build up a regular working force and transferring it from one +establishment to another with seasonal changes. + +Of great aid in a number of these measures is a broader industrial +training for the workers, making them more able to change from one +occupation to another. For this purpose every period of unemployment +and of temporary shortening of the working day ought to be used as +a time for trade education, by the recently devised and successfully +applied "short-unit courses for wage-earners."[13] + +§ 20. #Reducing cyclical unemployment and its effects.# The +maladjustments due to the movement of the business cycle are even more +difficult to remedy completely, but are diminished by every measure +that helps to reduce the great financial fluctuations.[14] Further, +many communities have already begun to plan large public works more +systematically so that they may be carried on mainly when private +business is more slack. A comparatively small amount of such work +would serve as a gyroscope to preserve the balance of employment for +a large part of the less skilled workers. It has been estimated by +Bowley, an English statistician, that in the United Kingdom, it would +be necessary to set aside only 3 per cent of the annual expenditure +for public works to be used additionally in years of industrial +depression, in order to balance the wage loss at such times. This is a +well-nigh incredibly small proportion, hardly as great as that of the +weight of the gyroscope compared with the car or ship to which it is +applied. It is hardly to be doubted that hitherto, in America, public +undertakings have been executed much more largely in periods of +business prosperity, and have been diminished during "hard times," +thus greatly accentuating the harmful swing of the labor-demand. +Finally, unemployment insurance, which has already been applied +by parliamentary legislation in Great Britain to a group of nearly +3,000,000 wage-workers, is an indispensable and highly hopeful +measure of relief. The place of this in a general system of industrial +insurance will be indicated in the next chapter. + + +[Footnote 1: See above, ch. 20, sec. 1.] + +[Footnote 2: See ch. 23, secs. 5-7, on the old law of employer's +liability.] + +[Footnote 3: See Vol. I, pp. 292-293.] + +[Footnote 4: See Vol. I, p. 304.] + +[Footnote 5: See Vol. I, pp. 293 and 303.] + +[Footnote 6: See above, ch. 12, sec. 2.] + +[Footnote 7: Great importance should not be attached to these +figures for they contain errors resulting from the inexact notions +of inexperienced enumerators as to what constitutes unemployment, +and from the inclusion of all persons gainfully employed, whether +self-employed or in professional, salaried, or wage-earning +positions.] + +[Footnote 8: See Vol. I, p. 207, on irregularity of employment as +influencing wages, psychic income, and choice of employment.] + +[Footnote 9: On static, see Vol. I, ch. 32; on the scarcity of labor, +see Vol. I, ch. 18, sec. 2 and references there; on value of +services and wages see Vol. I, ch. 18, especially sec. 3, and ch. 19, +especially sec. 7.] + +[Footnote 10: See above, ch. 21, sec. 9 on the minimum wage.] + +[Footnote 11: See Vol. I, p. 223, on friction in the adjustment of +wages.] + +[Footnote 12: See above, ch. 10, secs. 6 and 7, on the industrial +crisis.] + +[Footnote 13: See Bulletin of the United States Bureau of Labor +Statistics, No. 159 (April, 1915). ] + +[Footnote 14: See above, ch. 8, secs. 6, 7; ch. 9, secs. 6, 8; ch. 10, +secs. 14, 16; ch. 14, sec. 12. ] + + + + +CHAPTER 23 + +SOCIAL INSURANCE + + § 1. Purpose and meaning of social insurance. § 2. Increasing need + of social insurance. § 3. The new era of social insurance. § 4. Features + of social insurance. § 5. Historical roots of accident insurance. § 6. + Development of compensation for accidents. § 7. The compensation plan + in America. § 8. Standards for a compensation law. § 9. Historical + roots of sick-insurance. § 10. Need of sick-insurance in America. + § 11. Old-age and invalidity pensions. § 12. Unemployment insurance. + § 13. Need of ideals in social insurance. § 14. Insurance rather than + penalty. § 15. The compulsory principle. § 16. State insurance and + a unified system. § 17. The contributory principle. + + +§ 1. #Purpose and meaning of social insurance.# In importance +surpassing at present any one of the various measures on behalf of +the wage-earning class that have thus far been considered is the +remarkable development now under way of plans and agencies to provide +insurance for "the common man." Insurance means making some kind +of provision out of present means, so as to reduce the injury and +suffering that would result from a future mishap. Usually, likewise, +it implies uniting with others to distribute the expense fairly over +all in the group. Social insurance is the term most frequently applied +to the various institutions and plans provided, more or less under +the regulation of law, for the protection of the lower-paid workers in +most modern countries. The terms industrial insurance and workingmen's +insurance are likewise used. The principal types of events for which +social insurance in its various branches provides, are (1) accident, +(2) sickness, (3) incapacitation (either by old age or by invalidity, +that is, permanent failure of health within the normal working years), +(4) death (generally called "life" or "survivor" insurance), and (5) +unemployment. + +The direct aim of social insurance is not to prevent these mishaps +(tho that may be an indirect result), but it is to provide some +financial indemnity for the economic loss and expense involved in the +mishap. The principal kinds of losses are two. First, that occasioned +directly in caring for the sick or injured person, the expense of +medical attention, nursing, hospital care, drugs and special apparatus +such as crutches and glasses, and burial expenses. The second is the +loss of income because of inability to work as a result of injury, +of illness, or of permanent disability, or (in the case of life +insurance) of the death of the bread-winner, or of want of employment. + +§ 2. #Increasing need of social insurance.# In various connections we +have observed how the changes that have been occurring in modern times +have increased the uncertainties of the industrial life and of the +earning power of the mass of the workers.[1] It should be further +observed that in city conditions, a working family does not have, as +in agricultural conditions, the supplementary sources of income from +garden, field, forest, and stream, and it is not so possible to use +the earning power of children, of old people, and of the partially +disabled. The faster working pace of factories, the rapid fluctuations +of employment with changing fashions, inventions, shifts of +population, and waves of industrial prosperity and depression, all +have introduced new risks and problems into the worker's life. The +increasing payment of wages in money, and the more temporary nature +of employment of men in many kinds of factory work, have added to +the problem. With these changes have come a growing interest in +the welfare of the mass of the workers and a growing sense of +responsibility on the part of the public. + +There is an appalling mass of misfortune in the United States +requiring social insurance for its relief, altho satisfactory +statistics of the various types of misfortune are still lacking. On +the basis of the experience of private industrial insurance companies +it appears that there are not less than 25.000 fatal industrial +accidents yearly, and 700,000 injuries causing disability for more +than four weeks, to say nothing of the enormous number of slight +injuries--if injuries, many of them very painful, disabling for a +period from one day to four weeks, should be called slight. As to loss +of time due to illness, the experience of Germany shows an average of +eight or nine days a year per worker, which figure, applied to those +gainfully employed in America, would mean nearly 300,000,000 days of +illness, or 1,000,000 one-man working years, causing a loss estimated +to be $750,000,000 annually. + +It is estimated that one on eighteen of American wage-workers attains +the age of sixty-five with no financial provision for old age, and +that about 1,250,000 persons above the age of sixty-five are dependent +on their families or on charity, public or private, receiving +$250,000,000 yearly. + +The losses and suffering to dependents due to the death of the +bread-winner are very partially accounted for by accidents, but no +estimate of much value can now be made of the other cases. Some notion +of the losses from unemployment has been given in discussing that +subject in the preceding chapter. + +§ 3. #The new era of social insurance.# Some not insignificant +attempts to deal with these problems were made throughout the +nineteenth century, but the new era of social insurance may be said to +date from the message of the Emperor William to the German Reichstag +in 1881, in which he said: + + We consider it our imperial duty to impress upon the Reichstag the + necessity of furthering the welfare of the working people.... In order + to realize these views, a bill for the insurance of workmen against + industrial accidents will first of all be laid before you; after which a + supplementary measure will be submitted, providing for a general + organization of industrial sick-relief insurance. Likewise, those who are + disabled in consequence _of_ old age, or invalidity, possess a + well-founded claim to more relief on the part of the state than they have + hitherto enjoyed. + +The program here outlined was carried out by the enactment between +1883 and 1889 of a series of laws, which taken together constituted +a pretty effective system of social insurance for the mass of +wage-workers in the German Empire. Later amendments have extended +and improved the various features of the plan, which has served as a +stimulative example to other countries. America has been the tardiest +among all the industrial nations to undertake this kind of social +reform. + +§ 4. #Features of social insurance.# The plans of social insurance, +in force in various countries, present a great variety of features +combined in many ways. The main characteristics in which they may +differ relate to (1) the element of compulsion, (2) contributions by +the insured, (3) the nature of the insurance organization. + +Insurance may be _voluntary_ or _compulsory_. It is voluntary when +the state simply encourages the formation of insurance agencies, and +perhaps contributes something to them, leaving it to the individuals +to insure themselves as they choose, in mutual societies, or in +privately managed companies. In the case of accident insurance, +however, there is often a semi-compulsion by which the employer is +requires to pay indemnity to his workers, according to fixed scales of +compensation, but is left free to insure himself against this risk +or not as he pleases, in which case it is still called voluntary +insurance. Compulsory insurance is that which the state requires to +be provided be means of some mutual organization of the insured, or of +the employers, or by the state. + +Insurance may be _contributory_ or _noncontributory_. It is on the +contributory plan when the insured workers contribute something +toward the premiums that provide the funds for eventual payment. It is +noncontributory when the funds are provided either by the employers or +by the state without any payments from the insured. + +Insurance may be (a) in _private_ companies, carrying on the business +for profit; or (b) in _mutual_ companies of workingmen, or of +employers insuring themselves against the cost of compensation in case +of accident to their employees; or (c) in a _state_ bureau, or fund, +organized and conducted by government. + +§ 5. #Historical roots of accident insurance#. The different kinds +of social insurance had different origins, some knowledge of which is +necessary to an understanding of the present situation. These origins +still affect the nature of social insurance to-day, and have prevented +the development of a truly unified and logical system in accord with +present conceptions of needs and of justice. + +Accident insurance had its beginnings in the liability of employers +for accidents that happened as a result of the employer's negligence, +a principle found to some degree in all countries. Thus the earlier +payments to workers in cases of accidents were not insurance indemnity +but merely damages collected in court for the fault of the employer. +In Great Britain and the United States, indeed, by judicial +interpretation the law grew more strict as against the claims of the +workers, until about 1880 in Great Britain and 1910 in the United +States. To collect damages it was not enough for the workman to prove +the employer's negligence, for collection was made more difficult by +(1) the doctrine of contributory negligence, (2) the doctrine of the +assumption of risk, and (3) the fellow-servant doctrine. + +By the doctrine of contributory negligence, the workman's claim could +be defeated by showing that he had by his carelessness contributed +to the accident even when the employer had been negligent. By the +doctrine of assumption of risk the workman was presumed, in entering +upon employment, to have taken upon himself the risks usually incident +to the employment, including the chance of imperfections in the +machinery, of which he might by some care have known. By the +fellow-servant doctrine the employer was freed from responsibility for +accidents due to the negligence of other employees, "fellow servants," +even when it was impossible for him to know their character and +reputation as in the case of a large factory or of a great railroad. + +§ 6. #Development of compensation for accidents#. In some countries of +continental Europe, notably Germany and France, the law of employers' +liability was altered in favor of the worker early in the nineteenth +century, so as to make compensation more usual and adequate. Since +1885, especially, this liability has been much further extended in +many countries and in various directions, and yet the laws of accident +compensation still retain many features of the old liability laws and +remain in their legal character somewhat apart from the other branches +of social insurance. Even in the newer type of "compensation" laws the +indemnity paid by employers on account of accident is looked upon as +commuted damages, but the old employers' defenses, just named, are +abolished or made more difficult to plead. The new plan has the +advantages of granting compensation by a schedule fixed in the law, +insuring greater certainty, more adequate payments, greater ease of +securing redress, and abolishing the cost of law suits. Still, in most +countries and in most states in America, the worker has the option +of suing under the old law. In some forty countries the principle of +compensation by a prearranged schedule of rates has to some degree +replaced that of litigation, and determination by a jury of the +damages, in each separate case. The insurance spoken of in relation to +accidents is technically that which the employers may or must take to +protect themselves against loss, not that which the workman has. + +The situation as to compensation in a few leading countries is as + follows, the dates given being those of important legislation. + + ACCIDENT INSURANCE + + _Voluntary_ (as to employers insuring, but compulsory compensation). + + Great Britain, 1897, 1906, 1907. + + France, 1898, 1907, (compulsory for seamen, 1898, 1905). + + Denmark, 1898, 1908. + + Belgium, 1903, (voluntary except for miners). + + + _Compulsory insurance of their risks, by employers_. + + Belgium, for miners, 1868. + + Germany, 1884, (in employers' associations), 1887, 1900, + 1911 (voluntary for some classes). + + Austria, 1887 (as in Germany), 1894 (voluntary for some + classes). + + Norway, 1894 (in a state central insurance office), 1896. + + Italy, 1898, 1904. + + Holland, 1901 (in the Royal Bank or in private companies). + + Sweden, 1901 (as in Norway). + +§ 7. #The compensation plan in America#. Under the practical operation +of the law of employers' liability in force in any American state +until 1911, a very small proportion of the workers injured while +at work were legally entitled to any indemnity, and a still smaller +proportion could succeed in recovering any substantial amount. +Employers, and the accident companies with which employers insured, +either compromised the claims for small amounts or fought bitterly +in the courts the claims of those who refused to compromise. When the +courts awarded damages, large or small, a large part of the proceeds +went for legal expenses. But a small proportion of the total costs to +employers came as benefits to the victims of accidents. It appeared +in an extensive investigation of the business of the large industrial +insurance companies that but 28 per cent of the premiums paid by +employers were paid to workmen as indemnity. + +Between 1911 and 1916 the laws have been changed to some extent in +their application to selected occupations in at least 34 states and +territories of the United States, and covering nearly all but some of +the distinctly agricultural states. This remarkable development has +been largely actuated and guided by a comparatively small group +of socially minded nonworking class citizens rather than by either +employees or organized workers. It is an encouraging example of +what can be done by skilful methods, when conditions are ripe, in +furthering righteous social legislation without the use of money or of +corrupting influences. + +§ 8. #Standards for a compensation law#. The standards which, in +detail, in one jurisdiction or another, have already been attained, +and which are the provisional ideals now sought by reformers, may +be briefly stated as follows.[2] All employments should be included, +altho, as yet, there are various exceptions, such as farm labor +and domestic service, employers with but few employees (the +number excepted being one to five), and nonhazardous employments. +Compensation should be granted for all injuries, suffered in the +course of employment, that cause disability beyond a definite waiting +period of three to seven days. Compensation should include medical +attendance for a limited period, and two-thirds of the estimated +loss of wages for disability, either total or partial, during its +continuance; and, in case of death, funeral expenses, and from one to +two-thirds of the estimated wages, to the widow (or dependent widower) +and children, or to other dependent relatives. To secure the full +benefit of the plan it must be made the exclusive remedy, replacing +entirely the old remedy of suits for negligence. The employer should +be required to insure his risk, and general sentiment is moving +rapidly toward the plan of a state insurance bureau as the exclusive +agency.[3] For the administration of the system an accident and +insurance board should be created in each jurisdiction. Experience +shows the importance of careful attention to numerous other details, +and many amendments will be made as the needs become manifest in +practice. + +§ 9. #Historical roots of sick-insurance.# Sick-insurance had its +origin partly in trade unions and in fraternal societies voluntarily +organized by workers, and partly in the system of public poor +relief. The voluntary societies were first recognized, regulated, and +encouraged by law (in some cases being given state subsidies), and +later, in some cases, being made compulsory for some classes of +members (i.e., such as miners and seamen). On these institutions have +been built the later state systems of social sick-insurance. This +movement had made large headway by the end of the third quarter of the +nineteenth century in various European countries. The two systems that +are the most typical and influential examples are those of the German +Empire and of Great Britain, the former local and the latter national +in organization. The British plan of national health insurance +promises to be on the whole of the greatest influence upon American +opinion and policy. However, the best informed American students +favor in some features the more decentralized German rather than the +centralized British system. While it is impossible to describe the +various systems in detail, the situation in the leading industrial +countries of Europe may be indicated as follows. + + SICK-INSURANCE + + _Voluntary_. + + France, 1850, 1898 (voluntary except for miners). + Belgium, 1851, 1894. + Italy, 1886. + Sweden, 1891. + Denmark, 1892. + Holland (authorized private societies and poor relief). + + + _Compulsory_. + + Germany, 1883, 1911 (voluntary for others with earnings + of $500). + + Austria, 1888 (voluntary for some classes). + + France, for miners, 1894. + + Norway, 1909. + + Great Britain, national system 1911 (was voluntary 1875-1911). + +§ 10. #Need of sick-insurance in America#. Contrary to the usual +opinion in America, the sick-insurance in Germany is, both in amount +of contributions collected and in importance to the welfare of the +workers and their families, of more importance than is either accident +compensation or the system of invalidity pensions. Yet, thus far, our +interest and efforts in America have been directed almost entirely +toward the reform of accident compensation and almost everything +remains to be done in the matter of social insurance against sickness. +It is true that in recent years there has been a rapid development, +in some of the larger cities, of medical insurance clubs conducted by +private companies, with dues of ten cents weekly. They give medical +care in ordinary cases, but require extra payments for surgical +treatment and for medical supplies. They as yet touch only the +outer fringe of the problem, but they testify to the need and to the +increasing desire of the wage-workers for insurance of this kind. It +is believed that at least 4 per cent of the income of wage-workers +now is expended for the care of sickness and for burial insurance. The +losses of wages meantime remain unequalized by insurance indemnities. +A large proportion of the cases of temporary destitution in ordinarily +self-supporting families is due to sickness. The German experience +shows that 4 per cent of wages, collected in part from employers and +in part from wage-workers, is sufficient to give a far better medical +service than can be had through private effort, to give some indemnity +for loss of wages, and to carry on a very useful hygienic work for the +families and for the public health. + +§ 11. #Old-age and invalidity pensions#. Insurance to provide pensions +for old-age and permanent (partial or total) disability is in nature +but an extension of the insurance against accident and sickness. In +a relatively small number of cases accidents result in permanent +disability and it is both illogical and inhumane to limit, +arbitrarily, the compensation in such cases to a certain period, +as two or three years, as is done in many compensation laws. The +disability due to advancing years is in nature a chronic illness, +inevitable, sooner or later, to all who survive. The movement to +provide some indemnity in such cases has been rapid in European +countries, doubtless because the problem was a very pressing one where +the average earnings are low. In Germany and Austria this development +has been more in connection with other forms of insurance; in Denmark, +Great Britain, and France it has had more the aspect of an extension +of poor relief. In the United States little has been done to provide +for these great needs. Massachusetts in 1907 authorized savings +banks to sell insurance and old-age pensions to those who applied. An +increasing number of corporations, especially railroads, are adopting +a pension system for men growing old in their service, but nothing has +been done of a general public nature toward compulsory and universal +protection against these misfortunes. + +The following table shows the situation in some of the leading +countries: + + OLD AGE AND INVALIDITY PENSIONS + + _Voluntary_. + + Belgium, 1850, 1903 (voluntary except for miners). + + Italy, 1898, 1907 (all wage earners). + + + _Compulsory_. + + Belgium, for miners, 1868. + + Germany, 1889, 1899, 1911. + + Austria, 1889 (miners only); 1906 (office employees). + + Denmark, 1891, 1908 (noncontributory). + + France, for seamen 1850, 1881; for miners, 1894, 1905, + 1907 (noncontributory, all indigent citizens); 1910 (contributory, + all workmen and employees; was voluntary + by laws 1850, 1886). + + Great Britain, 1908 (noncontributory, old age pensions, + granted by the government). + + Sweden, 1913 (universal, contributory). + +§ 12. #Unemployment insurance#. The most difficult of all the problems +of insurance is that of unemployment. There the amount of the risk +in any case is so largely dependent on the personal qualities of the +worker. There are obvious objections to making the competent, steady, +sober members of any trade bear the burden of the infirmities of their +fellows. But, on the other hand, as we have seen,[4] a large part of +the problem of unemployment is chargeable to social maladjustments +rather than to individual faults. + +At present development in this field is along two lines, that +of subsidized trade-union relief (the Ghent system), and that of +compulsory state insurance in certain industries. The former has been +adopted by many cities and by some countries in western Europe, the +public paying a certain proportion (from one sixth to one third) of +the amounts of the benefits paid by the unions. Great Britain is +the only country as yet to adopt a compulsory state system. It began +operation in 1912, and applied to 2,500,000 persons, or one sixth of +all the wage-earners. The contributions are made 3/8 by employers, 3/8 +by wage-earners, and 2/8 by the state. There are several original and +interesting features of the act, such as rewarding, by the refunding +of dues, those employers that provide regular employment and older +workmen that have received benefits amounting to less than their +contributions. Its administration in close connection with the labor +exchanges will give valuable experience in this field. The working +out of the many minor problems of classification, assessment, and +administration, of unemployment insurance, will require many more +years of experimentation. + +§ 13. #Need of ideals in social insurance#. The world has had nearly +forty years of experimentation of a remarkably varied kind, in the +field of social insurance, since the German system was inaugurated in +the eighties of the nineteenth century. America stands almost at the +beginning of a development along those lines that is certain to be of +enormous extent and importance. It would be folly for us to repeat +the costly errors of other countries by failing to recognize certain +principles which have been clearly established by experience. If these +could be grasped and firmly kept in mind our progress in this field +in America would be faster, more certain, less costly, and farther +reaching than it promises otherwise to be. We can here attempt no more +than merely to outline these principles that must be embodied in an +ideal system of social insurance in America. + +§ 14. #Insurance rather than penalty#. The principle of social +insurance rather than that of legal penalty should be universally +recognized. At present, in all countries where the several kinds of +insurance are found side by side, accidents are indemnified on plans +that are still rooted in the notion of employers' liability for +negligence; whereas, necessarily, the indemnity in case of sickness +and of old age has no such explanation. The unfortunate result of +this difference of view is that whereas all cases of sickness and +invalidity entitle to benefits, only those accidents suffered "in +the course of employment" are indemnified, and the worker is left +unprotected in a large share of the accidents to which he is liable. +The worker's need and the social need are thus not adequately met. We +have started along the same line of development in America, and it +is to be feared that only through a long series of legal fictions and +contradictory judicial decisions shall we be able to work out toward +consistency in this matter. Another unfortunate result of this +difference is that accident compensation, being made peculiarly the +task of the employers, does not develop the spirit of responsibility +on the part of the workers and of coöperation between them +and employers that other forms of insurance call forth, where +representatives of both parties sit together in the administration of +the system. + +§ 15. #The compulsory principle#. Insurance must be general in its +application to all the persons within broad wage-earning classes, +and in order to be general it must necessarily be compulsory, +not voluntary, in its application. To leave any form of insurance +optional, or elective, with either employers or wage-workers, is to +fail of the main purpose in a large proportion of the individual cases +where it is most needed, and to increase the expense to those that are +included. Within a compulsory system, however, there should be given +wide opportunity for the voluntary principle by admitting to the +system others that are not compelled to insure, and to enable any +insured person to increase his paid-up, nonforfeitable insurance at +any time by extra payments made at times of unusually high wages, from +legacies, or from any other exceptional income. + +§ 16. #State insurance and a unified system#. The state, through +the public insurance office, must ultimately be the sole agency for +insurance. Only in this way can the maximum of simplicity and economy +be attained. Of course, this calls for a better appreciation of expert +training, and a broader sentiment in favor of the merit system in the +public service than we yet have in America. + +There should be a unification of various kinds of insurance in one +general plan and under one general administration for the whole state. +This should be done with full regard to the actuarial differences in +costs as among various kinds of insurance, various trades, various +establishments, and, to some extent, even the various individuals, so +as to ascertain the costs and to distribute them equitably. + +Only in this way can provision be made for entire mobility of labor, +so that men may not be bound, as a condition for obtaining benefits, +to continue in the service of any one employer. To this end there +should be interstate comity and coöperation, so that the insured could +at any time transfer his actuarial equity from one state to another. + +§ 17. #The contributory principle#. The contributory principle should +be adopted, and both employers and wage-earners contribute to the cost +in equal amounts. But further, the general public interests may +be recognized through the payments in aid of the funds (subsidies, +subventions). Both employers and employees usually seek to escape +the burden, by getting the state to bear the whole expense[5] or by +getting the other party to pay all or the larger part. But it is much +to be desired that in large part the finances of a system of social +insurance should be disassociated from the ordinary budgetary system +of taxation and public expenditures. The fundamental reason why the +premiums should be divided between employers and employees is that +this is most favorable to the equal participation and coöperative +efforts toward reducing the risk, and developing right industrial +and political relations. Everywhere it is the practice to provide for +representation nearly in proportion to contributions. + +It is usually assumed by employers, by wage-workers, and by others in +the discussion of the subject, that the burden remains and is borne by +those who directly pay the premiums, and just in proportion to their +payments. This is an almost utterly mistaken view. There is, on the +contrary, every reason to believe that the general principles of +shifting and incidence of taxation apply fully here.[6] It cannot be +doubted that, if wages are not arbitrarily fixed, if they result, as +we must believe, from an adjustment and equilibrium of the various +classes of labor in a general economic situation, then after a +time the premiums become a part of that general situation. Payments +compulsorily made by employers (by all, without exception) will +ultimately be offset by a lower wage, and if transferred to the +workmen will ultimately be offset by a higher wage. Of course, there +is some delay and friction in making the adjustment, but, under any +settled policy, the adjustment once made will be maintained. The +benefit of social insurance to the workingmen is not mainly that their +wages are increased by the direct contributions of employers to the +premiums, tho there are doubtless some cases of "parasitic" industries +and parasitic employers that escape their due share of payments for +risk, now that there is no insurance system. The great benefits are +that total wages and losses are apportioned economically to the points +of maximum utility; that accumulation of capital by and for the wage +workers is made regular, automatic, safe, and in great amounts; and +that financial aid, physical care, and mental relief from, some of the +most tragic anxieties of life, are given effectively and economically +to the masses of the people. + +But, as has been indicated in another connection above, it is far +from being a matter of indifference, psychologically, where the first, +immediate burden of premium payment falls. The persons paying the +premiums, in whole or in part, are far more keenly aware of the cost, +and alive to reducing and removing the evil conditions. Moreover, +their interest is stimulated by the fact that they are the first +to gain by any temporary economies, and the more so because of the +illusory belief sure to persist, that they are the ultimate as well as +the immediate bearers of the costs. + +The development of a complete system of social insurance along these +lines promises to do more than any other single measure of practical +social reform now under consideration to change the conditions and the +outlook of the wage-earning class. + + +[Footnote 1: See above ch. 2, sec. 14; ch. 10, sec. 7; ch. 20, sec. 1; +ch. 22, secs. 11-18.] + +[Footnote 2: The American Association for Labor Legislation has issued +a pamphlet describing these features more in detail.] + +[Footnote 3: Thirteen states had, in 1916, state insurance funds, +and, in five states (Oregon, Nevada, Washington, West Virginia, and +Wyoming), they are the only insurance agencies allowed.] + +[Footnote 4: Ch. 22, secs. 14-18.] + +[Footnote 5: See examples in the lists of laws above cited, sec. 11.] + +[Footnote 6: See above, ch. 16, sec. 14.] + + + + +CHAPTER 24 + +POPULATION AND IMMIGRATION + + § 1. Nature of the population problem. § 2. Complexity of race problems. + § 3. Economic aspects of the negro problem. § 4. Favorable economic + aspects of early immigration. § 5. Employers' gains from immigration. + § 6. Pressure of immigration upon native wage-workers. § 7. + Abnormal labor conditions resulting from immigration. § 8. Popular + theory of immigrant competition. § 9. Divergent views of effects on + population. § 10. The displacement theory; its fundamental assumption. + § 11. Magnitude of the inflow of immigrants. § 12. Earlier and recent + effects of immigration upon wages. § 13. _Laissez-faire_ policy of + immigration. § 14. Social-protective policy of immigration. § 15. + Population and militarism. § 16. Problem of maximum military power. + + +§ 1. #Nature of the population problem.# No one of the problems of +labor thus far discussed is of so great importance in relation to +popular welfare as is "the problem of population." By this is meant +the problem of determining and maintaining the best relation between +the population and the area and resources of the land. What is to be +deemed "best" in this case depends, of course, on the various human +sympathies and points of view of those pronouncing judgment. Very +generally, until the nineteenth century, the only view that found +expression was that of a small ruling class which favored all increase +in population as magnifying the political power of the rulers and as +increasing the wealth of the landed aristocracy. This view still is +unconsciously taken by the members of a small but influential class, +and is echoed without independent thought by many other persons. +But more and more, in this and other labor problems, another more +democratic standard of judgment has come to be taken, that of the +abiding welfare of the masses of the people. This is the point of view +that must be taken by the political economist in a free republic. + +The problem of population presents two main aspects: one as to +composition, and the other as to numbers of the people. Changes in +either of these respects concern the welfare of the masses. Changes in +the kinds of people, or in their relative numbers, may greatly affect +the welfare of the people, in some cases touching special large +classes, and in others affecting the whole mass of the people. + +§ 2. #Complexity of race problems.# The questions of race composition +that we shall here consider are those of the negro and of the +immigrant.[1] Both of these questions are complex and go beyond +the limits of mere economic considerations, touching the most vital +political and social interests of the nation. Indeed they involve the +very soul and existence of peoples, for who can doubt that ultimately +racial survival and success are mainly to be determined by physical +and spiritual capacity? + +The negro in America is the gravest of our population problems. In +large portions of our land it overshadows every other public question. +Yet the negro is here because men of the seventeenth century ignored +the complexity of the labor problem and thought only of its economic +aspect. The landowners wished cheaper labor and, reckless of other +consequences, they imported slaves from Africa to get it. They gained +for themselves and a few generations of their descendants a measure +of comparative ease, but at a frightful cost to our national life--a +cost of which the Civil War now seems to have been merely a first +installment on account rather than a final payment. + +§ 3. #Economic aspects of the negro problem.# The negro as a wage +earner is found very little outside of the least skilled branches of +a limited range of occupations. Of these the principal ones, as is a +matter of common knowledge, are farm work, domestic service (including +janitor service in stores and factories and work in hotels), and crude +manual outdoor labor. Repeated attempts to operate factories with +a labor force of negroes have proved unsuccessful. In some of the +better-paying occupations in which large numbers of negroes were found +in the North soon after the Civil War, such as barbering, waiting +on table in the best hotels, and skilled manual work, they have been +largely displaced by European immigrants. Negroes are a disturbing and +unwelcome influence in labor organizations, and even when nominally +eligible to membership are in fact rarely accepted. They very +frequently are employed as strike-breakers and this fosters race +antagonism both immediately and permanently. + +The negro problem is, from our present outlook, insoluble. The most +laudable of present efforts, that for industrial training, represented +by Hampton and Tuskegee Institutes, and the work of Booker T. +Washington, leaves the dire fact of two races side by side and +yet unassimilated socially, politically, and, in large measure, +economically. Two other possibilities, race admixture and caste, +are both so repellent to white American thought, that they cannot be +looked upon as solutions. Segregation in a separate state, or separate +states, is a thorogoing proposal, but is practically impossible. +Finally there is the conceivable, but improbable, event of the +decrease and extinction of the negroes in America, Their relative +number has declined since 1800,[2] but their absolute number still +continues to increase. It seems probable that if European immigration +were to be stopped that a very large migration of negroes from the +South to the North and the West would occur to take places hitherto +filled by unskilled immigrant workers. In the year 1915, following the +check to immigration as a result of the European war, a very marked +movement of this kind set in. If this occurred on a much larger scale +it might result in greatly reducing the negro population in some +portions of the South, and as the "natural rate of increase" of the +negroes in the North is a negative quantity, it might cause the total +negro population of the country to begin absolutely decreasing. + +§ 4. #Favorable economic aspects of earlier immigration.# Regarding +the immigration problem we are not confined to futile expressions of +regret as in the last case. For by the "immigration problem" is +meant primarily and mainly the coming of immigrants, and we can by +legislation limit or stop their coming, if we will. The question at +issue is whether their coming really is an evil or, on the whole, a +blessing to the country. + +The historic American attitude toward immigration has been highly +favorable to it. The early settlers on these coasts were led by +various motives, some political, some religious, but far the largest +part economic, the motive of bettering their worldly condition. +Land was plentiful and all men of any capacity could easily become +landowners. An inflow of laborers was favorable to the interests +of all the influential elements of the population, especially to +landowners and active business men. Increase of numbers, favoring +division of labor and the economies of production in manufacturing, +and reducing the dangers from Indians and from foreign enemies, seemed +an unmixed blessing. Many of the newcomers soon became landowners and +employers, and in turn favored a continuance of the movement. Thus was +hastened the peopling of the wilderness. The interest of these classes +harmonized to a certain point with the public interest; but likewise +it was in some respects in conflict with the abiding welfare of the +whole nation. It led to the fateful introduction of slavery from +Africa, and it encouraged much defective immigration from Europe, the +heritage of which survives in many defective and vicious strains of +humanity, some of them notorious, such as the Jukes, the Kallikak +family, and the Tribe of Ishmael. + +§ 5. #Employers' gains from immigration.#. The immigration from Europe +has furnished an ever-changing group of workers, moderating the +rate of wages which employers otherwise would have had to pay. The +continual influx of cheap labor aided in imparting values to all +industrial opportunities. A large part of these gains have been in +trade, in manufacturers, and in real estate as the cities have taken +and retained an ever-growing share of the immigrants. Successive waves +of immigration, composed of different races, have ever been ready to +fill the ranks of the unskilled workers at wages somewhat lower than +the current American rate. + +The lower enterprisers' costs that resulted from immigration surely +did not accrue to the advantage of the employers alone. Bearing in +mind the fact that the employing-enterpriser is a middleman,[3] we +may see that the lower costs must, in most cases, be passed on to +the consumers in the form of lower prices of products. And often the +consumer, as the employer of domestic service at lower rates than +otherwise would be possible, gets this advantage directly. This +increases the number of those whose self-interest, at least when +narrowly judged, leads them to favor the policy of unrestricted +immigration, Tho perhaps less general than it once was, this sentiment +in favor of immigration is still potent. The continuous inflow +of immigrants has in many industries come to be looked upon as an +indispensable part of the labor supply. Conditions of trade, methods +of manufacturing, prices, profits, and the capital value of the +enterprises have become adjusted to the fact. Hence results one of +those illusions cherished by men whenever they identify their own +profits with the public welfare. Without immigration, it is said, "the +supply of labor would not be equal to the demand." It would not at the +wages prevailing. But supply and demand have reference to a certain +price. At a higher wage the amount of labor offered and the amount +demanded would come to an equality. This would temporarily curtail +profits, and other prices would, after readjustment, be in a different +ratio to wages. + +§ 6. #Pressure of immigration upon native wage-workers.# There +must always have been cases where the labor incomes of workers were +somewhat depressed by the incoming of immigrants. Indeed, that must to +some extent always be so when the natives continue to work alongside +of the immigrant at just the same job. But before the Civil War living +conditions were simple, wages comparatively high and (more important) +pretty steadily rising, and the wage-earning class not yet a large +share of the population. Moreover, this conflict of interest was +minimized and often quite avoided by the native changing to another +occupation. In the old days there was always the outlet of free +land on the frontier, now closed. Always there has been a better +opportunity for natives to move into higher positions of foremanship +or as employers of immigrant labor. + +As the wage-earners have become relatively more numerous, many of +them have felt more keenly the pressure of competition from immigrant +labor. Moreover, the immigration since 1890 has been increasingly +from southern and southeastern Europe, from countries with much lower +standards of living, and has been of enormous proportions. Here are +some significant figures as to immigration since 1820. + + -------------------------------------------------------------- + | | | Immigration, + | Immigration | Increase of | per cent of + Decade | in the period | population | population- + | | | increase + -----------------|---------------|-------------|-------------- + 1820-30 | 124,000 | 3,300,000 | 3.8 + 1830-40 | 528,000 | 4,200,000 | 12.3 + 1840-50 | 1,604,000 | 6,100,000 | 26.3 + 1850-60 | 2,648,000 | 8,200,000 | 32.3 + 1860-70 | 2,369,000 | 8,400,000 | 28.2 + 1870-80 | 2,812,000 | 10,400,000 | 27.0 + 1880-90 | 5,246,000 | 12,700,000 | 41.3 + 1890-1900 | 3,687,000 | 13,100,000 | 28.1 + 1900-1910 | 8,795,000 | 16,000,000 | 55.0 + Total, 90 yrs. | 27,800,000 | 82,400,000 | 33.7 + +§ 7. #Abnormal labor conditions resulting from immigration.# The +labor supply coming from countries of denser population and with low +standards of living creates, in some occupations, an abnormally low +level of wages and prices. Children cannot be born in American homes +and raised on the American standard of living cheaply enough to +maintain at such low wages a continuous supply of laborers. Many +industries and branches of industry in America are thus parasitical +A condition essentially pathological has come to be looked upon as +normal. The commercial ideal imposes itself upon the minds of men in +other circles. + +Statistics show that the prevailing wages for unskilled manual workers +in America have risen much less since the Civil War than have other +wages.[4] Wages in the great lower stratum of the unskilled and +slightly skilled workers are much lower in America relative to those +of more skilled and professional workers than they are in Europe. It +can hardly be doubted that the most important, tho not the sole, cause +of this situation has been the unceasing inflow of immigrants going +into these low-paid occupations. The "general economic situation" in +America, but for immigration, would compel higher wages to be paid to +the masses of the workers. If immigration were suddenly stopped in a +period of normal or of increasing business, wages in these occupations +would at once rise, and that, without the aid of organization, of +strikes, or of arbitration. This would affect most those occupations +which now present the most serious social problems, in mines, +factories, and city sweatshops. In some small measure the war in the +Balkan States, by recalling many men for service, had this influence +in 1912; and the great war beginning in 1914, by stopping a large +part of the usual immigration, gave a striking demonstration of +this principle. In employing circles the rise of wages was sometimes +referred to with an air of grievance as due to the "monopoly of +labor," as if the economic situation here, enabling the wage-earners +(millions of them immigrants), to get a higher competitive wage when +immigration temporarily was diminished, constituted a monopoly. + +§ 8. #Popular theory of immigrant competition.# The depressing effect +of the ever-present and ever-renewing supply of immigrant labor upon +wages appears most clearly at the time of wage contests, and often +seems to be the most important aspect of the question. Laws against +contract labor, passed to prevent this particular evil, have put +no check to the great stream of those guided by friends to a "job." +Organized labor thinks most of these immediate effects. Commonly +labor's protest is expressed in terms of the untenable "lump of labor" +theory of wages. "Every foreign workman who comes to America" is +believed to take "the place of some American workman." The error in +this too rigid conception of the influence exerted upon wages by new +supplies of labor is evident in the light of the principles of wages. +Yet it may be true that, both immediately and ultimately, the foreign +workman depresses the incomes of those already here with whom he +directly competes. On the other hand, those in occupations into +which few immigrants enter may, as consumers of cheaper products, +be immediately the gainers in real wages, by the very change +that depresses the wages in the lower strata.[5] The +manufacturing-employers advocate "protection" which enhances the price +of their products, while usually favoring "free trade" in immigration +to cheapen their costs. What more natural than that laborers should +favor a policy of protection to labor, to keep foreigners from coming +here to be their competitors. + +§ 9. #Divergent views of effects on population.# The foregoing views +of the effects of immigration upon wages, both of those favoring and +those opposing it, are short-time views, relating to immediate rather +than ultimate effects. If the immediate causes are continuously +repeated throughout the lives of successive generations the results +are for those mortal men as ultimate as anything that concerns them. +In this case it would make no difference to the millions of workers, +whose wages are depressed, if it could be shown that wages fifty or +a hundred years from now would be no lower as a result of continued +immigration than they otherwise would be; or to the employer that +wages would then be no higher. But to the social philosopher and to +the statesman, interested in the abiding general welfare, the ultimate +economic effects are of the greatest importance. + +The question is: What will be the far-reaching, long-time effects of +immigration upon the general economic situation, as that determines +the welfare of the mass of the people? We confine ourselves here to +the economic effects, leaving aside as far as possible the racial, +moral, religious, political, and general social aspects of the +subject. + +We are met at the outset by two divergent opinions as to the permanent +results of immigration upon the growth of population. The one is that +all immigrants coming to our shores are net additions, hastening by +so much the growth in density of population; the other opinion, the +displacement theory, is that immigration has the effect of checking +the natural increase of the native stock so much that it does not +materially change the total population, or actually causes it to be +less than it would have been had no immigration occurred. + +§ 10. #The displacement theory; its fundamental assumption.# The +latter opinion which still has many upholders[6] was first advanced by +a distinguished economist, Francis A. Walker, but his first statement +of it referred only to the period between 1830 and 1860. The main +argument in support of this opinion was that in the three decades from +1830 to 1860 during which a large immigration occurred, the decennial +rates of increase of the population were almost the same as in the +three decades from 1800 to 1830.[7] The conclusion drawn from these +figures is that the immigrants were the cause of the decline of the +average birthrate that occurred in the families of native stock. The +validity of this conclusion is absolutely dependent on the assumption +that no other forces were at work to produce this result. Must we +believe that, but for immigration, the native birthrate would not have +declined at all? This is incredible. The birthrate of the native stock +had already begun to decline before 1820 as is shown by many family +records, and by the fall of the decennial rate of increase from 35 and +36 in the decades ending 1800 and 1810, to 33.1 and 33.5 in the next +two decades. This occurred despite the enormous western settlement +then under way on the Louisiana Purchase. The decline of the birthrate +began at that time to appear as a world-wide phenomenon, accompanying +improved transportation (roads, steamboats, steam railways), the rapid +growth of cities, and the general industrial revolution. The general +birthrate has declined of recent years in Australia and New Zealand, +where there has been little immigration, more rapidly than it has in +the United States.[8] + +§ 11. #Magnitude of the inflow of immigrants.#In view of these facts +it seems necessary to modify the displacement theory greatly. To the +extent that the coming of immigrants caused a net addition to the +population, it doubtless hastened the growth of cities and the +development of industrialism, and thus helped to reduce the birthrate +in some classes. But this view admits the effect upon population which +the displacement theory denies. Probably, in a good many cases the +more rapid business advancement of the natives, because of the +coming of the immigrants, led to the decline of birthrate that is a +consequence of economic success.[9] But a large part of this change +would have inevitably occurred even if there had been no immigration +after 1820. Between 1820 and 1910 the population increased 82,400,000, +and the total number of immigrants was 27,800,000, or 33.7 per cent +of the total increase. In an urban environment the birthrate among +immigrants always has been very much higher than that of native +Americans. This fact alone might well be taken as sufficient to offset +whatever depressing effects the coming of the immigrants may have +had upon the native birthrate, leaving the immigration nearly a net +addition to population. It does not seem possible to believe that +if there had been no immigration, our native population, rapidly +advancing in average wealth, wages, and general education, would have +continued with an unchecked birthrate, and would have filled all the +places taken by immigrants. And no believer in the displacement +theory has ever ventured to claim, as the argument requires, that if +immigration were now stopped, the birthrate would again return to the +old standard of 1820, or would cease to decrease somewhat. Especially +of late, since the rate of increase of the native population has +become much less, is the effect of continuing immigration apparent. +In the decade of 1900-1910 the total population increased 16,000,000, +while nearly 9,000,000 immigrants arrived. Of the remaining increase, +3,000,000 consisted of children born of foreign parents. That leaves +three or at the most four million (4,000,000) increase attributable to +the native stock, white and negro combined. + +§ 12. #Earlier and recent effects of immigration upon wages.# Let us +now correlate the principle of decreasing returns and the facts as to +the exploitation of our natural resources[10] with the growth of +our population, on the assumption that immigration has been a net +contribution to our numbers. While the vast frontier was open to +settlement, the growth of population could not fail to be looked +upon as a blessing, even tho somewhat mixed with political evils, +immorality, and pauperism. Beginning in colonial times, the policy of +"the open door" to immigrants came thus to be deemed the traditional, +patriotic American policy. Yet there is grave reason to believe that +the rate of growth in the nineteenth century was wastefully rapid and +that a slower and sounder growth might have been better.[11] However, +this rapid growth was largely extensive, spreading over wider areas, +and was consistent with a pretty steady rise of real wages in America +until about 1895,[12] the level continuing higher than that of Europe +despite the contemporaneous rise of wages there. Much of this general +rise is undoubtedly attributable to the adoption of better tools, +machinery, and industrial processes, the more so as inventions and +new methods have rapidly become free goods.[13] The beneficial +improvements long cooperated with the rapid exploitation of rich +resources to raise real wages, and then undoubtedly continued to +offset for a time the unfavorable effects as the richer resources +began to show signs of exhaustion. Since the end of the last century, +however, the net trend upward seems to be checked, and "the rising +cost of living" (real cost) has come to be a serious actuality for +larger sections of the population.[14] + +Yet so long as wages are enough higher in America to pay the passage +of the low-paid workers of the industrially backward nations, they +will continue to come. The ease and cheapness of migration in these +days of steamships, the encouragement of immigration by the agencies +and advertisements of the steamship lines, and the increasing +readiness of the peasantry to migrate, have become well known through +recent discussions. Unless immigration is limited, it must continue to +depress the wages of American workingmen, through both its immediate +and its ultimate effects. + +§ 13. #Laissez-faire policy of immigration.# There are those who take +a fatalistic, or a _laissez-faire_, view of the subject, and declare +that the problem will solve itself as the level of American wages +comes to be nearly the same as that of the countries of Europe from +which our immigration is coming. True enough, if this can be called a +"solution." There are many who cherish the commercial ideal according +to which cheap labor is absolutely desirable and needful to produce +cheaper products. This ideal has spread to wider circles. Here, for +example, are the words of a man who combines wide knowledge of the +facts of immigration with keen sympathy for the working classes:[15] +"The past industrial development of America points unerringly to +Europe as the source whence our unskilled labor supply is to be drawn +. . . America is in the race for the markets of the world; its call +for workers will not cease." Yet a little further on he must say: "All +wage-earners in America agree that it is not as easy to make a living +to-day as it was twenty years ago, and the dollar does not go so far +now as it did then. The conflict for subsistence on the part of +the wage-earner is growing more stern as we increase in numbers and +industrial life becomes more complicated, and the fact must be faced +that the vast army of workers must live more economically if peace and +well-being are to prevail." + +§ 14. #Social-protective policy of immigration.# A different kind of +solution is offered by those who favor the strict limitation, if not +the complete prohibition, of immigration. + +The foregoing study indicates that the time has come, if it is not far +past, when the traditional policy of fostering immigration is opposed +to the welfare of the masses of the people. This belief can be based +solely on grounds of numbers, the relation of population to resources, +quite apart from a preference for particular races or the familiar +arguments regarding social and political evils and lack of +assimilation, however valid they may be. The limitation of immigration +would immediately improve working-class conditions where they are +worst in America,[16] and would check and probably reverse the +tendency to diminishing returns already manifest in many directions. +This opinion does not necessitate an absolute prohibition of +immigration; it is consistent with the continuance of immigration of a +strictly selected character, and in numbers so small that all European +immigrants now here could be rapidly and completely assimilated, +economically and racially. With a slow national increase of population +and with the continued progress of science and the arts, it should be +possible for real wages to continue indefinitely rising in America. +The selection of immigrants to be admitted should be a part of a +national policy of eugenics,[17] which aims to improve the racial +quality of the nation by checking the multiplication of the strains +defective in respect to mentality, nervous organization, and physical +health, and by encouraging the more capable elements of the population +to contribute in due proportion to the maintenance of a healthy, +moral, and efficient population. In such a view, a eugenic opportunity +is presented in the selection and admission of immigrants that are +distinctly above (not merely equal to) the average of our general +population. + +§ 15. #Population and militarism#. In view of the recrudescence of the +spirit of armed national aggression evident of late, and especially +in the outbreak of the Great War in 1914, the military aspect of the +population question deserves serious consideration. The growth of +savage and barbarian tribes in numbers, so that their customary +standards of living were threatened, frequently has led to the +invasion and conquest of their richer neighbors.[18] To-day nations +on a higher plane of living are probably repeating history. The nation +with an expanding population is tempted to seek an outlet for its +numbers and for its products by entering upon a policy of commercial +expansion, which in turn has to be supported by stronger military and +naval establishments. It is led by primitive impulses that to it +carry their own moral justification, to possess the territory of its +neighbors. The immediate occasion is probably some matter of internal +politics, such as growing discontent and democratic sentiment among +the people. Nations with slowly growing populations, and still +possessed of ample territories to maintain their accustomed standards +of life, naturally favor the _status quo_, and are pacifist or +nonmilitarist. If they arm it is for their own safety. In this view, +militarism is seen to consist not in having drilled soldiers and +stores of munitions, but in the national state of mind that would +use these for aggression, not merely for defense. When, therefore, +a powerful nation has reached a certain stage in the relation of its +population to resources, limitation of population not limitation +of armaments is the real pacifism; and increase of population, not +increased military training or a larger navy, is the real militarism. + +§ 16. #Problem of maximum military power.# It is a grave question, +however, whether a nation with a comparatively sparse population, +high wages, and great wealth can safely limit that population in the +presence of a capable, ambitious, and efficient rival that covets such +opportunities. On the one hand, a population may be so sparse that +it has not soldiers enough to defend its territory against a numerous +enemy; on the other hand, it may be so dense, and consequently average +incomes be so low, that it cannot properly train, arm, and support +its population of military age. The recent developments in the art +of warfare call for great use of the mechanical industries, for +great power to endure taxation, and for great financial resources, +conditions found only where the average of national income is high. +The point of maximum military power must be far short of the maximum +possible population. It would seem that a nation of 100,000,000 +inhabitants favorably situated to resist aggression, well supplied +with the natural materials for munitions, and well equipped to produce +them, might safely limit its numbers so as to ensure a high level of +popular income. This safety would be greatly increased by permanent +alliance with other peoples likewise limiting their numbers and, +therefore, interested in maintaining the peace of the world. In +this way it would be possible for them all to maintain a standard +of popular well-being even higher than is fully consistent with +the maximum military power, even in the presence of prolific and +aggressive rival nations. + + +[Footnote 1: Even more important than these is the relative decrease +of the successful strains of the population, briefly treated in Vol. +I, ch. 33. This is the problem of eugenics, the choice and biologic +breeding of capable men to be the citizens of the nation, and broadly +understood, it includes both the negro and the immigrant problems.] + +[Footnote 2: See Vol. I, p. 430, figure 58, showing the fall in the +decennial rate of increase of negroes compared with whites; and see +comment in accompanying note.] + +[Footnote 3: See above, ch. 20, sec. 11, and references in note.] + +[Footnote 4: See below, sec. 12.] + +[Footnote 5: See Vol. I, p. 221, on non-competing classes.] + +[Footnote 6: The latest and best statement is that of H.P. Fairchild, +"Immigration," pp. 215-225, citing various opinions, and accepting the +view of Walker. But he says (p. 216): "It must be admitted that +this is not a proposition which can be demonstrated in an absolutely +mathematical way, which will leave no further ground for argument."] + +[Footnote 7: See Vol. I, p. 429, for figures of population and of +decennial rates of increase.] + +[Footnote 8: The effect of the growth of cities is discussed in the +"American Journal of Sociology," Vol. 18, p. 342, in an article on +"Walker's Theory of Immigration," by E.A. Goldenweiser.] + +[Footnote 9: See Vol. I, p. 420.] + +[Footnote 10: See Vol. I, chs. 34 and 35.] + +[Footnote 11: E.g., see above ch. 14, sec. 11 on the prodigal land +policy.] + +[Footnote 12: See Vol. I, p. 436 ff.] + +[Footnote 13: See Vol. I, ch. 36, on machinery and wages.] + +[Footnote 14: For analysis of the available statistics bearing on the +subject, with conclusions that real wages are no longer rising, see +H.P. Fairchild, in "American Economic Review" (March, 1916), "The +standard of living-up or down?"] + +[Footnote 15: Peter Roberts, in "The New Immigration," 1912, preface, +p. viii, and p. 47.] + +[Footnote 16: See above, sec. 7; also ch. 21, sec. 9.] + +[Footnote 17: See above, sec. 2, note; also Vol. I, p. 422.] + +[Footnote 18: See Vol. I, p, 412, on war and the pressure of +population.] + + + + +PART VI + + +PROBLEMS OF INDUSTRIAL ORGANIZATION + + + + +CHAPTER 25 + +AGRICULTURAL AND RURAL POPULATION + + § 1. Agriculture and farms in the United States. § 2. Rural and + agricultural. § 3. Lack of a social agricultural policy in America. § 4. + Period of decaying agricultural prosperity. § 5. Sociological effects of + agricultural decay. § 6. Fewer, relatively, occupied in agriculture; use + of machinery. § 7. Transfer of work from farm to factory. § 8. The + rural exodus. § 9. The farmer's income in monetary terms. § 10. + Compensations of the farmer's life. § 11. Ownership and tenancy. + + +§ 1. #Agriculture and farms in the United States#. There were +nearly 12,400,000 persons in the United States gainfully occupied in +agriculture in 1910, this being 32.5 per cent of all in occupations. +These, together with other family members not reported as engaged +in gainful occupations, constitute the agricultural population, and +comprize more than one third of the total population of the country. +"Agriculture" is here used in a broad sense, including floriculture, +animal husbandry (poultry, bee culture, stock raising), regular +fishing and oystering, forestry and lumbering. Agriculture thus +produces not only the food but (excepting minerals, including coal, +stone, natural gas, and oil) the raw or partly finished materials for +all the manufacturing and mechanical industries. + +With the exception of areas devoted to forestry on a large scale and +to fishing, the industry of agriculture is pursued on the 6,400,000 +farms, covering 46 per cent of the total land area of the country. Of +the land in farms, a little over half is classified as improved. The +estimated value of farm property, including buildings, implements, +machinery, and live stock, was, in 1910, about $41,000,000,000, +somewhere near one fourth of the estimated wealth of the country at +that date.[1] + +§ 2. #Rural and agricultural.# The adjectives rural and agricultural +are often used loosely as synonyms. Agricultural refers primarily to +the occupation of cultivating the soil, and is properly contrasted +with other occupations, as mechanical and professional; whereas rural +refers to place of residence outside of incorporated places of +a specified minimum population (of late, 2500), and is properly +contrasted with urban, applied to those living in larger population +groupings. In 1910 the rural population comprised 53.7 per cent of the +total population. It is true that the two groups of the agricultural +and the rural populations are largely composed of the same persons, +but to a considerable extent they are not. Many farm houses, together +with part or all of the farm lands, lie inside urban boundaries, and, +besides, some persons engaged in agriculture reside in urban places. +On the other hand, any one acquainted in the least with a rural +district (in the statistical sense) can at once think of many +persons living there that are not engaged in agriculture; they may +be merchants, warehousemen, railway employees, physicians, +handicraftsmen, teachers, artists, retired business men, and others. +The percentages given in this and in the preceding section indicate +that about two fifths of the rural families are not engaged in +agriculture. + +It is often important to make this distinction, tho it is difficult +to do; for some of the much-discussed rural questions are of a +broad social nature, are matters of rural sociology, relating pretty +generally to the rural population; while other questions of "rural +economics" are more strictly matters of agricultural economics and +relate to the farm as a unit of industry, or to agriculture as an +occupation. + +§ 3. #Lack of a social agricultural policy in America.# It is a common +remark that the farmer lives an independent life. This develops in him +a self-reliant spirit. He readily gives and takes simple neighborly +help in informal ways, but he does not readily turn to government +for aid. While every influential urban group, organized or +unorganized--manufacturers, merchants, wage-earners--has sought and +obtained special protective social legislation, the farmer has, from +choice or necessity, usually had to work out his economic problems +unaided. The exceptions are few and of small importance. For example, +the prodigal land-policy of the state and national governments +encouraging the settlement of the frontiers was not a farmers' +policy. It was originally inspired by the larger political purpose +of extending the bounds of the nation; later it was advocated and +fostered by a land-speculating element, linked with bad politics, in +the frontier states, and not by farmers as such. It in time greatly +injured the farmers of the eastern states. The "Granger legislation," +to regulate railroad rates, was so called by the East in a spirit of +derision because it began in the distinctively agricultural states +of the Northwest; but it had neither the aim, nor the result, of +obtaining especially for farmers any rates that were not open to +every one on the same terms. The tariff rates on American agricultural +products, placed in the acts as a matter of form, have, with minute +exceptions, been ineffective to favor farmers, as the shipments were +all outward and none inward, while heavy and effective rates were +placed on most things that the farmers had to buy.[2] + +In part the explanation of the lack of legislation favoring farmers +is to be found in their small part and influence, as a class, in +political affairs, outside of minor executive offices in township and +county governments. In the state legislatures farmers are few relative +to their numbers in the community, and still fewer in either House in +Washington. Among the real exceptions to the otherwise fair record of +the farming class in this respect is the tax on oleomargarine and the +special favor accorded to farmers' associations in the Clayton Act. It +might be cynically said that the farmer has not been "sharp" enough +to get his share of the "good" things" that the business classes were +passing around in protective legislation. But farmers have, as has +every economic group, interests which may legitimately be the subject +of social legislation; whereas they have limited their attention to +their private affairs at home and have been prone to vote patiently +and proudly the "straight ticket" to elect business men and lawyers to +office. + +§ 4. #Period of decaying agricultural prosperity#. Despite the facts +just stated, every campaign orator admits that there is no other +occupational class of the nation of greater importance to the nation +than the farmers, or more deserving of prosperity. Every other part +of the industrial organization of a nation is interrelated with +its agriculture. Great changes, in respect to growth of population, +immigration, exhaustion of natural resources, mechanical inventions, +scientific discovery, and many things more, have been occurring, +which have altered and, in some communities, have destroyed the very +foundations of agricultural enterprise in America since the close +of the Civil War in 1865. But the farmers have been left to struggle +individually with their individual difficulties, tho the outcome was +of the gravest portent to the whole social economy. Such was the case +in the period of agricultural depression from 1873 to about 1896.[3] +Multitudes of ancestral homesteads were then left behind by the last +farmer-descendant of the old line. No longer able to make a living on +the soil, he took up an urban occupation. + +§ 5. #Sociological effects of agricultural decay#. Such changes caused +a relative decline in the birthrate of the old American stock. The places +of many of these long-settled families remained unfilled as thousands of +abandoned farm houses testified. The places of others were taken by a +tenantry, white or black, lacking the thrift of ownership; the lands of +others passed to new owners of alien races. The populations of many rural +neighborhoods thus became heterogeneous, with results calamitous to the +social life. Once prosperous schools declined, once thronging country +churches were deserted, and much of the old neighborhood democracy +disappeared. When, about the year 1900, prosperity began slowly to return +to the American countrysides in the form of rising prices of farm produce, +it was in large part too late to remedy the evil, except as it may be +done by generations of effort under more favoring conditions. There +are merely suggested here some of the complex sociological effects of +past economic changes in American agriculture. It is certain that in +the future also the economic changes in this field will be related +closely to social and political changes of a fundamental character. + +§ 6. #Fewer, relatively, occupied in agriculture; use of machinery.# +Probably ever since the first census in 1790, the relative number of +agriculturists in this country has been decreasing. Beginning in +1880, the numbers of those occupied in agriculture for gain have +been reported at the census dates in a form that makes them fairly +comparable.[4] + +The explanation of this decrease in the proportion of the population +that is engaged in agriculture is twofold; the first is the real +increase in the productive output per person in agricultural industry. +In larger part this is due to the increasing use of machinery in place +of simple hand tools, and the substitution of horse-, hydraulic-, +windmill-, steam-, and gasoline-power for human labor. This change has +been made readily in the regions of level fields, but of late has been +made possible to a greater extent in hilly country, by rearranging +and combining the old irregular fields into regular fairly level +rectangular fields easily tillable, while turning the rougher lands +and hillsides into wood lots and pastures.[5] One man, thus, driving +three or four or more horses, can do the work formerly done by two +or more men and do it just as well. The farmers' incomes in different +parts of the country vary pretty nearly with the amount of horse-power +used per man. Economies equally great are made in the work done in the +barnyards and barns. In most parts of the country only a beginning +has been made in these ways, and in future the census will continue to +reflect the progress in these directions. + +§ 7. #Transfer of work from farm to factory#. The other part of the +explanation of the decrease in the proportion of the population that +is engaged in agriculture is that many operations are, step by step, +being transferred from the farm to the factory. "Agriculture," we have +observed, is a great complex of industries, in which many different +products are taken from the first simplest extractive stage, and then +put through successive processes to make them more nearly fitted for +their final uses. Not so long ago grain cut in the field was threshed, +winnowed, shelled, made into flour, and baked on the farm, as it still +is in many places. Logs were cut into boards, planed, and made into +houses or furniture by the farmer. The old-time farmer made by hand a +large number of his farm implements--rakes, ax handles, pumps, carts, +and even wagons. Until a generation ago all butter, cheese, and other +dairy products were made on the farm. Now these things are being done +in steadily increasing proportion by workers classified as in the +manufacturing industries, and agriculture contains fewer separate +industries and processes. Of course there is economy of labor in +nearly all of these changes, but the number occupied in agriculture is +greatly reduced. Many farmers and more farmers' sons are moving from +agriculture into occupations of manufacturing, trade, transportation, +and the professions, and are becoming more narrow specialists. + +§ 8. #The rural exodus#. The percentage of persons in the rural +population changes at about the same rate as does that of the persons +occupied in agriculture. In 1890 it was 64, in 1900 it was 60, and in +1910 it was 54 per cent. The percentage of the population in cities of +8000 or more has steadily increased. This phenomenon has been marked +in all of the countries that have been developing along industrial +lines. It has been variously described as "the rural exodus," "the +abandonment-of-the-farm-movement," and "the city-ward drift."[6] It +is only in part explained by the change from agriculture to other +occupations; perhaps even in greater part it is due to the decline +and disappearance in many rural places of small manufacturing and +mercantile businesses before the competition of large business in the +cities. In much of the long-settled area of the country every hillside +stream once turned a little mill to saw timber, grind corn, forge +iron, or weave cloth. Most of these mills are now deserted. In +countless villages the old blacksmith shop, once a center of business, +is abandoned. Here and there a patriarchal smith still serves a +dwindling group of customers and speaks with mingled pride and pathos +of his sons, now in the automobile business in the city. + +The movement away from the countryside has been but little +counteracted as yet, but may be more in future, by the growing +enjoyment of rural life, by the back-to-the-land movement, by +interurban railways, by improved roads, and by automobiles. + +§ 9. #The farmer's income in monetary terms#. Census figures and some +additional investigations have led to the estimate of the average +real income of the farmers of the United States in 1909, expressed in +monetary terms, as $724. The estimated value of all products, whether +sold or used by the farmer, plus the value of his house rent and fuel +consumed by family, was $1236, from which expenditures of $512 are +deducted for outside labor, and for materials used for operating and +maintaining the farm. Of the $724 the sum of $402 is estimated to +be the labor-income of the family and $322 is estimated to be the +wealth-income (at 5 per cent of the capitalization of the farm). This +was in a period of rising values in farm lands, averaging about $323 +per farm annually, and this to most farmers was equivalent to so much +monetary savings. The main items of net income, therefore, are as +follows: + + Rent $125 + Food from the farm 261 + Fuel 35 + Cash 303 + + Total $724 + Increase in value of farm 323 + + Total estimated monetary income $1047 + +Of the total, $422 is a labor-income, and $645 is a wealth income.[7] + +It would be difficult, even if the available statistics were much more +exact than they are, to compare exactly the farmer's income with those +of urban classes. Averages of such large numbers and over such a wide +area have a limited significance in the specific case; and living +conditions and the purchasing power of money are so different in +country and city and in different parts of the country.[8] + +§ 10. #Compensations of the farmer's life#. In bare monetary terms +the average farmer's family gets a labor-income less than that of the +ordinary wage-earner in a factory, and it is only by the aid of the +wealth-income that it appears to fare as well or better. Even the few +largest incomes made in farming are small in comparison with many of +those made in commerce, transportation, and manufacturing. The great +mass of farmers of the nation are hard-laboring men, poor in the eyes +of the city dwellers.[9] + +But this much is certain: the farmer's income in monetary terms has +on the average much larger power to purchase the main goods of life +(material and psychic goods) than it would have in town. Equally good +house usance would cost more in nearly all towns, and much more in +larger cities. Retail prices of the same food and fuel even in small +towns would be much greater. The necessary outlay for clothes to +maintain the class standard is much less for farmers than for city +dwellers. Moreover, in the use of horses and carriages, and now of +automobiles, and in the free control of his own time--in many elements +of psychic income--the farmer is on a parity with men in other +occupations of double or quadruple his income expressed in monetary +terms. + +Tho the farmer's working day in the busiest season of summer is very +long compared with that of factory or office workers, his working +day at other seasons is usually much shorter than the average urban +worker's day. The farmer's life is nearly always free from the +excessive pressure, haste, and competition of city life, and the +value, to many a man, of the more natural and wholesome conditions of +outdoor life and outdoor work are hardly to be measured in terms of +even the most untainted dollars. + +§ 11. #Ownership and tenancy.# Since 1880, when the first figures +on farm tenures were collected, the proportion of farms operated by +owners has steadily decreased. + + Percentage of farms operated by + Owners Cash tenants Share tenants + + 1880 ............ 74.5 8.0 17.5 + 1890 ............ 71.6 10.0 18.4 + 1900 ............ 64.7 13.1 22.2 + 1910 ............ 63.0 13.0 24.0 + +These statistics arouse fears that the class of independent farmers +operating their own farms is gradually giving way to a tenantry +in America. But in some respects the figures are misleading unless +carefully interpreted. The increasing proportion of tenants is due not +so much to owners falling into the class of tenants as to the +hired laborers rising into the class of tenants. The number of male +operating owners compared with all male workers (not merely with all +farms) has remained almost constant at about 42 per cent; while the +per cent of hired workers has decreased from 43.3 (in 1880) to 41.4 +(in 1890) and to 34.6 (in 1900). Most hired men on farms are farmers' +sons; the city boy does not adapt himself readily to farm work. Most +hired men of native stock become tenants, and finally owners. Only 11 +per cent of the hired workers in agriculture (in 1900) were over 35 +years of age. + +The landlord of a farm let to a tenant, especially to a share tenant, +is still to a large extent the general manager, controlling in a +large measure through the renting contract and by his oversight, the +operations of the farm. Older men find that letting the farm to +a share tenant is easier for them and gives better results than +continuing to operate the farm with hired labor. And it evidently +gives a man a somewhat higher status to become a tenant than to +continue to be a hired laborer. In the South this movement has taken +on large proportions in the breaking up of large plantations once +operated by the owner with hired labor, and now let in smaller lots +to operating tenants. Yet such a change appears, statistically, as a +decrease in the proportion of farms operated by owners. Despite these +somewhat reassuring facts, the problem of maintaining and increasing +operating ownership of farms in America is one deserving of the most +earnest thought and efforts. The best form of farm tenure is +not necessarily that giving the best immediate economic results. +Politically in a democratic nation, and sociologically in its effects +upon the size of families and the raising of healthy children, the +preservation of an independent American yeomanry is of fundamental +importance to the nation. + +The problem is as difficult as it is important, and becomes more +difficult with the rise in the acreage value of lands and with the +economical size of farms, both calling for a larger investment to +become an owner. Changes in the system of taxation should be made with +reference to this object; the system of agricultural credit should be +developed and administered to assist; special efforts in agricultural +education should be made and active administrative efforts should be +directed, toward this important end. + + +[Footnote 1: See above, ch. 1, secs. 7 and 8.] + +[Footnote 2: See ch. 14, sec. 5.] + +[Footnote 3: See Vol. I, p. 437.] + +[Footnote 4: It must be observed in studying these figures, that +farmers' wives and children, working at home, are not reported as +gainfully occupied. But a widow or a spinster owner, if herself acting +as the enterpriser, is reported as "occupied" in agriculture. The +increasing number of such cases in the past generation in part +explains the growing number and percentage of females in agriculture. + + Number occupied in agriculture Per cent of all persons occupied + Males Females Both sexes Males Females Both sexes + + 1880... 7,068,658 594,385 7,663,043 47.9 22.5 44.1 + 1890... 7,787,539 678,824 8,466,363 41.4 17.3 37.2 + 1900... 9,272,315 977,336 10,249,651 39.0 18.4 35.3 + 1910...10,582,039 1,806,584 12,388,623 35.2 22.4 32.5 +] + +[Footnote 5: See further, ch. 26, secs. 1 and 2 on the size of farms +as an economic factor.] + +[Footnote 6: See above, sec. 2, on the distinction between rural and +agricultural. In part the change here noted results from increases in +the population of towns and incorporated places from a little below +2500 to something about 2500. For example, if there were 2499 persons +in a town in 1900 they would all be classified as rural; if in 1910 +there were 2500 or more they would all be classified as urban.] + +[Footnote 7: Sec Vol. I, p. 225, and note 11.] + +[Footnote 8: See Vol. I, p. 206.] + +[Footnote 9: See Vol. I, p. 227, note, for figures on owners and farm +laborers.] + + + + +CHAPTER 26 + +PROBLEMS OF AGRICULTURAL ECONOMICS + + § 1. Size of farms, and total farming area. § 2. Influences acting + upon the size of farms. § 3. Self-sufficing versus commercial farming. + § 4. Farming viewed as a capitalistic enterprise. § 5. Diversified versus + specialized farming. § 6. Conditions favoring diversified farming. § 7. + Intensive farming in Europe and America. § 8. Prospect of more intensive + cultivation of land in America. § 9. The new agriculture. § 10. + Difficulty of coöperation among farmers. § 11. Rapid growth of farmers' + selling coöperation. § 12. Some economic features of farmers' selling + coöperation. § 13. Coöperation in buying. § 14. Need of agricultural + credit. § 15. Recent provisions for farm loans. + + +§ 1. #Size of farms, and total farming area#. The average area of +farms has varied from a maximum of 203 acres, in 1850 (the first +figures), to a minimum of 134 acres in 1880, being 138 acres in 1910. +A better index, perhaps, is the average improved area per farm, which +has been more nearly stationary, varying from a maximum of 80 acres +in 1860 to a minimum of 71 acres in 1870 and 1880, being 75 acres in +1910. Here again the statistics require interpretation, for in the +spread of the frontier the addition of large farms in the arid and +semi-arid regions may raise the average, or the breaking up of large +plantations in the South may decrease the average, without this +indicating any essential change in the technical conditions of farming +in the country generally. Since about 1900 the total area in farms has +increased very slowly. Between 1900 and 1910 the increase was only 4.8 +per cent; whereas a larger increase occurred in the area of improved +land, 15.4 per cent, and the unimproved area in farms decreased +5.6. Future changes of farm areas may be expected to be of this same +nature, mainly in the improvement of rough pastures, swamps, partly +cleared woodlands, and desert lands awaiting irrigation. An increasing +population will have to be provided with food and other products of +agriculture on a farming area that henceforth will be increasing less +rapidly than it has in the past and than the population increases. + +§ 2. #Influences acting upon the size of farms#. In these averages +for the whole country many conflicting influences unite and neutralize +each other. Making for smaller farms is the breaking up of large +grazing areas in the West into smaller general purpose farms or +irrigated fruit districts, and of larger general farms in the North +and East into small poultry, flower, and fruit farms. Opposed to this +is a movement toward the merging of farms of 50 to 100 acres into +larger farms of 300 acres, more or less. The economic cause of this +movement is interesting and important. The typical and economic size +of farms when the Atlantic states were settled, was determined by the +use of hand tools, which permitted a man and his family to operate a +farm of about 75 acres of which about half was tilled and the rest was +in permanent pasture and woodland. The fields were small and were laid +out irregularly, which was no disadvantage for hand cultivation. But +for the most economic use of land in field crops and under more modern +conditions it is necessary to have pretty level fields, of regular +rectangular shape. The farm unit should be of such extent as to permit +of the proper use of the soil by rotation of crops, and to employ +fully the best modern labor-saving machinery for each purpose. +Numerous recent agricultural surveys point to the conclusion that for +general farming this unit is a comparatively large area of about 300 +acres. + +These conditions offer a reward to those agricultural enterprisers +who can purchase lands at a price based upon the high costs and lower +yields of the older methods and cultivate them at the lower costs and +with the larger yields of the newer methods. This movement, therefore, +toward the consolidation of smaller into larger farms is likely to +continue in many communities for several decades. This is likewise +an advantage to the community in increasing the production with less +labor. But the net effect upon the social life of the countryside is +more doubtful, and calls for careful consideration. + +§ 3. #Self-sufficing versus commercial farming. The typical American +farming family once produced nearly everything it used, and used +nearly everything it produced. It was very nearly a self-sufficing +economic unit, "a closed economy," as it sometimes called. Food, +clothing, fuel, lumber, houses, furniture, tools, were on the farm +carried through the various processes from the first gathering of the +raw materials to the finished product. They were then consumed by the +farm household. It is true that even in the first settlements there +were some craftsmen, cobblers, millers, weavers, blacksmiths--whose +services and wares were got by trading some of the surplus products +from the farms--butter, cheese, eggs, wool, hides, furs, live stock, +grain lumber. A few rare commodities of foreign make found their way +to the farm through peddlers and merchants; but altogether the goods +produced outside the farm were a small fraction of the family's +consumption, and were exchanged for but little of the farm's +production. Most farmers tried to produce for themselves, as far as +possible, everything their families needed, when the soil and +situation were poorly suited to the purposes. True, there were early +some exceptions to the general rule, where only one kind of crop was +taken from the land. Such was the forest product of masts, shingles, +lumber, and turpentine, and the great southern staple, tobacco, and +later, cotton. The exceptions have been tending to become the rule +in more and more communities. Farmers have been specializing more +and more in the kinds of products to which their farms are adapted in +respect to soil, relation to market, and otherwise. These products are +taken to market and sold for money with which are bought the things +needed for use on the farm. + +§ 4. #Farming viewed as a capitalistic enterprise#. Thus the farm +comes to be looked upon more and more, not just as a home, but much as +if it were a commercial enterprise or a factory, by which products are +made for sale. This change, to be sure, is far from complete, as the +figures for the average farmer's income show that a large share of the +family living still comes from the farm. It has gone on much further +in some districts than in others, as is indicated in the types of +farming discussed below. But just to the extent that the farmer grows +crops to sell, his outlook on his work undergoes a change. He is +less exclusively a farmer, concerned with the technical processes of +farming; he must be more largely a business man. Like a manufacturing +enterpriser, he buys the factors of production, combines them into +new products, and sells them again. He becomes interested in market +conditions and prices. He grows more commercially-minded. He views +the farm no longer as a fixed area, but one that may be enlarged by +purchase or by rental, and that may be reduced by selling or letting +the less needed parts. One-fifth of farm owners now rent additional +land. In commercial farming the land is not contrasted with capital as +something apart, consisting of the value of the equipment and stock; +but the whole complex of land and other goods is thought of as a +capital-investment. The greater ease of transferring landed-property +in America and the greater mobility of our population have always made +it more natural here than in Europe to look upon land as a capital +investment. This view is now becoming more general as a result of the +commercializing of farming enterprise. + +This change has been favored by other influences. Particularly has +the use of machinery and of other equipment, calling for a larger +investment per man and per acre, been making agriculture, in its +form of enterprise, more and more like manufacturing and commercial +undertakings. + +§ 5. #Diversified versus specialized farming#. To be self-sufficing a +farming family must carry on general farming, that is, must produce +a diversity of products. As farming becomes more commercialized it +necessarily becomes somewhat more specialized, and produces a smaller +variety of products. In some parts of the country and on particular +farms this specialization is extreme: in California, citrus fruits, or +prunes, or beans, may be the only crop raised; wheat in Kansas and +the Dakotas, and dairy products in thousands of farms surrounding +the great cities, are the main, tho not the exclusive products. Many +farmers in these districts have no gardens or orchards, keep no cow, +and buy much or all of the grain for their horses, as well as milk, +butter, vegetables and fruits for their own use. Poultry and eggs +are shipped in trainloads two thousand miles from the Middle West to +California to be consumed by orange growers. Many farmers in the East +no longer keep sheep, pigs, or beef cattle, and they buy out of the +butcher's wagon all the meat except fowls used by their families. This +partly explains the decrease of live stock in the whole country in +recent years and the increase in the price of meat. + +§ 6. #Conditions favoring diversified farming#. There are, however, +limits to the net advantage of specialization in crops, and competent +authorities on agriculture question whether in many cases that limit +has not been readied and passed. Most farms have a variety of soils +and of conditions--hilltops, slopes, bottom lands--which are suitable +for different purposes. A rotation of crops is necessary to get good +yields. Live stock must be kept to maintain the fertility of the land, +which deteriorates fast if hay and grain are continually sold. Some +live stock can be kept on every farm very cheaply with the food that +would go to waste otherwise. The specialization in stock raising in +the prairie states ceased to be profitable when lands became more +valuable. Specialization in wheat production in the states just west +of the Mississippi is possible only so long as wheat will grow on +the virgin soil without costly fertilizers. The cotton farmers of +the South, especially the negro farmers, have been forced by debt and +thriftlessness into a one-crop policy that is now seen to be wasteful +in the long run. A variety of production is necessary to employ labor +somewhat regularly on a farm throughout the year. These and other +conditions will make most farming always an industry of comparatively +diversified products. Only 1 per cent of the farms get as much as 40 +per cent of their receipts from fruit; 2 per cent get that much from +tobacco; 3 per cent from vegetables; 6 per cent from dairy products; +and 19 per cent from cotton. The remaining 60 per cent of receipts +were in most cases from various sources, and these figures did not +include the value of produce consumed by the farmer's family. + +§ 7. #Intensive farming in Europe and America#. No other farm problem +interests the city man so much as that of increasing the production +of the land. To most city men farming hardly seems to be an occupation +giving livelihood and life to the farmer; it seems rather to exist +for the sole purpose of feeding men living in cities. The city man, +therefore, measures the success of farming not by the farmer's income, +by the level of countryside prosperity, but by the number of bushels +per acre raised to ship to town. Every city newspaper and magazine +contains articles pointing to the fact that larger crops per acre +are raised in Europe than in America, and broadly suggesting that the +American farmer could do as well, if only he would. Foreign travelers +comment in like vein on the wasteful use of land in America as +compared with farming methods in Europe. + +Land is used most extensively, with respect to labor, when it is in +forests; somewhat less so when in pasture as care must be given to the +live stock; and still less when used for hay, grain, and other crops. +But the use of machinery in large fields is far more extensive than +the patient work of peasants with their hand tools. The more labor or +the more equipment (or both together) that is put upon an acre, the +larger the product, but the larger the cost per unit. It is a familiar +economic principle.[1] It would bankrupt any farmer, excepting the +millionaire amateur, to farm in America by European methods. American +farmers, at least many of them, could raise as many bushels per +acre and keep their farms as thoroly cultivated as do the European +peasants, if wages were as low here as are the peasants' incomes. + +§ 8. #Prospect of more intensive cultivation of land in America#. As +the aggregate need for food increases in America there must come a +steady pressure upon our stock of land uses, resulting in decreasing +returns to labor in agriculture, unless this movement can be +counteracted by the spread of better methods in agriculture--not +European peasant methods, but new American methods consistent with +high labor-incomes. A good deal of our farm land is undoubtedly too +intensively used now in view of present and prospective commodity +prices and wages. Maladjustment of land uses has resulted +from mistaken judgment, from changing conditions as to prices, +transportation, and markets, and from loss of soil fertility. There +are thus, on nearly every old farm, some fields that would better be +in pasture and much hillside pasture that would better be woodland. It +is often declared extravagantly that our country could support easily +the total population of China, or as great a population per square +mile as that of Italy. If it did so it would be only on the penalty +of lowering wages toward, if not quite to, the level of the Chinese +coolie or of the Italian peasant. Great metropolitan dailies gravely +present as an argument in favor of unrestricted immigration, the +proposition that "if" the cheaper immigrants would but go upon our +"waste" land (which they refuse to do), and raise food by European +methods the problem of the rising cost of food in the cities would be +solved. This urban ideal of a frugal, low-paid agricultural peasantry +can hardly be adopted in America as the national ideal. Rather, +it would seem, any movement toward more intensive agriculture that +necessitates a lowering of the standard of living of the masses of the +American people will, when it is recognized, be condemned and opposed. + +§ 9. #The new agriculture#. Agricultural method, the technic of +farming, has been constantly progressing for two hundred years in +Europe and in America, Were it not for this, the great growth of +population on this combined area would have been quite impossible. +But the betterments since about 1890 in America have been especially +great. They are mostly the first large fruits of the scientific study +made possible by the land-grant colleges and agricultural experiment +stations fostered by state and national, legislation. These many +diverse improvements are grouped under the general title of "the +new agriculture." Its chief features are: new machinery and other +labor-saving methods; better methods of cultivation of the soil; +better selection of seed; introduction of new plants and trees from +abroad to utilize low-grade lands; plant-breeding to develop new +varieties of better quality, heavier bearing, or immune to disease; +more efficient and economical ways of maintaining soil fertility; +better methods of marketing; and better technical education of the +individual farmer. Each of these topics, and a number of other minor +ones, would require a chapter in a complete treatise on agricultural +economics. Here this mere enumeration must be allowed to convey its +own suggestion of far-reaching results for the whole political economy +of the nation and of the world. + +Indeed, so much has been written in a Barnumesque way of the +wonders of the new agriculture, that its actual results and further +possibilities are in many minds absurdly exaggerated. It has not as +yet been potent enough to prevent diminishing returns in respect to +the great staple foods and raw materials obtained by agriculture. +It apparently has barely kept pace with the needs of the growing +population of Christendom. It has enabled a larger population to exist +in about the same, if not in a worse condition, on the same area, +while progress in cheapness of goods has come almost entirely from the +side of the chemical and the mechanical industries. It does not +give the promise of an indefinite amelioration of the lot of an +indefinitely multiplying population. But to a population slowly +increasing, a new and ever newer agriculture, utilizing constantly the +achievements of the natural sciences and the mechanic arts, ensures +the possibility of a steady betterment of the popular welfare in city +and in open country alike. + +§ 10. #Difficulty of coöperation among farmers#. Rural communities +are proverbially conservative; the American farmer is proverbially +an individualist. No wonder, then, that the new ideas and plans of +coöperation in business matters have made headway in agriculture +slowly and with difficulty. The need of mutual aid among American +farmers is especially great, for, as has often been, said, isolation +is the problem of the farm as congestion is that of the city. On the +frontier a coöperative spirit manifested itself frequently in mutual +helpfulness, in house raising bees, husking bees, threshing bees, and +other similar gatherings. + +But this spirit seems to have almost disappeared in the older +communities, the more rapidly doubtless in the period of decaying +agricultural prosperity.[2] To-day, for example, it is impossible on +a certain Pennsylvania road for one more progressive farmer to get +his neighbors to coöperate in so simple a matter as hauling their +milk cans to the creamery, and so every day in the year ten horses are +hitched to ten delivery wagons carrying two or three milk cans apiece, +and driven by ten drivers along the same road to and from the railroad +station. One driver and two horses could easily carry as much or +more, as is done now in many other dairy districts. Even of successful +coöperation among farmers sympathetic critics are forced to say: "Many +students of rural economics assert that coöperation as applied to the +distribution and marketing of farm products is not very successful +unless it is founded upon dire necessity. When the records of the +organizations of the country are analyzed it becomes almost necessary +to accept that statement. So long as farmers do fairly well in their +own way they are not inclined to coöperate." + +§ 11. #Rapid growth of farmers' selling coöperation#. Despite what has +just been said, coöperation among farmers now is more developed and is +growing faster than all other kinds of coöperation in America. This +is most marked in farming communities in the West, especially in +California and in the Middle Western or Northwestern states (e.g., +Minnesota and Wisconsin). There the farmers are younger, and many have +been educated in the state agricultural colleges. They all produce +nearly the same kinds of crops of staple produce which must be shipped +to distant markets. The need of uniting to get what they thought +would be fair treatment from the railroads, and to protect themselves +against the abuses of the competitive commission salesagents, seems to +have given the first impetus to farmers' coöperation. + +The most notable developments were those of the California Fruit +Exchange and of coöperative societies of the Northwest for marketing +grain. The membership of the former is made up entirely of the +local citrus growers' associations in California. It has a complete +organization of selling agents in the Eastern cities and a remarkably +efficient, tho simple, system of equalizing and expediting shipments. +Now the agricultural coöperative associations of various kinds are +multiplying all over the country, for shipping live stock, fruits, +butter, cheese, and other farm products. Coöperation for these +purposes called forth new activities; packing houses were built, and +grain elevators and creameries and dairies, and now a goodly number of +the simple manufacturing processes are undertaken by these societies, +now numbering thousands. + +§ 12. #Some economic features of farmers' selling coöperation#. This +type of producers' selling coöperation is proving in America to be far +more successful than producers' coöperation among workingmen;[3] and +certain important economic features in it should be noted. The local +producers' selling coöperative society is composed of farmers who as +enterprisers own and carry on their own separate businesses; they +are not, as in the other case, wage workers. Any productive processes +undertaken by this kind of society are subordinate to the main +business, being such as picking, packing, drying, preserving, and +making boxes for packing. This form of coöperation with the related +form of consumers' coöperation that is fostered by it, promises to +have a wide extension. + +Some of these societies, as those dealing in citrus fruits, regulate +with some success the picking and the marketing so as to distribute +them more evenly throughout the year. They watch the markets and +direct their agents by telegraph to divert cars _en route_ away from +markets that are glutted with products and into markets where prices +are higher. They take some of the products, as eggs in the spring at +the period of low prices, and pack or refrigerate them, to be sold +when prices are higher. For thus withholding the supply they are said +by some to exercise a monopolistic power. But this is a more than +doubtful view. So long as only the seasonal variations are equalized +and the total supply of the year is not reduced it is, on the marginal +principle, an economic service to the consumers, comparable to +insurance in its utility. Any reduction of the area planted or of the +entrance of others into the industry would be a monopolistic act but +this as yet has not occurred. + +§ 13. #Coöperation in buying.# Coöperative buying (called also +consumers' coöperation or distributive coöperation) has had a large +growth in the British Isles, since 1844, when the society called the +Rochdale Pioneers was founded by a group of factory workingmen. The +coöperative stores, both in Great Britain and on the Continent, have +continued to develop mainly among the industrial classes in urban +centers. However, this has not been exclusively the case, and +particularly in Denmark and Ireland coöperative buying has increased +in agriculture in connection with selling associations. Since 1890 +the growth of consumers' coöperation among European industrial +wage-earners has been phenomenal, especially in Belgium, Germany, and +Switzerland. American wage-workers, however, have made few and feeble +efforts in this direction. + +In the period beginning 1867 many coöperative stores were founded in +America by farmers in the Grange movement, who operated also grain +elevators, warehouses, and steamboat lines. But the movement failed +about 1877. This result is easily explained by lack of commercial +knowledge and lack of harmony among the members, selling on credit, +and inefficient management. A new era in consumers' coöperation for +farmers began about 1900 and now in several widely separated parts +of the country--Minnesota, Kansas, California, Washington, and +elsewhere--the movement is spreading rapidly, supported in large part +by the same persons who are members of the selling associations. + +§ 14. #Need of agricultural credit.# Banking originated in cities and +for the use of the merchant-class. It still retains pretty faithfully +its commercial character. The change of farming toward a more +commercial form[4] has been little aided by banking credit. National +banks and many others were forbidden in their charters to lend on the +security of real-estate, the farmer's one business asset.[5] A great +number of farms are always in course of being purchased, the balance +of purchase money being borrowed by the purchaser. A group of private +agencies such as life insurance and mortgage loan companies and local +money lenders has supplied in somewhat costly ways the need of farm +credits. Tho rates of interest have become more equalized throughout +the whole country, they still range between 7 and 10 per cent in the +Southern and Western states, averaging 7 per cent in the whole country +for interest and commission. The need of better opportunities for +credit in the agricultural districts has long been recognized. The +high rate of interest for borrowed money necessarily placed a limit on +improvements in equipment and methods of farming.[6] + +§ 15. #Recent provisions for farm loans#. The Federal Reserve Act +made two important changes to improve agricultural credit.[7] Soon +afterward some of the states took more vigorous action to provide +a special system of agricultural credit, especially New York and +Missouri. In the latter state, on the initiative of a public-spirited +citizen of St. Louis, was passed in 1915 a notable act of legislation +known as the Gardner State Land Bank Act (effective December 1, 1916, +provided a constitutional amendment is adopted in November, 1916). +This authorizes the establishment of a land bank, with power to lend +on the security of farming lands, for buying farms and for productive +improvements, and to issue bonds to be sold to investors. + +Following this general plan the Federal Farm Loan Act became law +July 17, 1916. It authorized the establishment of twelve Federal Land +Banks, each with a capital of not less than $750,000 to make loans +through national farm loan associations organized somewhat after the +model of the building and loan associations. The bonds issued by these +banks are to bear not to exceed 5 per cent interest. It is hoped that +they will have the high credit of municipal bonds so that they may +be sold at parity, bearing interest at 4 or 4.5 per cent. The loan +is repaid by the farmers under a regular plan of amortization. The +practical results of these measures are yet to appear. They are +expected to give to loans that are made on the security of farms as +wide a market and as high credit as state and municipal bonds now +have. They bid fair to bring the rate of interest on long-time loans +to farmers down to 5 per cent or less in the remotest parts of the +land. This will stimulate agricultural improvement, and facilitate +the purchase of land by tenants. Where the interest rate has been +the highest it should raise the value of farm lands as it brings them +within the circle of a lower-interest-rate economy. This may hasten +the transfer of the lands from less provident to more provident +owners, who are willing to take the land at a higher capitalization. +But the system of loans will probably help to develop greater thrift +in the younger farming population. + + +[Footnote 1: See Vol. I, chs. 12 and 13 on proportionality and +usance.] + +[Footnote 2: See ch. 25, secs. 4 and 5.] + +[Footnote 3: See above, ch. 19, secs. 13, 14, 15.] + +[Footnote 4: See above, sec. 3.] + +[Footnote 5: See ch. 8, sec. 8.] + +[Footnote 6: See Vol. I, pp. 495-497, on the relation between lower +interest rates and productive processes.] + +[Footnote 7: See ch. 9, sec. 7 on time deposits, and sec. 9 on farm +loans.] + + + + +CHAPTER 27 + +THE RAILROAD PROBLEM + + § 1. Rise of the corporation concept. § 2. The modern era of + corporations. § 3. Beginning of corporation problems. § 4. The era of + canals. § 5. Rapid building of American railroads. § 6. Reasons for + governmental aid. § 7. Kinds of governmental aid. § 8. Emergence of + the railroad problem. § 9. Discrimination as to goods. § 10. Local + discrimination. § 11. Personal discrimination. § 12. Economic power + of railroad managers. § 13. Political power of railroad managers, + § 14. Consolidation of railroads. § 15. State railroad commissions. § 16. + Passage of the Interstate Commerce Act. § 17. Working of the Act. + § 18. Public nature of the railroad franchise. § 19. Other peculiar + privileges of railroads. § 20. Private and public interests to be + harmonized. + + +§ 1. #Rise of the corporation concept#. In the legal systems of +primitive people and long afterward, only natural persons had legal +rights, could make contracts, have property, and carry on a business. +But in a number of cases, very early, groups of men came to have +certain interests in common and certain possessions. Gradually some +such groups gained more or less of legal recognition, with certain +political and economic rights as a body and not as individuals. +Thus evolved the conception of a "corporation" (body) having men as +"members," an artificial person, yet not the same as any one or as all +the individuals together, and legally distinct from the individuals. +A group of burghers obtaining a charter from the lord of the realm +became a municipal corporation; a group of teachers, a _collegium_, +became the corporation of the college or a university (a number of +persons united into one association); a group of craftsman became a +gild-corporation. Each corporation had certain rights, privileges, and +immunities, and used a corporate seal as a signature. All of the early +corporations had some economic features that were incidental to the +main purposes, which were political, ecclesiastical, educational, +and fraternal. Toward the end of the Middle Ages groups of traders +obtained charters to act as corporations permanently for business +purposes, such as foreign trade, colonization, and banking. These +increased in the sixteenth and seventeenth centuries, and in the +eighteenth century this form of organization was adopted also and +parliamentary charters obtained, by groups of men for building +turnpikes and canals and for carrying on other kinds of business. + +§ 2. #The modern era of corporations#. The great era of the +corporations did not begin, however, until well on in the second +quarter of the nineteenth century. Then, both in Europe and in +America, the corporate form of organization was extended to a greater +number, and to other kinds, of enterprises. It proved itself to be +well adapted to enterprises for the construction and operation of +canals and railroads, requiring a larger amount of capital than +usually could or would be risked by one person. The investor in a +corporation bought shares, and his liability for debts and losses +was limited by charter to his share capital. It is an advantage that +permanent enterprises of that kind are owned by corporations +with charters perpetual or for long periods. It is possible for +corporations to make investments running for longer periods than would +be safe for individuals. The corporation with an unlimited charter +has legally an immortal life. Sale and change of management are not +necessary on the death or failure in health of any one owner. As the +factory system and large production developed, the corporate form of +organization was found to have these same advantages in manufacturing. +It appeared in textile, iron, mercantile, and other industries. After +1865 the corporate form of organization increased at a cumulative +rate, until now it is applied to many enterprises of small extent and +local in operation. There are 300,000 corporations making returns +to the United States Commissioner of Internal Revenue.[1] There were +70,000 manufacturing corporations, which were 26 per cent of the whole +number of manufacturing establishments, but which employed 76 per cent +of all wage earners and turned out 79 per cent of the whole product. + +§ 3. #Beginning of corporation problems.# With the corporations +came "the corporation problem," a single name for a complex of +problems--legal, political, moral, and economic--which arise out of +the relations of corporations to their individual stockholders, to +their employees, to the state, to the general public, and to their +competitors in business. The problems differ also in corporations of +different sizes and in different businesses. We shall discuss in +this and succeeding chapters but a few of the larger aspects of the +corporation problem, the railroad, the industrial trust, and certain +other kinds of monopolistic industry. + +Of the various forms of corporations, banks first presented problems +calling for economic legislation and regulation. This is explained by +the fact that it was the first kind of business corporation to become +important, and further by the fact that its work was in various ways +closely connected with the coinage and regulation of money, which had +already become a governmental function. The railroad was the form +of corporation next in point of time to become a great problem; this +because of the peculiarly vital and far-reaching effects that such +railroad transportation has upon all other kinds of business in the +community, as appears in what follows. + +§ 4. #The era of canals.# Canals were used in the ancient empires +for irrigating, for the supplying of cities with water, and for +navigation. In the late eighteenth and the early nineteenth centuries +they were rapidly built in England and America. Six canals had been +built in the United States before 1807, but the "canal-era" in America +dated from the beginning of work on the Erie canal in 1817, and +continued until about 1840, when nearly all new work ceased; over 4000 +miles of canals had been built at a cost of $200,000,000. + +The great advantage of canals is cheapness of operation due to the +simplicity of the machinery needed and to the great loads that can be +moved with small power. A cent a ton-mile proved to be a paying rate +on a small canal. For heavy, slow-moving freight, a railroad can even +now barely rival a parallel canal at its best. As canals, however, can +be built only along pretty level routes and where the water supply is +at high level, their construction is limited to a small portion of the +country. The principle of diminishing returns applies strongly to +the construction of canals; the first canals in favored locations +are easily constructed and economically operated, but it is only +with greater cost and difficulty that the system can be successively +extended. In temperate climates the use of canals is limited by ice +to a part of the year, and by the summer's drought sometimes still +further. At its best, therefore, the small land-locked canal is fitted +only to be a supplementary agent in the system of transportation +wherever another transportation agency of higher speed and greater +regularity is possible. Far different is the case of the oceanic canal +in a tropical climate. + +Canals do not appear to have developed any serious problems calling +for public regulation of rates. A first simple legislative act fixing +the rate of tolls for boats was sufficient. Charges were made by +distance as on a toll road and the boats were owned by different +private shippers or by common carriers among whom competition +prevailed. + +§ 5. #Rapid building of American railroads#. The canal was just +reaching the peak of popular favor when the railroad in 1830, after a +half-century of slowly accumulating technical improvements, burst into +view as a demonstrated success as a means of transportation.[2] The +railroad excels in adaptability any other agent of transportation; it +can go over mountains or tunnel through them. It is markedly superior +in certainty; it may be blocked for a day or two by floods and snows, +but it suffers no seasonal stoppage of traffic. In speed, even the +early railroad so far excelled that the canal could survive only by +dividing the traffic, taking the lower grades of freight, and leaving +to the railroad the passenger traffic and fast freight. Even in +respect to cheapness, the unique virtue of waterways in favored +localities, the railroad made rapid gains. Improvements in roadbed, +rails, cars, engines, and other equipment soon reduced greatly the +cost of conducting traffic on the main lines of roads. Because of +these qualities railroads soon surpassed in importance every other +agency of internal transportation. The miles constructed and miles in +operation in the United States, by decades since 1830 were as follows +(route mileage, not counting double tracks and sidings): + + Miles constructed Total route miles + in decade. in operation. + + 1830 ........................ 23 23 + 1840 ........................ 2,795 2,818 + 1850 ........................ 6,203 9,021 + 1800 ........................ 21,605 30,626 + 1870 ........................ 22,296 52,922 + 1880 ........................ 40,345 93,267 + 1890 ........................ 73,924 167,191 + 1900 ........................ 31,773 198,964 + 1910 ........................ 51,028 249,992 + 1915 (5 yrs.) ............... 13,555 263,547 + +The extension of railroads was so rapid that there was not time for +a gradual adjustment of industrial conditions. In many places the +resulting changes were revolutionary. The building of railroads in +the Mississippi valley in the seventies lowered the value of eastern +farms, ruined many English farmers, and depressed the condition of +the peasantry in all western Europe.[3] With the lower prices that +resulted when the fertile lands of the western prairies were opened +to the world's markets, the less fertile lands of the older districts +could not compete. Many other changes, of no less moment in +limited districts, resulted from the building of railroads. Local +trading-centers decreased in importance. Villages and towns, hoping +to be enriched by the railroads, saw their trade going to the cities. +Commerce became centralized. Enormous increases of value at a few +points were offset by losses in other localities. + +§ 6. #Reasons for governmental aid#. The growth of railroads in +America was more rapid than in any other part of the world, but it +did not occur without much help to private capital from governmental +agencies. The railroad enterprise was uncertain, the possibilities of +its growth could not be foreseen, and private capital would not invest +without great inducements. In European countries the railways were +built through comparatively densely populated districts to connect +cities already of large size. Yet railroad extension was very slow +there, even tho the states in many ways aided the enterprises. America +was comparatively sparsely populated, and most of the railroads were +built in advance of and to attract population, business, and traffic. +In many cases railroad building in America was part of a gigantic +real-estate speculation undertaken collectively by the taxpayers of +the communities. + +§ 7. #Kinds of governmental aid#. American states recklessly abandoned +the policy of non-interference, and vied with each other in giving +railroad enterprises lands, money, and privileges, in loaning bonds, +in subscribing for stock, and in releasing from taxation. These +fostering measures were expected to increase wealth and to diffuse a +greater welfare through the community. Many states were forced to +the point of bankruptcy by their reckless generosity, and some states +repudiated the debts thus incurred. + +The national government then took up the same policy and granted lands +to the states to be used for this purpose. The first case of this kind +was the grant to the Illinois Central road, in 1850, of a great strip +of land through the state from north to south. Grants were made in +fourteen states, covering tens of millions of acres of land. Then the +national government, between 1863 and 1869, aided the building of the +Pacific railroads by granting outright twenty square miles of land for +every mile of track and by loaning the credit of the government to +the extent of fifty million dollars,--a debt which was settled by +compromise only after thirty years. + +Counties, townships, cities, and villages then entered into keen +competition to secure the building of railroads, projected by +private enterprise. Bonds, bonuses, tax-exemptions, and many special +privileges were granted. To obtain this new Aladdin's lamp, this great +wealth-bringer, localities mortgaged their prosperity for years to +come. The promoters bargained skilfully for these grants, playing off +town against town, cultivating the speculative spirit, punishing the +obdurate. Not the civil engineer, but the railroad promoter determined +the devious lines of many a railroad on the level prairies of America. +The effects of these grants were in many cases disastrous, and after +1870 they were forbidden in a number of states by legislation and by +constitutional amendments. But before this era of generosity ended, +probably the railroads in America had received more public aid than +has ever been given to any other form of industry in private hands. + +§ 8. #Emergence of the railroad problem#. In most charters and laws +authorizing the building of railroads, either nothing was specified +regarding rates, or maximum rates were fixed which proved to be so +high that they were of little, if any, practical effect. But very soon +began to appear some serious evils in the policy of railroads toward +the shipping and traveling public in matters of rates and of service. + +As the ownership of the wagons, ships, and canal-boats of a country +is usually divided, ocean ports and points along the lines of +turnpikes and canals enjoy competition between carriers. In the early +days of the railroads it was believed that a company or the government +would own the rails and charge toll to the different carriers, who +would own cars and conduct the traffic as was done on the canals. +Experience soon showed the impracticability of this scheme and the +need of unified management. An operating railroad company, therefore, +has a monopoly at all points on its line not touched by other +carriers. This, like any other monopoly, is limited, for the railroad, +to secure traffic, is led to meet competition of whatever kind--that +of wagons, canals, rivers, or of other railroads--wherever it occurs. +The railroads in private hands early began to "charge what the traffic +would bear," high where they could, and low where they must, to get +the business. Thus developed the various forms of discrimination which +are now to be described. + +§ 9. #Discrimination as to goods#. Discrimination as to goods is +charging more for transporting one kind of goods than for another +without a corresponding difference in the cost. When reasonably +understood, this proposition does not apply to a higher charge for +goods of greater bulk, as more per pound for feathers than for iron, +the "dead weight" of car being much greater in one case than in the +other. It does not apply where there is a difference in risk, as +between bricks and powder, or coal and crockery; nor where there is a +difference in trouble, as between live stock and wheat. Any difference +that can reasonably be explained as due to a difference in cost is +not discrimination; on the other hand a difference in cost without a +difference in rate is discrimination. Discrimination as to goods may +be by value, as low rates for heavy, cheap goods, and high rates for +lighter, valuable ones. Coal always goes at a low rate as compared +with dry goods, and sometimes more is charged for coal to be used for +gas than for coal to be used for heating purposes. + +Railroad discrimination so frequently has resulted in injustice to the +shipping public that the term has taken on an evil significance. But +it is well to observe that the word discrimination is not derived from +_crimen_ (crime), but from _discernere_ (to discern). There are +both reasonable and unreasonable forms of discrimination. In +general discrimination as to goods more often appears, under certain +conditions and made with due regard to the public interest, to +be reasonable; less often to be justified is the form of local +discrimination, next to be described; and least often of all to be +justified is the last named form of personal discrimination. + +§ 10. #Local discrimination#. Discrimination between places (called +also local discrimination) is charging different rates to two +localities for substantially the same service. This occurs when local +rates are high and through rates are low; when rates at local points +are high and at competing points are low; when less is charged for +shipments consigned to foreign ports than for domestic shipments; +when, more is charged for goods going east than for goods going west. +The causes of local discrimination are: first, water-competition, +found at great trade centers such as New York and San Francisco; +second, differences in terminal facilities, making some places better +shipping-points than others; third, competition by other railroads, +which is concentrated at certain points, only one tenth of the +stations of the United States being junctions; fourth, the influence +of powerful individuals or large corporations and the personal +favoritism shown by railroad officials. + +The effects of local discrimination are to develop some districts and +depress others; to stimulate cities and blight villages; to destroy +established industries; to foster monopolies at favored points; and to +sacrifice the future revenues of the road by forcing industry to move +in the competing points to get the low rates. The power of railroad +officials arbitrarily to cause rates to rise or fall is happily +limited in practice by the need of earning as large and as regular +an income as possible, but even as exercised it has been at times as +great as that possessed by many political rulers. + +§ 11. #Personal discrimination#. Discrimination between shippers +(personal discrimination) is charging one person more than another for +substantially the same service. This most odious of railroad vices, +rarely practised openly, is done by false billing of weight, by +wrong descriptions or false classification to reduce the charge below +published rate-sheets, by carrying some goods free, by issuing passes +to some and not to all patrons under the same conditions, or by +donations or rebates after the regular rate has been paid. In some +cases a subordinate agent shares his commission with the shipper, and +the transaction does not appear on the books of the company. In other +cases favored shippers are given secret information that the rate is +to be changed, so that they are enabled to regulate their shipments to +secure the lower rate. + +One group of reasons for personal discrimination is connected with the +interests of the road. It is to build up new business; it is to +make competition with rival roads more effective by favoring certain +agents, as was very commonly done in the Western grain business; it +is to exclude competition, as by refusing to make a rate from a +connecting line or to receive materials for a new railroad which is +to be a competitor; and it is to satisfy large shippers whose power, +skill, and persistence make the concession necessary. Another group of +reasons has to do with the interests of the corporate officials. It is +to enable them to grant special favors to friends; or it is to build +up a business in which they are interested; or it is to earn a bribe +that has been given them. + +The evils of personal discrimination are great. It introduces +uncertainty, fear, and danger into all business; it causes business +men to waste, socially viewed, an enormous fund of energy to get good +rates and to guard against surprises; it grants unearned fortunes and +destroys those honestly made; it gives enormous power and presents +strong temptations to railroad officials to injure the interests of +the stockholders on the one hand and of the public on the other. + +§ 12. #Economic power of railroad managers.# Other evils of +unregulated private management of railroads appeared. When the +railroad was a young industry, it was thought to be simply an +iron-track turnpike to which the old English law of common carriers +would apply. This and similar notions soon, however, proved illusory. +It was seen that the higher railroad officials had, in the granting +of transportation service and the fixing of rates, a great economic +power. They had complex and sometimes conflicting duties to +the stockholders and to the shipping public. They wore their +conscience-burdens lightly, before the days of effective regulation, +and frequently made little attempt to meet the one and no attempt +whatever to meet the other obligation. The opportunities for private +speculation brought to many railroad managers great private fortunes. +There were no precedents, no ripened public opinion, no established +code of ethics, to govern. It was a betrayal of the interests of +the stockholders when directors formed "construction companies" and +granted contracts to themselves at outrageously high prices. It was +an injury not only to shippers, but also to the stockholders, when +special rates were granted to friends and to industries in which the +directors were interested. In general, however, the interests and +rights of the stockholders were more readily recognized than +were those of the public. A railroad manager is engaged by the +stockholders, is responsible to them, and looks to them for his +promotion. Hence their interests are uppermost whenever the welfare +of the public is not in harmony with the earning of liberal dividends. +The managers long felt bound to defend the principle of "charging what +the traffic will bear" in the case of each individual, locality, and +kind of goods, even if this ruined some men and enriched others, and +if it destroyed the prosperity of cities to increase the earnings of +the road. + +§ 13. #Political power of railroad managers.# Likewise in various ways +railroad managers may exercise great political influence and power. +Some writers maintain that the power to make rates on railroads is +a power of taxation. They point out that if rates are not subject to +fixed rules imposed by the state, the private managers of railroads +wield the power of the lawmaker. By changing the rates on foreign +exports or imports, the railroads frequently have made or nullified +tariff rates and have defeated the intention of the legislature. +High rates on state-owned roads in Europe have been used in lieu of +protective duties. These facts go to show that a change of railroad +rates between two places within the country is similar in effect to +the imposing or repeal of tariff duties between them. + +The wealth and industrial importance of the railroads soon began to +give them widespread political power in other ways. It was commonly +charged in some states that the legislature and the courts were +"owned" by the railroads. The railroads, in part because they were +the victims at times of attempts at blackmail by dishonest public +officials, declared that they were compelled, in self-defense to +maintain a lobby. The railroad lobby, defensive and offensive, was, in +many states, the all-powerful "third house." Railroads even had their +agents in the primaries, entered political conventions, dictated +nominations from the lowest office up to that of governor, and elected +judges and legislators. The extent to which this was done differed +according as the railroads had large or small interests within the +state. These statements can with approximate truth now be made in +the past tense, as was not possible a few years ago. A better code +of business morality has developed, and the railroad management's +relationship of private trusteeship toward the shareholders and of +public trusteeship toward the patrons of the road is now much more +fully recognized. The change was not brought about without long and +strenuous agitation and effort, educational and legislative, as is in +part described below. + +§ 14. #Consolidation of railroads#. Gradually the consolidation of the +railroad mileage into larger units put into fewer hands greater and +greater economic power. The early railroads, many of which were built +in sections of a few miles in length, have been slowly welded into +continuous trunk lines with many branches. The New York Central +between Albany and Buffalo was a consolidation, by Commodore +Vanderbilt, of sixteen short lines. The Pennsylvania system was formed +link by link from scores of small roads. In the decade of the nineties +the growth of consolidation went on more rapidly than ever before. In +1903 it could be said that 60 per cent of the mileage of the United +States was under the control of five interests; 75 per cent was +controlled by a group of men who could sit about one table. The +country was being divided territorially into great railroad domains, +within each of which one financial interest was dominant. Since that +time the policy of the leading roads has been still further unified +by great financial alliances and by the method known as "community of +interests." + +Toward this result strong economic forces have been working. +Consolidation has many technical advantages: it saves time, reduces +the unit cost of administration and of handling goods, gives better +use of the rolling stock and of the terminal facilities of the +railroads, and insures continuous train service. It has the advantage +of other large production and the possible economies of the trusts. +Most important, however, from the point of view of the railroads, is +the prevention of competition and the making possible of higher +rates and larger dividends. The statement that competition is not an +effective regulator of railroads often is misunderstood to mean that +it in no way acts on rates. It is true that competition between roads +does not prevent discrimination and excessive charges between stations +on one line only; but competition usually has acted powerfully at +well-recognized "competing points." The larger the area controlled +by one management, the fewer are the competing points; the larger, +therefore, is the power over the rate and the more completely +the monopoly principle applies. It is a grim jest to say that +consolidation does not change the railroad situation as regards the +question of rates. + +§ 15. #State railroad commissions.# When it became evident that public +and private interests in the railroads were so divergent, it still was +not easy to determine how the public was to be safeguarded. At first, +some general conditions such as maximum rates were inserted in the +laws and charters; but these were not adaptable to changing conditions +and, for lack of administrative agents, could not be enforced. Some +early efforts at state ownership were disastrous. The old law of +common carriers gave to individual shippers an uncertain redress in +the courts for unreasonable rates; but the remedy was costly because +the aggrieved shipper had to employ counsel, to gather evidence, and +to risk the penalty of failure; it was slow, for, while delay was +death to the shipper's business, cases hung for months or years in +the courts; it was ineffectual, for, even when the case was won, the +shipper was not repaid for all his losses, and the same discrimination +could be immediately repeated against him and other shippers. + +In the older Eastern states, attempts to remedy these and other evils +by creating some kind of a state railroad commission date back to the +fifties of the last century. Massachusetts developed in the seventies +a commission of "the advisory type" which investigated and made public +the conditions, leaving to public opinion the correction of the evils. +A number of the Western states, notably Illinois and Iowa, developed +in the seventies commissions of "the strong type," with power to fix +rates and to enforce their rulings. The commission principle, strongly +opposed at first by the railroads, was upheld by the courts and became +established public policy. By 1915 every state and the District of +Columbia had a state commission. In Wisconsin and in New York, in +1907, in New Jersey, in 1911, and in many other states since, the +"railroad" commissions were replaced by "public utilities" or "public +service" commissions, having control not only over the railroads but +over street railway, gas, electric light, telephone, and some other +corporations. The state commissions have found their chief field +in the regulation of local utilities, and they fall far short of a +solution of the railroad problem. Altho they from the first did much +to make the accounts of the railroads intelligible, something to make +the local rates reasonable and subject to rule, and much to educate +public sentiment, on the whole their results have been disappointing. +It was difficult to get commissioners at once strong, able, and +honest; the public did not know its own mind well enough to +support the commissions properly; and the courts decided that state +commissions could regulate only the traffic originating and ending +within the state. + +§ 16. #Passage of the Interstate Commerce Act.# Public hostility to +private railroad management was greatest in the regions where the +most rapid building of roads occurred from 1866 to 1873. One center of +grievances was in "the granger states' of Illinois, Wisconsin, Kansas, +Nebraska, Iowa, and Minnesota; another center was in the oil regions +of Ohio and Pennsylvania. The Eastern states were not without their +troubles, for the report of the Hepburn Committee of the New York +legislature in 1879 showed that discrimination between shippers +prevailed to an almost incredible degree in every portion of New York +state. When the courts, in 1886, decided that the greater portion of +the railroad rates could not be treated by state commissions, national +control was loudly demanded. Scores of bills were presented to +Congress between 1870 and 1886, and, despite much opposition, the +Interstate Commerce Act was passed in 1887. + +The act laid down some general rules: that rates should be just and +reasonable; that railroads should not pool, or agree to divide, +their earnings to avoid competition; that they should, under similar +conditions, and, unless expressly excused, fix rates in accordance +with the long- and short-haul principle (to charge no more for a +shorter distance than for a longer one on the same line and in the +same direction, the shorter being included within the longer). The +act provided for a commission of five men, to be appointed by the +President, which might require uniform accounts from the railroads, +and which should enforce the provisions of the act. + +§ 17. #Working of the Act.# The commission in its earlier years +gave promise of effectiveness, but its powers, as interpreted by the +courts, proved inadequate to its assigned task. The railroads in many +cases refused to obey its orders, and court decisions paralyzed its +activity. Competent authorities declared in 1901, after fourteen years +of the commission's operation, that discrimination never had been +worse, and a series of exposures of abuses strengthened the popular +demand for stricter legislation. The result was first the Elkins' Act +of 1903, aimed at discrimination and rebates, and then the Hepburn +Act Of 1906, which marked a new era in railroad regulation in this +country. The commission was increased to seven members, its authority +was extended to include express, sleeping car, and other agencies of +transportation, and it was given the power to fix maximum rates, +not to be suspended by the courts without a hearing. It became thus +unquestionably a commission of "the strong type." It began to exercise +its new powers with vigor, and the carriers reluctantly accepted its +authority. Responsive to a calmer but insistent popular demand +further amendments were made by the Mann-Elkins Act of 1910, +which strengthened the long-and-short-haul clause, and gave to the +commission, among other new powers, that of suspending new rates +proposed by carriers. A special Commerce Court of five judges was +created with exclusive jurisdiction in certain classes of railroad +cases, but this was abolished after a short trial. + +It cannot be said that a final satisfactory solution of the railroad +problem has been attained; indeed, in most human affairs such a thing +is unattainable. But it can be said that there is no considerable +sentiment anywhere in favor of reversing the railroad policy that has +been developed, as here briefly outlined. Certainly the public has no +such sentiment, and the railroads, which for many years opposed the +progress of strong federal control, are now foremost in advocacy of +a policy of exclusive national regulation, to remedy the evil of +"forty-nine masters." + +§ 18. #Public nature of the railroad franchise.# A pretty definite +public opinion regarding the nature of the problem has emerged from +the nearly half-century of experience and discussion, since the +first vigorous agitation of the subject in the seventies of the last +century. Railroads in our country are owned by private corporations +and are managed by private citizens, not, as in some countries, by +public officials. They have been built by private enterprise, in +the interest of the investors, not as a charity or as a public +benefaction. Railroad-building appears thus at first glance to be +a case of free competition where public interests are served in the +following of private interests. But, looked at more closely, it may +be seen to be in many ways different from the ordinary competitive +business. Competition would make the building of railroads a matter of +bargain with proprietors along the line, and an obdurate farmer could +compel a long detour or could block the whole undertaking. But the +public says: a public enterprise is of more importance than the +interests of a single farmer. By charter or by franchise the railroad +is granted the power of eminent domain, whereby the property of +private citizens may be taken from them at an appraised valuation. +The manufacturer, enjoying no such privilege, can only by ordinary +purchase obtain a site urgently needed for his business. Why may the +railway exercise the sovereign power of government as against the +private property rights of others? Because the railway is peculiarly +"affected with a public interest." The primary object is not to +favor the railroads, but to benefit the community. These charters and +franchises are granted sparingly in most European countries. In this +country they have been granted recklessly, often in general laws, by +states keen in their rivalry for railroad extension. When thus +great public privileges had been granted without reserve to private +corporations, it was realized, too late in many cases, that a mistake +had been made and that an impossible situation had been created. + +§ 19. #Other peculiar privileges of railroads.# Further, do the +various grants of lands and money to the railroads make them other +than mere private enterprises? One answer, that of those financially +interested in the railroads, was No. They said that the bargain was +a fair one, and was then closed. The public gave because it expected +benefit; the corporation fulfilled its agreement by building the road. +The terms of the charter, as granted, determined the rights of the +public; but no new terms could later be read into it, even tho the +public came to see the question in a new light. Similar grants, tho +not so large, have been made to other industries. Sugar-factories were +given bounties; iron-forges and woolen-mills were favored by tariffs; +factories have been given, by competing cities, land and exemption +from taxation; yet these enterprises have not on that account, been +treated, thereafter, in any exceptional way. So, it was said, the +railroad was still merely a private business. + +But the social answer is stronger than this. The privileges of +railroads are greater in amount and more important in character than +those granted to any ordinary private enterprise. The legislatures +recognize constantly the peculiar public functions of the railroads. +In other private enterprises, investors take all the risk; +legislatures and courts recognize the duty of guarding, where +possible, the investment of capital in railroads. Laws have +been passed in several states to protect the railroads against +ticket-scalping. Whenever the question comes before them, the courts +maintain the right of the railroads to earn a fair dividend. Private +enterprise has been invited to undertake a public work, yet public +interests are paramount. + +§ 20. #Private and public interests to be harmonized.# If an extremely +abstract view is taken there is danger of losing sight of the real +problem, which is that of harmonizing these two interests in thought +and in public policy. Yet the extreme advocates of the private +control of railroads for a long time resented indignantly any public +interference with railroad rates and with railroad management as +an infringement of individual liberty. Before the passage of the +Interstate Commerce Act, in 1887, this position was inconsistently +taken by those in whose interests free competition had been violently +set aside at the very outset of railroad construction, and for whom +governmental interference had made possible great fortunes. It has +become generally recognized that the railroads ought not to be allowed +to change from a public to a private character just as it suits +their convenience. True, they are private enterprises as regards the +character of the investment, but they are public enterprises as to +their privileges, functions, and obligations. + +Finally, it might be said that if there were none of these special +reasons for the public control of railways, there is an all-sufficient +general reason in the fact that a railroad is always, in some respects +and to some degree, a monopoly. Therefore, the railroad problem may be +viewed as but one aspect of the general problem of monopoly. To other +aspects of this problem we are now to turn our attention. + + +[Footnote 1: Returns for 1915. The following figures are from the +census taken in 1909.] + +[Footnote 2: See A.T. Hadley, "Railroad Transportation," pp. 10, 32.] + +[Footnote 3: See Vol. I, pp. 437, 438, 443.] + + + + +CHAPTER 28 + +THE PROBLEM OF INDUSTRIAL MONOPOLY + + § 1. Kinds of monopoly. § 2. Political sources of monopoly. § 3. + Natural agents as sources of monopoly. § 4. Capitalistic monopoly; + aspects of the problem. § 5. Industrial monopoly and fostering + conditions. § 6. Growth of large industry in the nineteenth century. § 7. + Methods of forming combinations. § 8. Growth of combinations after + 1880. § 9. The great period of trust formation. § 10. Height of the + movement toward combinations. § 11. Motive to avoid competition. + § 12. Motive to effect economies. § 13. Profits from monopoly and + gains of promoters. § 14. Monopoly's power to raise prices. + + +§ 1. #Kinds of monopoly.# Monopolies may, for special purposes, be +classified as selling or buying, producing or trading, lasting or +temporary, general or local, monopolies. The terms selling or buying +monopoly explain themselves, tho the latter conflicts with the +etymology.[1] Under conditions of barter the selling and the buying +monopoly would be the same thing in two aspects. A selling monopoly +is by far the more common, but a buying monopoly may be connected with +it. A large oil-refining corporation that sells most of the product +may by various methods succeed in driving out the competitors who +would buy the crude oil. It thus becomes practically the only outlet +for the oil product, and the owners of the land thus must share +their ownership with the buying monopoly by accepting, within certain +limits, the price it fixes. The Hudson Bay Company, dealing in furs, +had practically this sort of power in North America. Many instances +can be found, yet, relatively to the selling monopolies, those of the +buying kind are rare. + +A producing monopoly is one controlling the manufacture or the source +of supply of an article; a trading monopoly is one controlling the +avenues of commerce between the source and the consumers. + +Monopolies are lasting or temporary, according to the duration of +control. By far the larger number are of the temporary sort, because +high prices strongly stimulate efforts to develop other sources of +supply. Yet the average profits of a monopoly may be large throughout +a succession of periods of high and low prices. + +Monopolies are general or local, according to the extent of territory +where their power is felt. At its maximum where transportation and +other costs most effectually shut out competition, monopoly power +shades off to zero on the border-line of competitive territory. The +frequent use of the adjectives partial, limited, and virtual are +implied but usually superfluous recognitions of the relative character +of monopoly. + +§ 2. #Political sources of monopoly.# Monopoly gets its power from +various sources. A political monopoly derives its power of control +from a special grant from the government, forbidding others to engage +in that business. The typical political monopoly is that conferred +by a crown patent bestowing the exclusive right to carry on a certain +business. A second kind is that conferred by a patent for invention, +or the copyright on books, the object of which is to stimulate +invention, research, and writing by giving the full control and +protection of the government to the inventor and the writer or their +assignees. In this case the privilege is socially earned by the +monopolist; it is not gotten for nothing. Moreover, the patent, being +limited in time, expires and becomes a social possession. A third +kind is a governmental monopoly for purposes of revenue. In France and +Japan the governments control the tobacco trade, and the high price +charged for tobacco makes this monopoly yield large revenues. A fourth +kind is that derived from franchises for public service corporations, +such as those supplying electricity, gas and water. These franchises +are granted to private capitalists to induce them to invest capital in +enterprises that are helpful to the community. + +§ 3. #Natural agents as sources of monopoly.# "Economic" monopoly, +so-called, arises when the ownership of scarce natural agents, as +mines, land, water-power, comes under the control of one man or one +group of men who agree on a price. Economic monopoly is a result of +private property that is undesigned by the government or by society. +It is exceptional, considering the whole range of private property, +but it is important. The oil-wells embracing the main sources of the +world's supply have largely come under one control. One corporation +may control so many of the richest iron mines of the country as to +be able to fix a price different from that which would result under +competition. Coal mines, especially those of some peculiar and +limited kind, such as anthracite, appear to become easily an object +of monopolization. Economic monopoly merges into political monopolies, +such as patents and franchises. Private property is a political +institution designed to further social welfare, and only rarely is +property in any particular business a monopoly. Private control of +great natural resources might have been prevented in many cases had it +been foreseen. + +§ 4. #Capitalistic monopoly; aspects of the problem.# Capitalistic +monopoly, variously called contractual, organized, commercial or +industrial monopoly, arises when men unite their wealth to control +a market, to overpower or intimidate opposition, and to keep out or +limit competition by the mere magnitude of their wealth. These +various kinds so merge into each other that they cannot always be +distinguished in practice. A patent may help a capitalistic monopoly +in getting control of a market; great wealth may enable a company to +get control of rare natural resources. + +In the discussion of industrial monopoly, the problem now before us, +there is a good deal of vagueness and misunderstanding because of +lack of definiteness in the use of words which have rapidly shifted in +meaning. The word "trust" originally applied, and still in legal usage +applies, to a particular form of organization, that of a board of +trustees holding the stock, and thus unifying the control, of two or +more formerly separate enterprises. The Standard Oil Company at one +time had this form of organization, which was declared by the courts +to be illegal _(ultra vires)_ for corporations. Now "trust" often +is used in the sense of a corporation having monopoly power in some +degree; either broadly, of any monopolistic corporation (including +railways and local public utilities), or, oftener, limited to +manufacturing and commercial monopolies, otherwise called "industrial +trusts" in contrast with franchise trusts and railroads.[2] The word +"combination" referred originally to a more or less thoro "merger," +with a view to attaining monopolistic power, of a number of formerly +separate organizations, as in the case of the United States Steel +Corporation. But the word is often used as if it were a synonym for +trust (in a narrower or wider sense) even as applied to a single +enterprise that has grown to be monopolistic. A "trust" in the legal +sense of a form of organization, and "combinations" as above defined, +might have no monopoly power whatever; whereas a monopoly may be +possessed by an individual owner (e.g., of a patent right, railroad, +waterworks plant), or by a single corporation that has simply grown +monopolistic without the trust form of organization or without +combination. + +Now it is evident that the real problem is that of monopoly, however +attained. Monopoly may be defined as such a degree of control over +the supply of goods in a given market that a net gain will result if a +portion is withheld.[3] In accord with growing and now dominant +usage it is well to observe the following meanings in our discussion. +"_Combination"_ is a term referring particularly to one method by +which monopolies are formed. "_Trust,"_ in the now popular sense, is +best limited to an industrial, primarily manufacturing, enterprise or +group of enterprises, with some degree of monopoly power due not to +a "special franchise" giving the use of streets and highways and the +right of eminent domain, nor to a single patent, but to a group of +favoring technical, financial, and economic conditions. The trust may +consist of a single establishment; or of a group of establishments +separately operated but united in a "pool" to divide output, +territory, or earnings; or of such a group held together by a holding +company, or combined into one corporation. Public utility is the +name of special franchise enterprises of the kind just mentioned, +including, in the broad sense, railroads and local utilities such as +street railways, gas, water, and electric light-plants. + +§ 5. #Industrial monopoly and fostering conditions.# The problem of +monopoly is probably as old as markets. From the first coming together +of groups of men to trade there were doubtless efforts made by some +individuals and groups of traders to manipulate conditions so as to +get higher prices than they could get in a free and open market.[4] +There are traces of these practices in ancient times, and the history +of the Middle Ages is full of evidences both of monopolistic practices +and of the efforts to prevent or control them. + +If this fact is borne in mind it may help us to distinguish in thought +four features of enterprise that are readily and constantly +confused, viz: large individual capital, large production, corporate +organization, and monopoly.[5] Evidently any one of these features may +appear without the other; e.g., a person of large aggregate capital +may have his investments distributed among a large number of small +enterprises, such as farms, without a trace of corporate organization +or monopoly, and numerous examples could be given of large production, +or of corporate organization, or of monopoly without one or more of +the other features. + +But the presence of any one of these features is a favoring condition +for the development of the others. Hence they are frequently found +together, and of late this occurs increasingly. It is difficult to say +in every, indeed in any, case which feature has been cause and which +effect in this development, but, on the whole, large production seems +to have been primary. Itself made possible by inventions, by better +transportation, and by the widening of markets, it in turn helped to +build up large individual fortunes, and then to create a need for the +corporate form of organization. And monopoly power no doubt is more +easily gained by large aggregations of capital in a corporation having +the advantages of large production. + +§ 6. #Growth of large industry in the nineteenth century.# The great +recent growth of the monopoly problem is in part to be explained as +the result of the growth of large industry, not as the sole cause, +but as a favoring condition. Before the middle of the last century a +tool-using household industry, on farms and in homes where the greater +part of the things used were produced in the family, was still the +typical organization in the United States.[6] A family produced +somewhat more than it needed of food and cloth and exchanged with its +neighbors; so with shoes, candles, soap, and cured meats. The early +factories growing out of the household industry were small. Since +that time two counter forces have been at work to affect the ratio +of manufacturing establishments to population. The number of small +establishments has been increased by the many industries producing the +things once made on farms, and by increasing demands for comforts and +luxuries. Many establishments producing the staple products that can +be transported have been consolidated or have been enlarged, so +that the unit of production now averages much larger. The number of +cotton-weaving factories was about the same in 1900 as it had been +seventy years earlier, while population has grown six fold. Iron- +and steel-mills were fewer in 1900 than in 1880. In industries having +local markets or local sources of materials, such as grist mills +and saw mills, the change in numbers was less, for many small +establishments were started in outlying districts at the same time +that the mills became larger in the great population centers. But the +average number of employees and the average capital per establishment +increased in every period between census enumerations. + +§ 7. #Methods of forming combinations.# Combinations of previously +independent enterprises may be more or less complete and are made by +different methods. Four major methods are: + +(1) The pool, by which the enterprises continue to be separately +operated, but divide the traffic (or output), or the earnings, or the +territory, in prearranged proportions. + +(2) The trust, in a legal sense (as defined above in section 5). + +(3) The holding company, a corporation with the sole purpose of +holding the shares of stock, or a controlling number of them, in +various corporations otherwise nominally independent. + +(4) Consolidation into one company. + +At least five minor methods may be distinguished; these are here +numbered continuously with the preceding four. + +(5) Lease by one company of the plants of one or more other companies. + +(6) Ownership of stock by one corporation in another corporation, +sufficient to give substantial influence over its policy, if not +absolute control. + +(7) Ownership of stock in two or more competing companies, by the same +individual or group of individuals, to such an extent as appreciably +to unify the policies of the competing companies. + +(8) Interlocking directorates, that is, boards of competing companies +containing one or more of the same persons as directors. + +(9) Gentlemen's agreements, mere friendly informal conferences and +understandings as to common policies. + +§ 8. #Growth of combinations after 1880.# Undoubtedly industry before +1860 had some elements of monopoly. Monopoly constituted part of the +banking problem; it began to be evident in the railroads almost at +once, and it rapidly increased as street railways and other public +utilities were constructed. But after 1880 occurred the formation in +larger numbers of industrial enterprises which appeared to exercise +some monopoly power. In the years between 1890 and 1900 this movement +was still more rapid. Consolidation took place on a great scale in +railroads and in manufactures. Much of this has been of such a kind +that it does not appear at all in the figures showing the number of +establishments and of employees. In the data regarding this movement +given by different authorities, many discrepancies appear, as there is +no generally accepted rule by which to determine the selection of the +companies to be included in the lists. One financial authority +gave the following figures[7] regarding the industrial companies +reorganized into larger units in the United States between 1860 +and 1899, not including combinations in such businesses as banking, +shipping, and railroad transportation. Some of the enterprises here +included have much and others probably have little or no monopolistic +power. + + _Decade Number Organized Total Nominal Capital_ + + 1860-60 ............... 2 $ 13,000,000 + 1870-79 ............... 4 135,000,000 + 1880-89 ............... 18 288,000,000 + 1890-99 ............... 157 3,150,000,000 + --------------- ------ --------------- + Total, 40 years ........ 181 $3,586,000,000 + +§ 9. #The great period of trust formation.# The number of trusts +organized and the capital represented by this movement in the last +of these decades were seven times as great as in the thirty years +preceding. The figures by years for the decade 1890-1899 are as +follows: + + Decade Number Organized Total Nominal Capital + + 1890 ................... 6 $82,000,000 + 1891 ................... 13 168,000,000 + 1892 ................... 13 140,000,000 + 1893 ................... 5 226,000,000 + 1894 ................... 2 35,000,000 + 1895 ................... 7 104,000,000 + 1896 ................... 3 40,000,000 + 1897 ................... 6 93,000,000 + 1898 ................... 22 574,000,000 + 1899 ................... 80 1,688,000,000 + ---------------- ---- -------------- + Total, 10 years ......... 157 $3,150,000,000 + +The influence of great prosperity shows in the large number of +combinations; but in 1893, the number was less, altho the total +nominal capital (stocks and bonds) was still the greatest it had ever +been in any year. Then came the period of depression, 1894-97, when +both the numbers and the capital were comparatively small. Then from +1898 to 1901 followed the period of the greatest formation of trusts +the world has ever seen. + +The list of these four years contains the names of the most widely +known American combinations, a few of which are here given with the +years of their formation: 1898, American Thread, National Biscuit; +1899, Amalgamated Copper, American Woolen, Royal Baking Powder, +Standard Oil of N.J., American Hide and Leather, United Shoe +Machinery, American Window Glass; 1900, Crucible Steel, American +Bridge; 1901, United States Steel Corporation, Consolidated Tobacco, +Eastman Kodak, American Locomotive. + +§ 10. #Height of the movement toward combinations.# In a list by +another authority[8] it appears that the data for all industrial +trusts are in round numbers as follows: + + Number of + Plants Acquired Total + Date Number or Controlled Nominal Capital + + Jan. 1, 1904 318 5288 $7,246,000,000 + +These figures compared with those given above would indicate that the +industrial trusts had about doubled in the years 1900-1903 inclusive. +Probably most of this growth was in the years 1900 and 1901; then the +movement became very slow, because, as is generally believed, of +the aroused public opinion, of more vigorous prosecution by the +government, and of additional legislation against trusts. The +authority last cited gives in a more comprehensive list, in six +groups, all the monopolistic combinations in the United States, at +the date of January 1, 1904, as follows (the figures just given above +being the totals of the first three groups): + + No. of Plants Total Nominal + Groups Number Acquired or Controlled Capital + + 1. Greater industrial + trusts 7 1528 $2,260,000,000 + 2. Lesser industrial + trusts 298 3426 4,055,000,000 + 3. Other industrial + trusts in process + of reorganization + or readjustment 13 334 528,000,000 + 4. Franchise trusts 111 1336 3,735,000,000 + 5. Great steam + railroad groups 6 790 9,017,000,000 + 6. Allied independent 10 250 380,000,000 + --- ----- -------------- + Total, 445 8664 $20,000,000,000 + +§ 11. #Motive to avoid competition.# This remarkable movement toward +the formation of united corporations from formerly independent +enterprises called forth a variety of explanations. The organizers of +trusts gave as the first explanation of their action that it was the +necessary result of excessive competition. It is not to be denied +that a hard fight and lower prices often preceded the formation of +the trusts. But as this excessive competition usually is begun for the +very purpose of forcing others into a combination, this explanation +is a begging of the question. It is fallacious also in that it ignores +the marginal principle in the problem of profits. Profits are never +the same in all factories, and to those manufacturers that are on the +margin competition may appear excessive. It generally has been the +largest and strongest factories, in the more favored situations, +that, in order to get rid of troublesome competitors, have forced the +smaller, weaker, industries to come into the trust. In other cases the +smaller enterprises have been eager to be taken in at a good price, +altho they might have continued to operate independently with moderate +profits. When, therefore, it is said that competition is destructive, +it may be a partial truth, but more likely it is a pleasantry +reflecting the happy humor of the prosperous promoters of the +combination. + +§ 12. #Motive to effect economies.# Another advantage of the +combination of competing plants that was strongly emphasized was the +economy of large production.[9] The economies that are possible within +a single factory may be still greater in a number of combined or +federated industries. The cost of management, amount of stock carried, +advertising, cost of selling the product, may all be smaller per unit +of product. Each independent factory must send its drummers into every +part of the country to seek business. In combination they can divide +the territory, visit every merchant and get larger orders at smaller +cost. A large aggregation can control credit better and escape +losses from bad debts. By regulating and equalizing the output in +the different localities, it can run more nearly full time. Being +acquainted with the entire situation, it can reduce the friction. A +combination has advantages in shipment. It can have a clearing-house +for orders and ship from the nearest source of supply. The least +efficient factories can be first closed when demand falls off. +Factories can be specialized to produce that for which each is best +fitted. The magnitude of the industry and its presence in different +localities often, in the period of trust formation, served to +strengthen its influence with the railroads, and to increase its +political as well as its economic power. + +Another phase of corporate growth is the "integration of industry," +that is, the grouping under one control of a whole series of +industries. One company may carry the iron ore through all the +processes from the mine to the finished product. A railroad line +across the continent owns its own steamers for shipping goods to Asia +or Europe. Large wholesale houses own or control the output of entire +factories. + +§ 13. #Profits from monopoly and gains of promoters.# There are, +however, well-recognized limitations to the economy of large +production in the single establishment,[10] and of late there has been +ever-increasing skepticism as to the net economy actually attributable +to combinations. Undoubtedly the merging of a number of old plants has +sometimes effected an immediate improvement in the weaker ones. A new +broom sweeps clean. This movement chanced to be contemporaneous with +the development of "efficiency engineering," and of "scientific +cost-accounting," and these better methods, already developed and +applied in comparatively small plants, could be more quickly extended +to the other plants brought into the combination. Moreover, the +personal organizations in the separate enterprises had been brought to +a high state of efficiency by the stimulus of competition, and there +is reason to fear that, after some years of centralized bureaucratic +organization, much of this efficiency may be lost. + +There seems no doubt that the strong motive for forming combinations +is the profit to the organizers.[11] Whatever was the more generous +motive or more fundamental economic reason assigned by the promoters, +the investing public confidently expected that higher prices would be +the chief result. There are indirect as well as direct gains to the +promoters of a combination. There is the gain from the production and +sale of goods to consumers, and there is the gain from the financial +management, from the rise and fall in the value of stock. The +promoters of a combination often expect to make from sales to the +investing public far more than from sales to the consumer of the +product. A season of prosperity and confidence, when trusts and their +enormous profits are constantly discussed, has an effect on the +public mind like that of the gold discoveries in California and in the +Klondike. Then is the time for the promoter to offer shares without +limit to investors. + +§ 14. #Monopoly's power to raise prices#. There is no doubt that the +formation of a combination from competing plants can and does give a +control over prices, a monopoly power, not possessed by the separate +competing establishments. The same kind of power might be attained by +the growth of one establishment outstripping all its competitors, +or by a new enterprise coming into the field backed by powerful +capitalists. But this would work slower and less extensive results +than does the formation of a combination. + +Of course, the fundamental principles of price cannot be changed by a +trust; a selling monopoly can affect price only as it affects supply +or demand.[12] The strongest trust yet seen has not been omnipotent. +Many careless expressions on the subject are heard even from +ordinarily careful writers and speakers: "The trust can fix its own +prices," "has unlimited control," "can determine what it will pay +and for what it will sell." This implies that trusts are benevolent, +seeing that the prices they charge are usually not far in excess of +competitive prices in the past. Such a view overlooks the forces that +limit the price a monopoly can charge. If the supply remains the same, +no trust can make the price go higher. The monopoly usually directs +its efforts to affecting the supply, leaving the price to adjust +itself. It can affect the supply either by lessening its own output or +by intimidating and forcing out its competitors. It is true that this +logical order is not always the order of events. The trust may not +first limit the supply, and then wait for prices to adjust themselves; +it may first raise its prices, but unless it is prepared to limit the +supply in accordance with the new resulting conditions of demand, +such action would be vain. The control of the sources of supply is the +logical explanation of the higher price, even tho the limitation +of supply is effected later by successive acts found necessary to +maintain the higher price. + +The report of the Federal Industrial Commission, which, from 1898 +to 1901, investigated the trusts, showed that immediately upon their +formation, the industrial combinations had raised their prices.[13] +Prices might be lowered again but only when and where competition +became troublesome, thus causing either "price-wars" or +discrimination. + + +[Footnote 1: See Vol. I, p. 76.] + +[Footnote 2: As in the list in sec. 8, below.] + +[Footnote 3: See Vol. I, chs. 8 and 31.] + +[Footnote 4: See Vol. I, ch. 8, on competition and monopoly, and ch. +31, on monopoly prices and large production. An understanding of the +definitions and of the general principles distinguishing competition +and monopoly is a necessary prerequisite to a profitable discussion of +the practical problem of monopoly.] + +[Footnote 5: See Vol. I, p. 267, on capital; pp. 388-393, on large +production. See also references in preceding note on monopoly; and ch. +27, secs. 1 and 2, on corporate organization.] + +[Footnote 6: See above, ch. 26, sec. 3; and ch. 25, secs. 6 and 7.] + +[Footnote 7: Compiled from data given by "The Journal of Commerce and +Commercial Bulletin," reprinted in "The Commercial Year Book," Vol. V, +1900, pp. 564-569.] + +[Footnote 8: John Moody, "The Truth About the Trusts," 1904] + +[Footnote 9: See Vol. I, pp. 388-393.] + +[Footnote 10: See Vol. I, pp. 391-392.] + +[Footnote 11: See Vol. I, p. 334, on the function of the promoter.] + +[Footnote 12: See Vol. I, pp. 80-85, 382-387, 394-396.] + +[Footnote 13: A summary of this evidence is given in the author's +"Principles of Economics" (1904), pp. 327-330. A fuller outline of +the results of the Commission's conclusions may be found in "The Trust +Problem," by J.W. Jenks, who acted as expert in the investigation.] + + + + +CHAPTER 29 + +PUBLIC POLICY IN RESPECT TO MONOPOLY + + § 1. Moral judgments of competition and monopoly. § 2. Public character + of private trade. § 3. Evil economic effects of monopolistic price. + § 4. Common law on restraint of trade. § 5. Growing disapproval of + combination. § 6. Competition sometimes favored regardless of results. + § 7. Increasing regard for results of competition. § 8. Common law remedy + for monopoly ineffective. § 9. First federal legislation against + monopoly. § 10. Policy of the Sherman anti-trust law. § 11. Policy of + monopoly-accepted-and-regulated. § 12. Field of its application. § 13. + Industrial trusts,--a natural evolution? § 14. Artificial versus natural + growth. § 15. Kinds of unfair practices. § 16. Growing conception of + fair competition. § 17. The trust issues in 1912. § 18. Anti-trust + legislation in 1914. + + +§ 1. #Moral judgments of competition and monopoly.# What should be the +attitude of society toward monopoly? Is it good or bad as compared +with competition? Some very strong ethical judgments bearing on +practical problems are found in the popular mind connected with the +ideas of competition and monopoly. Competition usually is pronounced +bad when viewed from the standpoint of the competitors who are losing +by it, and as good when viewed from the standpoint of the traders on +the other side of the market who gain by that competition. Competition +among buyers thus appears to sellers to be a good thing; that among +sellers appears to themselves to be a bad thing (and _vice versa_). +Many persons are moved by sympathy to pronounce competition among +low-paid and underfed workers to be bad, and each worker is convinced +that it is so in his own trade. Yet nearly all men are of one mind +that competition is a good thing in most industries, those that are +thought of as supplying "the general public." Monopoly is believed by +the public to be wrong in such cases, and competition to be the normal +and right condition of trade. Yet there are some men interested in +"large business" who look upon competition as bad, and upon monopoly +as having essentially the nature of friendly coöperation. The roots +of these opinions, or prejudices, are easily discoverable in the +theoretical study of the nature of monopoly.[1] Yet often different +men or groups of men feel so strongly on this matter, viewing it from +their own standpoints, that they are quite unable to understand +how any one else can feel otherwise. There is thus a great deal of +controversy to no purpose. + +§ 2. #Public character of private trade.# Any such general judgment as +that of the public, tho it may be mistaken in some details, is likely +to be a resultant of broad experience. There is in competitive trade a +public, a social character, which monopoly destroys. Even in a simple +auction, when the bidding is really competitive, price depends far +less on shrewd bargaining, on bluff, or on stubbornness, than is the +case in isolated trade. Each bidder is compelled by self-interest to +outbid his less eager competitors, and thus the limits within which +the price must fall are narrowly fixed. The auction-sale is less a +purely personal matter, takes on a more public aspect, has a more +socialized character than isolated trade, depends more on forces +outside the control of any one man, and results in a price fixed with +greater definiteness. The price in a more developed market results +from the play of impersonal forces, or at least from the play of +personal forces which have come under the rules of the market.[2] This +price men are ready to accept as fair. It has a democratic character, +whereas the gains of monopoly price arouse resentment as being the +work of personal, and felt to be despotic, power. Monopoly price is a +bad price to the one who pays it, not only because it is a high price +but because it bears the character of personal extortion. + +The medieval notion of _justum pretium_, the just price, may have +been often misapplied, and it was often criticized and ridiculed by +economists in the period of idealized competition (from Adam Smith +to John Stuart Mill). But at the heart of the notion was the judgment +that general uniform prices fixed in the open market are the proper +norms for prices when one of the traders is caught at an exceptional +disadvantage. The modern world has been compelled to reëxamine the +conception of the just price. + +§ 3. #Evil economic effects of monopolistic price.# Theoretical +analysis confirms this view. Any exercise of monopolistic power over +price keeps some, the weaker bidders, from getting any of the desired +goods, or limits them to their most urgently desired units. What +may be called "the theoretically correct price"[3] with two-sided +competition is the one that permits the maximum number of trades +with a margin of gain to each trader. In narrowing the possibility of +substitution of goods by trade, the sum of values of goods for most +men is diminished. All citizens thus that are the victims of an +artificially created scarcity look upon monopoly as "bad," just +as they do upon the evils of nature--drought, locusts, fires, and +pestilence. A monopoly has an indirect and more distant effect upon +the spirit of all those trading with it. If they are producers selling +at prices depressed by monopoly, their money incomes are reduced; if +they are consumers buying at monopoly prices, their real-incomes are +reduced; in either case their psychic incomes, the motives of all +industry, are diminished, and their industrial energies are relaxed. + +§ 4. #Common law on restraint of trade.# The first recorded case in +English law, wherein the courts sought to prevent the limiting of +competition by agreement, runs back to the year 1415, in the reign +of Henry V. This was a very simple case of a contract in restraint of +trade, whereby a dyer agreed not to practise his craft within the town +for half a year. The court declared the contract illegal (and hence +unenforceable in a court) and administered a severe reproof to the +craftsman who made it. Thus was set forth the doctrine of the moral +and legal obligation of each economic agent to compete fully, freely, +and without restraint upon his action, even restraint imposed upon +himself by a contract voluntarily entered into for his own advantage. + +Not until the eighteenth century was this rigid doctrine somewhat +relaxed so as to permit the sale of the "good will" of a business +under limited conditions, and some "reasonable" contracts in restraint +of trade. Later the emphasis was somewhat further shifted, by judicial +interpretations, from the notion of free competition to that of "fair" +competition, so as to permit contracts involving moderate restraint of +trade, if the essential element of competition was retained. Thus +it was said that a piano manufacturer might by contract grant an +exclusive agency to a dealer in a certain territory, there being many +other competing makes of pianos, and such a contract "does not operate +to suppress competition nor to regulate the production or sale of any +commodity."[4] But with such moderate limitations the courts in cases +under the common law have steadily disapproved contracts in restraint +of trade that would appear to be to the disadvantage of third parties, +whether producers or consumers. + +§ 5. #Growing disapproval of combination.# The attitude of the courts +became in one respect stricter. Some earlier cases involved the +doctrine that what is lawful for an individual to do alone is lawful +if done in combination with others. Indeed, a comparatively recent +case[5] declared regarding a group of dealers, agreeing not to deal +with another, that "desire to free themselves from competition was a +sufficient excuse" for such action. But the general trend has been +to the doctrine that a combination of men "has hurtful powers +and influences not possessed by the individual." Hence threats of +associations of traders (retailers or wholesalers) not to deal with +another if he continued to deal with some third party have been +declared acts in restraint of trade.[6] Yet in the case cited the +court seemed to have been more concerned with protecting "the +individual against encroachment upon his rights by a greater power," +"one of the most sacred duties of the courts," than with rights and +interests of the general public, endangered by such restraint of +trade. + +§ 6. #Competition sometimes favored regardless of results.# In another +respect the courts have wavered in their attitude toward competition, +the general doctrine being that competition, particularly the cutting +of prices, is absolutely justifiable, regardless of circumstances. In +the leading English case[7] the facts were that the larger steamship +companies sent to Hankow additional ships, now called, figuratively, +"fighting ships," to "smash" freights in order to ruin tramp steamship +owners and drive them out of the field. The court held that this +constituted no legal wrong to the tramp steamship owners, and scouted +the idea of the court's looking at the motives in price cutting, +or taking into consideration in any way what the court called "some +imaginary normal standard of freights and prices." And of this case +the lawyer is forced to say: "Undoubtedly the excellent opinion just +quoted represents the law everywhere," even tho there are other cases +difficult to harmonize with it.[8] + +To the economist, not bound in like manner by legal precedent, such +a verdict was from the first impossible. The court appears to have +considered that only the rights of the private litigants, the tramp +steamship owners, were involved, not the rights and interests of the +shipping public; it considered the immediate and not the ultimate +effects of the "smashing" of rates; it allowed itself to be deceived +by the appearance of acts that in outer form were competition, +but that had as their purpose the strengthening and maintenance of +monopoly. These acts are forms of the "unfair" practices that will be +mentioned later.[9] + + +§ 7. #Increasing regard for results of competition.# Despite the +binding precedents, the courts in some later decisions have refused +to look upon competition as good regardless of its motives and of its +consequences. In a federal case[10] the judge, in a brief and acute +dictum, recognized the evil of a rate war that would result from +threats of definite cuts. They impair "the usefulness of the railroads +themselves, and cause great public and private loss." The court's +opinion was no doubt largely influenced by the fact that railroad +rates were already subject to regulation: "Every precaution has been +taken by state legislatures and by the congress to keep them just and +reasonable,--just and reasonable for the public and for the carriers." + +In a state case[11] the facts were that a man of wealth started a +barber shop and employed a barber to injure the plaintiff and drive +him out of business. The court recognized that while, as a general +proposition, "competition in trade and business is desirable," it +may in certain cases result in "grievous and manifold wrongs to +individuals"; and in this case the "malevolent" man of wealth was +declared to be "guilty of a wanton wrong and an actionable tort." +The economists can but pronounce this judgment admirable so far as it +goes, but it is remarkably confined to a consideration of the private +legal rights of the injured competitor, and gives hardly a hint of +a higher criterion for judging competitive acts, that of the general +welfare. + +§ 8. #Common law remedy for monopoly ineffective.# The common law +contained prohibitions enough, both broad and specific, against +contracts and acts in restraint of trade. The common law contained +likewise a closely related body of doctrine by which the railroads, +as common carriers, ought to have given equitable and undiscriminating +rates to all shippers. There was a strong body of influential opinion +that long maintained that the case was sufficiently covered, that the +only thing needed was to enforce the common law. Even now, after all +that has elapsed, there are some in railroad and business circles +who still appear to hold that opinion. But the evils of railroad +discrimination and of other monopolistic practices continued, and for +some cause the common law was not enforced, excepting occasionally, +disconnectedly, and without important results. + +Why? The answer may be ventured that in the common law the whole +question of restraint of trade was treated primarily as one of private +rights and only incidentally as one involving general public policy. +Cases came before the courts only on complaint of some individual +that felt injured. Now the injury of higher prices due to contracts in +restraint of trade is usually diffused among many customers, and +the loss of any one is less than the expense of bringing suit. +Consequently, it rarely happened that cases were brought before the +courts except by one of the two equally guilty parties to a contract +in restraint of trade, when the other party had failed in some way to +do his part. When such an illegal contract in restraint of trade was +proved before a court by a defendant in a civil suit the contract was +declared unenforceable, and the only penalty in practice was that the +plaintiff could not collect his debt or secure performance from the +defendant.[12] A very similar situation existed in the case of the +individual's grievances against railroad charges and services. + +§ 9. #Federal legislation against monopoly.# The passage of the +Interstate Commerce Act in 1887[13] prohibiting discrimination and +railway pooling, and that of the Act of 1890 "to protect trade and +commerce against unlawful restraints and monopolies," popularly known +as the "Sherman Anti-trust Law," were part of one public movement to +remedy monopoly. From one point of view it seems true, as has often +been said, that in essence these statutes were simply enactments +of long established principles of the common law. Section 1 of the +Sherman law declared illegal "every contract, combination in the +form of trust or otherwise, or conspiracy, in restraint of trade or +commerce among the several states, or with foreign nations." Section 2 +made it a misdemeanor "to monopolize, or attempt to monopolize." + +But from another point of view, these new laws showed a marked change +both in the conception of the interests involved and in the means of +preventing the evils. The evil was at last conceived of as a general +public evil; the laws are not merely to protect individuals,[14] +but "to regulate commerce," "to protect trade and commerce." +More important still, it was made the duty of public officers +(district-attorneys of the United States) to institute proceedings in +equity "to prevent and restrain" violation of the Sherman Act, and a +special Commission was instituted to deal with railroad cases. It was +this undertaking of the initiative by the government, the treatment of +the problem as one of the general welfare, that marked a new epoch +in this field. The methods and agencies provided might be at first +inadequate and ineffective, but time and experience could remedy those +defects. + +§ 10. #Policy of the Sherman anti-trust law.# But in important +respects opinion and policies were not yet clear and consistent. They +wavered from one to another conception of the method for dealing with +the problem. It was clear only that _laissez-faire_ had been laid +aside. There are three other possible policies reflecting as +many different conceptions of the problem of monopoly: (1) +monopoly-prosecuted, (2) monopoly-accepted-and-regulated, +(3) competition-maintained-and-regulated. The policy of +monopoly-prosecuted is merely negative. This is the policy of +the Sherman law. It opposed no positive action to the making of +monopolistic contracts and to the formation of combinations, but +declared them to be illegal and provided for their prosecution and +punishment after the mischief had been done. The great epoch of the +formation of combinations[15] followed the enactment of this law. +True, lack of experience by the department of justice, and lack of +vigorous effort to enforce the law, and the slow action of the courts +were largely to blame for this result. The law has proved to be more +effective to prevent new combinations since it has been successfully +enforced in a few notable cases. But once large combinations have +been formed and complex individual financial interests have become +involved, the courts have proved to be incapable of undoing the deeds. +In practice the most sweeping remedy attempted under the law has been +the dissolution of enormous combinations formed years after the law +went into effect. This has been called the job of unscrambling the +eggs. The most notable cases were those of the Standard Oil Company +and of the Tobacco Company, decided in 1911, the results being +absurdly futile. + +§ 11. #Policy of monopoly-accepted-and-regulated.# A second policy may +be called that of monopoly-accepted-and-regulated. This is represented +by the Interstate Commerce Act (at first weakly, and more vigorously +after its amendment), and by the great mass of state legislation +putting the local and interurban public utilities under the control +of regulative commissions. For some decades after these industries +developed, the public faith was in competition as the effective +regulator. If monopolistic prices were too high, another company was +chartered to build a parallel railroad or another horse-car line on +the next street, or to lay down another set of gas pipes in the same +block. Almost from the first some students of the subject saw the +wastefulness and futility of this kind of competition, and nearly a +half century later the public reluctantly came to this view. Still, +sad to relate, the same history had to be repeated in regard to the +telegraph and telephone industry, and in some quarters the ultimate +outcome is not yet recognized. The Interstate Commerce Act itself, +with odd inconsistency, contains an anti-pooling provision (section +5) the purpose of which seems to have been to compel competition as to +rates which is now practically impossible under the other provisions +of the law. The policy of "monopoly-accepted" was seen to involve as +a necessary feature, public regulation of rates, to the point, if +necessary, of absolutely fixing them. The principle has come to be +accepted that wherever competition ends there public regulation of +prices and service begins. Monopolistic enterprises are _ipso facto_ +quasi-public institutions. + +§ 12. #Field of its application#. This policy, gradually extending +in practice, came to be applied to the class of industries which, +for lack of a better name, are called local utilities. The one +characteristic that they all have in common is that the service, +or product, which is sold requires for its delivery an expensive, +permanent, physical plant, and some special use of public highways. +Thus gas pipes, water pipes, poles and wires for telegraph, telephones +and electric light, street railways, regular steam railroads and some +other minor industries all answer to this test.[16] + +Beginning about the year 1900 one state after another enlarged the +powers of its state railroad commission or created a new corporation +commission to regulate these "local" or "public utilities."[17] They +have accomplished much, but the development of this kind of regulation +has not proceeded in many cases beyond the adjustment of relative +rates and the abolition of discrimination among the different +individuals and classes of customers. Experience has shown the great +difficulty of determining what is a fair absolute level of charges. +A new science of accounting has been developing to assist in the +solution of a problem, the complexity of which transcends the agencies +at hand to deal with it. With this policy applied to the local utility +(and railroad) phase of monopoly, there remains still the problem of +the industrial trusts in the manufacturing enterprises. + +§ 13. #The industrial trust,--a natural evolution?# The policy that +one is inclined to favor regarding industrial trusts depends very +much on one's answer to the question: Are or are not industrial trusts +natural growths? In this bare form the question is somewhat vague, but +the thought of those who answer it in the affirmative is positive if +not always entirely clear. They (at least the extreme representatives +of this view) declare that trusts have been, are, and will continue +to be, the results of a "natural evolution" of business conditions, as +inevitable as the great changes in the physical world. If this is so +man and society must recognize the facts, must waste no efforts vainly +in fighting against fate, but should accept the trusts and realize +their possibilities for good. And these are declared to be great, for +it is assumed that without the trusts all of the economies of large +production must be sacrificed. Irresistible economic forces, it is +said, are creating larger and larger units of business; friendly +coöperation and unified action must take the place of competition in +business. + +The outcome must be monopoly in every important line of manufacturing +industry and perhaps of commerce. In view of public opinion toward +monopoly, its acceptance necessitates its regulation. This argument +is supported by appeal to the experience in the field of railroads +and other local utilities, where public opinion has, after long +hesitation, recognized competition to be impracticable and the +acceptance of monopoly as inevitable. As extremes often meet, the view +of the industrial trust as a natural evolution is most favored on the +one hand by men of "big business," already interested financially +in trusts, and on the other hand by the most radical communists (or +socialists) whose ideal is the complete monopolization of industry +under the government. + +§ 14. #Artificial versus natural growth.# Opposed to this view is a +deep and widespread popular opinion or prejudice, against the trust +and in favor of competition. General opinion in this case (as not +always) finds much support in special economic studies of the methods +by which the existing industrial trusts came into being. First the +question properly is raised; just what is meant by "natural"? In a +sense everything has been the natural outcome of evolution,--the steam +engine, the submarine, the boycott, militarism. In an equally good, +if not better sense, every mechanical invention and every method of +industrial organization is artificial, has been the result of man's +choice and effort. In any case men may choose as good or reject as +unsuitable or bad, any particular mechanical device, and society +may decide to adopt any particular policy toward a certain form of +business organization and certain business practices (unless, indeed, +our philosophy be that of automatism, crude determination or fatalism, +regarding all human affairs). + +Now when one examines the methods which the notable trusts actually +did employ, and apparently had to employ, even when they were already +powerful single enterprises, in order to destroy their competitors and +to attain their monopolistic power, the word "natural" seems hardly to +describe the process. The evidence is not a matter of hearsay but is +embodied in a long line of judicial decisions, and in numerous special +inquiries by governmental commissions and officials.[18] + +§ 15. #Kinds of unfair practices#. This evidence is a startling +array of "unfair practices" and "unfair" forms of competition, which, +however novel in appearance, are essentially of the kind that has been +illegal under the common law for the past five hundred years. Many of +these practices were baldly dishonest, many of them were contemptibly +mean. The manifold varieties of unfair competition may be roughly +grouped under three headings according as they are connected with (1) +Illegal favors received from public or quasi-public officials; (2) +Discrimination against, or control of, customers; (3) Foul tactics +against competitors. + +(1) Among the practices in the first group are discriminatory rates +and rebates from railroads, favoritism in matters of taxation, undue +influence in legislatures, special manipulation of tariff rates +through powerful lobbies, or paid agents, undue influence in the +courts through the employment of lawyers of the highest talent, who +often later became judges. + +(2) Among the unfair practices toward customers are discriminations +among them by the various forms of price cutting, grants of credit, +and kinds of service. The liberty of retail dealers is limited in +a variety of ways, such as fixing resale prices, requirement of +exclusive dealing, and full-line forcing. + +(3) All the methods just mentioned as employed in dealings with +customers are likewise unfair toward competitors. Many other methods +are used to the same end, such as: enticing away their employees, +or corrupting and bribing them to act as spies, paying secret +commissions, false advertising, misrepresenting competitors, imitating +their patterns in goods of defective workmanship, shutting off their +credit or their supplies of materials, acquiring stock in competing +companies, malicious suits, infringement of patents, intimidation by +threats of business injury or of scandalous exposures, operation of +bogus independent companies. + +§ 16. #Growing conception of fair competition.# Any industrial trust +that was able to gain domination and monopoly power only by the use of +such practices, or any part of them, can hardly be deemed the result +of a "natural evolution." If "artificial" means the use of artifices +surely this development deserves the adjective. Yet even if not +natural, this development may be thought to be "inevitable," human +nature being as it is. But the bald fact is that while the great trust +movement was in progress no effort worthy of the name was being made +to enforce even the then existing laws and to oppose this artificial +development. The same allegation of inevitableness was once commonly +made of discriminatory railroad rates and rebates, evils which have +been in large part remedied only since the period 1903-1906, when at +last intelligent action was taken. + +To those that came to see the problem in this light, acceptance +of industrial monopoly with its complex task of fixing by public +commission the prices on innumerable kinds and qualities of goods +seemed at least premature. Rather, the first step toward a solution +seemed to be the vigorous prevention of unfair practices, and the +next step a positive regularizing of "fair competition."[19] The +fundamental idea in this is the enforcement of a common market price +(plus freights) at any one time to all the customers of an enterprise. +By this plan potential competition would become actual, and small +enterprises that were efficient might compete successfully within +their own fields with large enterprises that maintained prices above +a true competitive level. Even general lowering of prices by a large +enterprise with evident purpose of killing off smaller competitors is +unfair competition under this conception. It was for years recognized +that the realization of this policy required legislation regarding +uniform prices and the creation of a commission for the administration +of the law. + +§ 17. #The trust issues in 1912#. The campaign of 1912 presented in an +interesting manner the three policies above outlined. The +Republican party led by President Taft stood for the policy of +monopoly-prosecuted; its program was the vigorous enforcement of the +Sherman law. The Progressive party, led by Mr. Roosevelt, stood in the +main for the policy of "monopoly-accepted-and-regulated"; its program +called for minimizing prosecution and for developing a system of +regulation of trust-prices. The Democratic party, led by Mr. Wilson, +stood for the policy of competition-maintained-and-regulated, and the +problem was to find means to strengthen and regularize the forces of +competition. + +In practice these programs doubtless would be less divergent than they +appear. All alike proposed the retention of the Sherman law. The +two proposals to go further were presented as mutually exclusive +alternatives, whereas they necessarily must supplement each other in +some degree. The Progressives did not expect all industries to become +monopolies, and the Democrats tacitly conceded to monopoly-accepted +the large field of transportation and local utilities it already had +occupied. But there was a real difference in the angle of approach and +a real difference in emphasis. The Democratic program (the somewhat +unclearly) showed greater distrust of monopoly and greater faith in +the possibilities of creating fair conditions of competition (which +never had fully prevailed) in which efficiency would be able to prove +its merits and monopoly would work its own undoing. It was the more +logical for the country to give this policy at least a trial before +adopting irrevocably the policy of general industrial monopoly. +In either case competition actual or potential is the fundamental +principle by which prices have to be regulated. Where competition is +enforced it is by applying some general rules that create a general +market price instead of discriminatory prices, but the fixing of the +price is left to the competitors. Where monopoly is accepted prices +must be fixed with reference to an estimated competitive standard, +that which under hypothetically free conditions would just suffice to +attract and retain private enterprise and capital. + +§ 18. #Anti-trust legislation of 1914#. The anti-trust legislation +of 1914, passed by the Democratic party to carry out its program, is +embodied in two acts: the Clayton Act, laying down new rules; and +the Federal Trade Commission Act, mainly to provide an agency with +administrative and quasi-judicial functions to deal with unfair +practices. This displaced the Bureau of Corporations, established in +1903. The Clayton Act forbids discrimination where the effect may be +to lessen competition, or tend to create a monopoly. Due allowance may +be made for difference in the cost of selling or transportation, but +a difference is not required in such cases. It forbids contracts +to prevent dealers from handling other brands. It forbids corporate +ownership of stock in a competing corporation, forbids interlocking +directorates in large banks and in other competing corporations, +with capital, surplus and undivided profits aggregating more than +$1,000,000. The Trade Commission Act in addition to its administrative +provisions for investigation, reports, and readjustment of the +business of companies upon request of the courts, declares that +"unfair methods of competition in commerce" are unlawful, and both +empowers and directs the Commission to prevent their use (banks and +common carriers subject to other acts being excepted). + +These acts are too new to have been given a fair test. They have, +however, given evidence of exercising at once an influence upon +the situation. They are imperfect in some details that will require +amendment; but they mark the beginning of a new policy toward +industrial monopoly, the results of which will be watched with the +deepest interest. + + +[Footnote 1: See Vol. I, especially pp. 74 and 75.] + +[Footnote 2: See Vol. I, pp 59, 68, 70-71] + +[Footnote 3: See Vol. I, pp. 66, 67.] + +[Footnote 4: 77 Miss., 476. Cited by Bruce Wyman, "Control of the +Market," p. 137.] + +[Footnote 5: 19 R.I., 255.] + +[Footnote 6: 115 Ga., 429.] + +[Footnote 7: Mogul Steamship Company v. McGregor (L.R. 23 Q.B.D. +598).] + +[Footnote 8: Bruce Wyman, "Control of the Market," p. 22. In 1914 (216 +Fed. 971), a federal court granted an injunction restraining the use +of fighting ships by a combination, and in 1915 (220 Fed 235), +the court indicated a willingness to grant a similar injunction if +necessary. Similarly "fighting brands" of goods have been recently +prohibited.] + +[Footnote 9: See below, sec. 15.] + +[Footnote 10: Averrill v. Southern Railway (75 Fed. Rep. 736).] + +[Footnote 11: 107 Minn. 145.] + +[Footnote 12: Arnott v. Pittston and Elmira Coal Co., 68 N.Y. 558 +(1877).] + +[Footnote 13: See ch. 27, sec. 16.] + +[Footnote 14: At the same time the rights of injured individuals +are better safeguarded by sec. 7 of the Sherman law, permitting the +recovery of threefold damages and attorney's fees.] + +[Footnote 15: See ch. 28, sec. 9.] + +[Footnote 16: See further, ch. 30, secs. 5-9.] + +[Footnote 17: See ch. 27, sec. 15, on state commissions.] + +[Footnote 18: A few among the most important sources are the Report +of the Industrial Commission, 1898-1901, 19 volumes; reports of the +Bureau of Corporations on the petroleum and tobacco industries; U.S. +Supreme Court decisions, e.g., the Addystone Pipe case (175 U.S. 211), +given in Ripley, Trusts, Pools, and Corporations, p. 86; the Standard +Oil case (221 U.S. 1), and the Tobacco Trust case (221 U.S. 106); and +the very comprehensive volume on "Trust Laws and Unfair Competition," +by Joseph E. Davies, Commissioner of Corporations, Washington, 1916.] + +[Footnote 19: John B. Clark, the distinguished professor of economics +in Columbia University, has been the foremost and clearest exponent of +this idea, in his "The Control of Trusts," 1901, 2d ed., 1912, and in +other works.] + + + + +CHAPTER 30 + +PUBLIC OWNERSHIP + + § 1. Waves of opinion as to public ownership. § 2. Primary functions + of government favoring public ownership. § 3. Economic influences + favoring public ownership. § 4. Forms of municipal ownership. § 5. + Localized production favoring monopoly. § 6. Economies of large + production favoring monopoly, § 7. Uniformity of products favoring + monopoly. § 8. Franchises favoring monopoly. § 9. Various policies + toward local public service industries. § 10. State ownership of various + kinds. § 11. National ownership. § 12. Economic basis of public + ownership. + + +§ 1. #Waves of opinion as to public ownership.# Opinion and practice +in the matter of the public ownership of wealth and the direct +management of enterprises has moved in waves. In feudal times, when +government was practically identical with the personal ruler, and +the private "domains" of the lord or king were the sole source of +his public revenues,[1] holdings of this kind were very large. Their +public nature came to be more fully recognized, but they did not yield +large revenues, and gradually were in large part sold or given away to +private owners. This was particularly true in England, and in a less +degree on the continent of Europe. The conviction grew that the state, +or government, was an inefficient enterpriser, and that the sound +public policy was to foster private industry and obtain public +revenues by taxation. The ideal was embodied in the _laissez-faire_ +philosophy that government should confine itself exclusively to the +most essential political functions, leaving the economic functions +absolutely alone. It should keep the peace, prevent men from beating +and robbing each other, and preserve the personal liberty of the +citizen.[2] Thus, it was believed, all of the economic needs would be +provided for by competition, in the best way humanly possible, in the +quantities and at the rate needed. This policy attained its maximum +influence in the first half of the nineteenth century in England, and +in America probably just before the Civil War, in the decade of the +fifties. + +§ 2. #Primary functions of government favoring public ownership#. Some +public ownership, however, is necessary for the exercise even of +the primary political functions of the state. Civilized government +requires the use of numerous material agents. Buildings for +legislative and executive offices, custom-houses, post-offices, +lighthouses, can be rented of private citizens, as post-offices +usually are in small places; but it is obviously economical and +convenient in large cities for the government to own the public +buildings. Government can reduce to a minimum its direct employment +of officials by "farming out" the taxes, as all countries once did +to some extent, and as France continued to do up to the French +Revolution. It is now the general policy for government to own or +control its essential agencies, but this does not involve in every +case the employment of day-labor direct as in cleaning the streets or +collecting garbage. The more simple political functions shade off into +the economic. To coinage usually are added the issue of legal-tender +notes and certain banking functions: the post carries packages, +transmits money, and in most countries now performs the function of +a savings-bank for small amounts. The social and industrial functions +undertaken by public agencies have steadily increased since the +middle of the nineteenth century, and the sphere of the state has been +enlarging.[3] The question ever open is as to the proper limits to +this development. + +§ 3. #Economic influences favoring public ownership#. In some cases +private ownership is difficult because of the excessive cost of +collecting for the service. The cost of maintaining toll houses on a +turnpike sometimes exceeds the amount collected. Collection in +other cases, as for the service of lighthouses to passing ships, is +impossible. Public industry may secure, through the economy of large +production, a cheaper and more efficient service, the benefits and +costs being diffused throughout the community. The benefits of the +work of experiment-stations for agriculture are felt immediately by +the farmers, but are diffused to all citizens. A manufacturer able to +keep his method secret, or to retain his advantages for a time, can +afford to undertake experiments in his factory, but the farmer seldom +can. The public ownership of parks for the use of all gives a maximum +of economy in the production of the most essential goods,--fresh air, +sunshine, natural beauty, and playgrounds in the midst of crowded +populations. Municipal ownership of waterworks is an extension of the +same idea. Not only because large amounts of water are used by the +public, but because cheap, pure, abundant water is an essential +condition to good citizenship, speculation should in every possible +way be eliminated from this industry. + +The assumption is made in the _laissez-faire_ doctrine that the +interest of the public harmonizes with that of the individual. But +this proves often not to be the case. For example, the forest has an +immediate value to its owners and to the consumers of lumber, and it +has also a diffused utility in its influence on industry, on climate, +on navigation, on water-power and on floods. Yet, as the private +owner, unless a great land monopolist, does not control enough of the +forest to appreciably affect any of these things, and could rarely +sell them even if he could affect them, he will cut down the +tree whenever he can gain by doing so. In this situation either +governmental control or governmental ownership of forests is +essential. + +Each kind of political unit, or subdivision of government, develops +characteristic kinds of public ownership and industry. Federal states +consist of three main groups of political units: national, provincial, +and local. Provincial units are the largest subdivisions, as the +American "states," or commonwealths, the German states, and the +provinces in other countries. The term local political unit is more +complex and may mean county, township, village, city, or school or +sanitary district; but most of what is to be said of local ownership +refers to cities or to incorporated villages. + +§ 4. #Forms of municipal ownership#. Local political units acquire +ownership only in local industries and in wealth used locally by the +citizens. Nearly all parks and recreation grounds are owned by cities. +As population has become more dense, private yards of any extent +have become impossible, in cities, for all but the wealthy. Public +ownership of parks insures a "breathing place" and recreation grounds +to the common man in the most economical way. Of late the movement for +large and small public parks and playgrounds has gone on rapidly in +American cities. Related to parks are public baths, public libraries, +art collections, museums, zoological gardens, etc. Some have seen +danger in this policy, but the public sees no such danger so long +as the things supplied gratify the higher tastes--as art, music, +literature, and social recreation. These give no encouragement to +the increase of improvident families and to the breaking down of +independent character. The means of local communication--streets, +roads, bridges--were once owned largely by private citizens. Here and +there still are found toll roads and toll bridges built under charters +granted a century ago, but tolls on public thoroughfares are for the +most part abolished. A public market, where the producer from the +farm and the city consumer can meet, is an old institution. About two +thirds of the cities of 30,000 population or more have public markets +or scales, and fully one third have public markets of importance. New +York City has six large retail and wholesale markets, for selling meat +and farm produce, in which rents or fees are charged, and several open +markets. There has recently been a large movement in this direction. + +The providing of apparatus for extinguishing fires is always a public +duty; the conveyance of waste water is increasingly a public function. +The supply of pure water for domestic and business uses, for fire +protection and for street cleaning, while often a private enterprise +in villages, and sometimes in large cities, is increasingly undertaken +by public agencies. Most of the largest cities now own their own water +supply systems. Public ownership of gas and electric lighting is less +common, as the utility supplied is not so essential and the industry +is somewhat less subject to monopoly; but the difference is one of +degree only. Street railroads are often under public ownership in +Europe; but there have thus far been few cases of the kind in the +United States and Canada.[4] + +§ 5. #Localized production favoring monopoly#. A number of these +enterprises have characteristics in common which appear to make +inevitable their drift into monopolistic control. Waterworks, gas, +electric lighting, street railways, telephone systems, are among +these. However fierce may be the competition for a time, sooner or +later either one company drives out the other or buys it up, or both +come to an agreement by which the public is made to pay higher prices. + +A feature favoring the growth of monopoly when such industries are +left to private enterprise is the need to produce and supply the +commodity or service at a given locality. While two street railways +can compete on neighboring streets, it is physically impossible for +two or more to compete on the same street. Two systems of water-mains +or gas-mains can be put down, as sometimes is done, but this is not +only a great economic waste, but the tearing up of the streets is an +intolerable public nuisance. This difficulty is less marked in the +case of telephones and electric lighting, and some persons still cling +to faith in competition to regulate the rates in those industries; but +faith in competition between water companies and between gas companies +has been given up by nearly all persons now, as it was long since by +students of the subject. + +§ 6. #Economies of large production favoring monopoly#. A second +feature favoring monopoly in such industries is the marked advantage +of large production in them. These industries are usually spoken of as +"industries of increasing returns." This advantage is enjoyed in +some degree by every enterprise, but it is gradually neutralized and +limited. The need to extend an expensive physical plant to every point +where customers are to be served, and the very much smaller cost +per unit of delivering large amounts of water, gas, electricity, and +transportation, on the same street, offers a greater inducement +for one competitor to crowd out or buy out the other at a more than +liberal price. Even then, larger net dividends and correspondingly +larger capitalization are secured than were before possible to both +companies combined. + +§ 7. #Uniformity of products favoring monopoly#. A third feature +favoring monopoly is uniformity in the quality of the furnished. It is +a general truth that competition is most persistent where there is the +greatest range of choice open to the customer, and consequently the +most individual treatment required of the enterpriser. An artist, +even a storekeeper, attracts about him a body of patrons who like his +product (for the merchant's manner and method of dealing are a part +of the quality of his goods), and who cannot be tempted away by slight +differences in price. Rival companies in the stage of competition are +seen to claim superiority for their particular goods and to improve +their service in every way possible. A new telephone company, entering +where a monopoly has held the field, works at once a wonderful +betterment in rates, courtesy, and service. But as the product of all +competitors attains the highest technical standard possible at the +time, the rivalry is reduced to one of price, and it is usually a +"fight to the finish." + +§ 8. #Franchises favoring monopoly#. A fourth feature favoring +monopoly in these enterprises is the necessity of making permanent and +exceptional use of the public streets and alleys. If this right were +granted by a general law to every citizen, this feature would be +sufficiently implied in the foregoing discussion. As it would be +intolerable to allow private interests to use public property in +whatever way they wished, the legislative body makes special grants in +such cases in view of the circumstances. Not only is the legislature +(or council, or county board of commissioners, etc.) led by the +economic difficulties to withhold a charter from a second company, but +it may be corruptly influenced by the company already established. The +knowledge of the opposition to be encountered in getting a franchise +must keep competitors out, even tho monopoly prices are maintained. + +In view of these several features, which are so closely related that +they form a common character, more or less fully shared by various +industries, and especially in view of the necessity for the formal +granting to them of peculiar privileges in the form of a public +franchise, the public, in order to protect the general interest, is +forced to undertake an exceptional control of these industries. + +§ 9. #Various policies toward local public service industries#. +Several courses are open to the public, acting in its political +capacity, to retain those monopolistic advantages for the general +welfare. (a) It may do nothing, trusting vainly to competition to +regulate the rate, or consciously leaving the result to be worked out +by the monopoly principle; this is what in most cases has been done in +the past in America. (b) It may attempt, in granting the franchise, +to fix near cost the charge for the service or product, so that the +franchise will be worth little as private property. (c) It may leave +the rate to be fixed by the monopoly principle, but charge for the +franchise so much that the value of the monopoly is appropriated into +the public treasury. (d) It may have public officials carry on the +business, either selling the product at cost or making monopoly +profits that go into the public treasury. Various combinations of +these plans are followed in practice, the most common plan being the +fixing of maximum rates which, with improved methods, generally become +ineffective. It is difficult to fix a uniform rate that is equitable, +because conditions change, and, further, because a uniform rate must +be applied to all parts of the town, altho the cost of service varies +greatly. It is difficult because of the limited number of competent +bidders, to sell the franchise for what it is worth. There remains the +policy of public ownership to secure the profits of monopoly to the +public, either directly or in a diffused manner. There is no doubt +that the general trend of municipal policy everywhere is toward public +ownership of this type of local public service industries. + +§ 10. #State ownership of various kinds#. The movement toward public +ownership by the American states has been much less marked than that +by the municipalities. The commonwealths have retired from some fields +where once they were engaged in industry. Students of American history +know that between the years 1830 and 1840 some states engaged largely, +even wildly, in canal building, railroad construction, banking and in +other enterprises. The undertaking of these industries was determined +often by political and by selfish local interests, and their operation +often was wasteful. A few enterprises succeeded, the most notable of +these being the Erie Canal in New York. The unsuccessful ones remained +worthless property in the hands of the state or were sold to private +companies, as in the case of the Pennsylvania Railroad. This reckless +state enterprise was a bitter lesson in public ownership, and +continued for three quarters of a century to have such an effect on +public opinion, that few proposals for public ownership could have a +fair hearing in America, But railroads and canals are publicly owned, +and more or less successfully operated, by many foreign states, as in +Prussia and other German states, in Switzerland, and in the new states +of Australia, and this policy is rapidly extending to other countries +and to varied industries. + +There has been recently a greatly increased interest in forestry +shown by the American states. This is especially likely to be a state +enterprise wherever the forest tracts are entirely within the limits +of the state, as is the case in New York and Pennsylvania which +have been foremost in this work. At present at least 32 states have +forestry departments. Most of the forests in Germany are either +communal or state-owned. The schools, a great industry for turning +out a product of public utility, are largely conducted by the American +states and by local units rather than by the nation or by private +enterprise. The state encourages researches in the arts and sciences, +and gives technical training. A variety of minor enterprises have been +undertaken by states to supply salt, phosphate, banking facilities, +even some manufactures. One after another the states are adopting the +"state use" system of labor in the prisons and public institutions, +engaging in agriculture and manufacturing on a large scale, and +using the products, amounting to millions of dollars annually, almost +entirely for public purposes. + +§ 11. #National ownership#. The national governments everywhere appear +to be enlarging the field of their ownership. This policy has its +roots far in the past. Some industries grow out of the political needs +of government. Established as a means of communication with military +outposts, the post became a convenient means of communication +for merchants and other citizens and grew into a great economic +institution. In most countries the telegraph is publicly owned and +has been annexed to the post, to which it is very closely related in +purpose. National ownership of railroads is the rule, and our policy +of private ownership the great exception in the world to-day. +Many persons, even some in railroad circles, believe that national +ownership of railroads is sure to develop out of our present policy of +regulation. + +The national improvements connected with rivers and harbors were first +political--that is, they were for the use of the government's navy; +they became, secondly, commercial--for the free use of all citizens +engaged in trade; and they continue to unite these two characters. +Forestry is most largely undertaken in this country by the national +government, partly because some forest areas in the West extend over +state boundaries, and largely because large tracts of public forest +lands were still unsold at the time public attention was attracted +to the subject. Since 1890, the policy of reserving great areas for +forests, and picturesque districts for national parks, has developed +greatly in the United States. The national forest area contained +in the various forests in 20 states (not including Alaska and Porto +Rico), now covers about 225,000 square miles, equal in area to five +states of the size of Pennsylvania. There are, besides, fourteen large +national parks, ranging in size from a few hundred acres up to over +2,140,000 acres (the area of the Yellowstone National Park), and +aggregating 4,600,000 acres, nearly the size of Massachusetts or of +New Jersey, besides numerous other national reservations for monuments +and antiquities. + +In some countries mines are thought to be peculiarly fitted for +national ownership and control. In the German Empire the several +states own coal, salt, and other mines. Coinage and banking are +everywhere looked upon as functions of sovereignty, and yet it is no +more necessary for a nation to own its own mint in order to control +the monetary system than for it to print the banknotes in order to +regulate their issue. The American government has its own printing +office. The fish commission, and the various branches of the +department, coöperate with private industry in many ways. This brief +survey suggests that the industries undertaken by government are both +varied in nature and large in extent, altho small in proportion to the +mass of private industry. + +§ 12. #Economic basis of public ownership#. The question as to the +proper limits of public ownership is one most actively debated. The +movement is progressing in accordance with the principle that public +ownership is economically justified wherever it secures a product +or service of widespread use that would otherwise be impossible, or +insures the public a better quality or a lower price. The question of +public ownership is not exclusively an economic question. There +are incidental problems, such as its effects on enterprise and on +political integrity, with which it is not possible here to deal. In +the main, however, public ownership is simply a business policy which +must be justified by its economic results. In the case of a general +social benefit not to be secured without public ownership (as popular +education or the climatic effect of forests), the only question +to answer is whether the utility is worth the cost. In the case of +industries already in private hands, as waterworks, gas and electric +lighting, there is needed, to make a wise decision possible, a +knowledge of the effect a change to public ownership will have upon +cost and service. If public officials can furnish some goods cheaper +than they are furnished by private enterprise, it is because of the +wide margin of monopoly profit, not because there is any magic in +public ownership. The same general items of cost must be met. The +first cost of the plant and the annual interest payments are much the +same. Experience shows that, because of political influence and of +public opinion, wages are likely to be higher under public ownership, +but salaries for management lower. Public collection of dues along +with taxes is an advantage not enjoyed by private companies. Several +public officials sometimes share the same office and thus reduce +expenses. In small towns the public electric lighting and waterworks +have been operated more economically under one roof. Some items of +cost may be less under public management, but on the whole, public +industry probably has no advantage in these respects. Public industry +does not have to meet the costs of lobbying and blackmail which are +often forced upon private companies. But the greatest source of saving +in public ownership is the value of monopoly privileges that, under +private management, go into private pockets. + +The temptation of political corruption may be more insistent when a +large force of men is constantly employed, and when large supplies are +constantly purchased, by public officials, but the temptation is not +so strong or so centralized as it is in the granting of franchises to +wealthy corporations. Public industry is weakened by the absence of +certain motives to excellence that are present in private business. +The income of public officials not being dependent on the economy of +management, the spur and motives of competitive industry are lacking. +No social discovery has made individual honesty and civic virtue +useless to good government. + +The decision in any specific case is one dependent on local +conditions, and the exact limits of public ownership are not fixed. +Industry is changing so rapidly that new adjustments are made every +year. The main outlines of public ownership, however, are now in large +part determined. Some industries do well, others ill, under public +management, and between these lie many debatable cases. Waterworks and +probably electric lighting, because of the comparative simplicity of +their operation, are more suitable for public ownership than are gas +works. No absolute line divides the one group from the other. But +whatever the changes, the fact can not be ignored that the increase +of public ownership is altering in manifold ways the organization +of industry, and is reacting upon the production of wealth, and the +distribution of incomes. + + +[Footnote 1: See above, ch. 16, sec. 5.] + +[Footnote 2: See above, ch. 16, sec. 2, on the police function.] + +[Footnote 3: See ch. 16, secs. 3 and 4.] + +[Footnote 4: See above, ch. 16, sec. 5, statistics of receipts from +public service enterprises.] + + + + +CHAPTER 31 + +SOME ASPECTS OF SOCIALISM + + § 1. The distribution of incomes. § 2. Distribution by force and by + status. § 3. Social effects of the right to transmit property. § 4. + Effects of the right to inherit property. § 5. Broader social effects + of inheritance. § 6. Limitations upon intestate inheritance. § 7. Some + merits of competition. § 8. Wide acceptance of competition. § 9. + "Economic harmonies" and discords. § 10. Competition modified by + charitable distribution. § 11. Competition modified by authoritative + distribution. § 12. Meanings of socialism. § 13. Philosophic socialism. + § 14. Socialism in action. § 15. Origin of the radical socialist party. + § 16. The two pillars of "scientific" socialism. § 17. Aspects of the + materialistic philosophy of history. § 18. Utopian nature of "scientific" + socialism. § 19. Its unreal and negative character. § 20. Revisionism and + opportunism in the socialist party. § 21. Alluring claims of + party-socialism. § 22. Growth and nature of the socialist vote. § 23. + Economic legislation and the political parties. + + +§ 1. #The distribution of incomes#. The great economic progress of the +past two centuries has been mainly in lines of technical production. +The developing natural sciences and mechanic arts have given men a +marvelously increased control over forces and materials. This has +multiplied the quantities of goods of most kinds at the disposal of +men, collectively considered. All men, with rare exceptions, have +been gainers; but the increased production has been very unequally +distributed among the members of the community. More and more +insistently the plea and the demand have been made for better methods +of distribution that will give to the masses of the people a larger +share of the goods produced. Production is largely a problem of the +technical arts; distribution is a problem of social economy. + +Two aspects of distribution may be distinguished: functional +distribution is the attribution of value (yields) to wealth and labor +considered impersonally, as groups of productive agents; and personal +distribution is the actual movement of incomes into the control of +persons.[1] Personal incomes, whether monetary, real, or psychic, +are the sum of a number of elements. Some parts are due to services +performed by the person himself. When one combs his own hair he +is performing for himself a service that is a part of his income. +Benjamin Franklin said it was better to teach a boy to shave himself +than to give him a thousand dollars with which to pay barbers for a +life-time. Other parts of income are the uses and fruits of legally +controlled wealth; chance finds, as gifts of value or lost and +abandoned goods; goods assigned to one by authority; wealth inherited; +illegal gains by robbery; goods secured on credit; gifts either +of things or of services. The many methods by which incomes are +distributed to the persons making up a society may be grouped in the +following five general classes: force, status, charity, competition, +and authority. These will be discussed in due order. + +§ 2. #Distribution by force and by status.# Distribution by force is +the most primitive mode of distribution. The stronger takes from the +weaker. Forceful distribution still persists in the form of crime, +and if we include fraud within the term it still affects an enormous +amount of income. The lawless take whatever they can, and the +supporters and officers of the law do what they can to check the acts. +Slavery is distribution by force, as is the levying of war indemnities +from a conquered people. + +Distribution may be by status, or set rules and customs. In this case +men receive incomes that are independent of their efforts and outside +of their control. Distribution by status is guided neither by the +personal merit of the recipients nor by the value of their direct +services, but the merits and acts of men not living. Feudal society +was built on status. Men were born to certain privileges and +positions; they inherited property which could neither be bought +nor sold; they followed trades which could rarely be entered by any +outside of favored families. Caste in India and in other Oriental +countries regulates a large part of the life of the people. + +This method still prevails to a greater extent in our society than is +usually recognized.[2] By public opinion and by prejudice, status is +still maintained in respect to the choice of occupations even where +the law has formally abolished it, as is seen in modern race problems, +in western countries to-day inheritance of property is the main legal +form of status and it shades off into other forms of distribution. +Private property must find its justification in social expediency.[3] +There is no feature of it that is more questioned than is the right of +inheritance. + +§ 3. #Social effects of the right to transmit property.# The right +to transmit property by inheritance or by bequest may be judged with +reference to its effects upon the giver, upon the receiver, and upon +society at large. It is well to take these three points of view. +The right to dispose of property either during life or at death has +undoubtedly in many ways a good effect upon the character of men. +It stimulates the husband and father to provide for his wife and +children, and spurs others to continued economic activity. There is +a joy in giving, a joy in the power to bestow one's wealth upon those +one loves, or as one pleases. Much of the existing wealth probably +never would have been created if men had not had this right. But there +is a limit to the working of this motive, and other motives often are +more effective. Many a man after gaining a competence continues to +work for love of wealth and power in his own lifetime, as the miser +continues to toil for love of gold. When men without families die +wealthy, when men not having the slightest interest in their nearest +relatives labor till their dying days to amass wealth, it is evident +that the right to bequeath property has little to do with their +efforts. Love of accumulation and love of power in these cases supply +the motives. A more limited liberty to dispose of property at death +might still suffice, therefore, to call out the greater part of the +efforts now made to accumulate property. + +§ 4. #Effects of the right to inherit property#. That the effects upon +the receiver of the property are good is somewhat more doubtful. It is +true that children reared in families of large incomes would be great +sufferers if plunged into poverty at the death of their parents. There +is much social justification for permitting families to maintain +an accustomed standard of comfort. Few would deny that provision by +parents to provide education and opportunity for their children is +commendable and desirable. But the evil effects of waiting for dead +men's shoes are proverbial. Many a boy's greatest curse has been his +father's fortune. Many a man of native ability waits idly for fortune +to come and lets opportunities for self-help slip by unheeded. The +world often exclaims over the failure of the sons of noted men to +achieve great things, for, despite confusing evidence, men still +have faith in biologic heredity. A too easy fortune saps ambition and +relaxes energy; and thus rich men's sons, if not most carefully and +wisely trained, are often made paupers in spirit, while the self-made +fathers think their boys have better opportunities than they +themselves enjoyed. The greater social loss is not the dissipated +fortunes, but the ruined characters. Andrew Carnegie said that it +would be a good thing if every boy had to start in poverty and make +his own way. Cecil Rhodes recorded in his will his contempt for the +idle, expectant heir. + +§ 5. #Broader social effects of inheritance#. Inheritance has good +effects for the community insofar as it helps to secure efficient +management of wealth. If the son or relative has been in business with +the deceased, there is a reason that he should inherit the property, +and his succession to it makes the least disturbance to existing +business conditions. This consideration, however, has less weight as +the corporate form of organization becomes well nigh universal in +"big business." Every profligate son, every incompetent heir, is +an argument against the inheritance of property. It is to society's +interest that no able-bodied member should stand idle. Every child +should have presented to him the motive to use his powers in useful +ways. Moreover, many feel that the great fortunes now accumulating +through successive generations in the hands of a few families are a +danger to our free society, even if these fortunes should continue to +be well administered. There is a widespread feeling that the heredity +of great wealth is, like the heredity of political power, out of +harmony with the democratic spirit. Democracy wishes to see men and +individuals put to the test, not profiting forever by the deeds of +their forebears. This feeling is shared by those who cannot be charged +with radical prejudices. It was startling when a conservative body +of lawyers meeting in their state association in Illinois, passed +a resolution favoring moderate limits to inherited fortunes. Almost +every year sees bills of this purport introduced in the legislatures +and in Congress. Probably no one of many current radical proposals +is more widely favored than this, among men of otherwise conservative +social views. Tho sum most often mentioned as the proper limit is +$1,000,000, but in every case it is a sum larger than the fortune of +the person speaking.[4] + +§ 6. #Limitations upon intestate inheritance#. A proposal less crude +and with strong reasons of social expediency in its favor is to +limit the right of intestate inheritance to persons that have been +in essential economic and social relations with the deceased. The +foregoing considerations show that the case for the right of gift in +the lifetime of the giver is strongest; that for the right of bequest +comes next. The man who has acquired wealth may usually be trusted to +decide who bear to him close social or personal relations, and to say +whose lives have in a measure furnished the motives of his activity. +But the right of intestate inheritance by distant relatives is one +that stands on weak social foundations. It is a survival from more +patriarchal conditions when, in the large family, or clan, the bond +of unity was very strong. A truer test to-day of the proper limits for +intestate inheritance is whether the wish to provide for these heirs +has furnished the motive for the producing and preserving of the +wealth. The claims of those nearest in blood and closest in personal +relations are strongest. Family affection and friendship form the +strongest of social ties, and it is socially expedient to cultivate +them. Motives for abstinence and industry must be strengthened. But +the same test shows that the zealous regard of the American law for +the rights of distant kinsmen in foreign lands, or in distant quarters +of this country, is irrational, and is unjust to the community where +the fortune was made. Public opinion tends strongly toward this idea. + +Property rights as they exist are clearly seen not to be a product of +pure reason. They are the result of social evolution, of historical +accidents, of class legislation, and in many cases, of selfish +interests. Changing social conditions and ideas are bringing many +changes in law, and further changes must be expected to come, which +will reduce the influence of inheritance of property in fostering +status in distribution. Especially important are the increasing +application of the progressive principle to incomes and +inheritance,[5] and the development of insurance to put family savings +into the form of terminable annuities instead of capital sums.[6] + +§ 7. #Some merits of competition#. The dominant method of distribution +to-day is that of competition.[7] This is not a mere accident, but +is a resultant of unending experimentation with different methods of +distribution carried on since the beginning of human society. A method +of distribution had to be found and retained that would work under +the conditions of human nature at each stage of social progress; and +competition, however imperfectly, has worked. It is evident from the +voices of praise and of blame that competition has its good and its +bad aspects. Let us observe first the good ones. Competition acts to +distribute the working force over the field of industry wherever it +is most needed. The remarkable (tho far from perfect) adjustment +of industry to the needs of each neighborhood is brought about by +individual motives, not by centralized authority. Wherever consumers +settle, stores are started and factories are built. Wherever work is +to be done, men come in about the right number to do it. It is not +mere chance that produces this result. The available skill is adjusted +to varying needs by the delicate measurement of the market rate of +wages. Two-sided competition gives a definite rule of price--the only +definite impersonal rule. The theoretical competitive price is the +standard to which things tend constantly to adjust themselves in an +open market.[8] + +Competition is an essentially economic method as contrasted with the +legal and personal methods above and later described, because it +is impersonal and reducible to a rule of value. Distribution under +competition is made, not with reference to abstract ethical principles +or to personal affection, but to the value of the product. Each worker +strives to do what will bring him the largest return, and the price +others pay expresses their estimates of the service in that market. +Each seeking his own interest is led to make himself more valuable to +others. In most cases and in large measure, competition stimulates men +to sacrifice, to invention, to preparation; thus is zeal animated and +are efforts sustained. In the economic realm, as is now seen to be the +case in the biologic realm, competition of some effective kind is +an indispensable condition not only of progress but of life without +degeneration. Monopoly, as we have noted, never has ceased to +rest under the ban of Anglo-Saxon law, and therefore to exemplify +compulsory, as opposed to competitive distribution. A striking feature +of the competitive method is its decentralization. Each helps to value +the economic services of each. If one pays more for the services of +the singer than for those of the cook, it is not because one would +rather listen to the singing than to eat when starving, but because by +apportioning one's income one can get the singing and the eating too. +In the existing circumstances, the singer's services seem to the music +lover to be worth paying for, and he backs his opinion with his money. +So each is measuring the services of all others, and all are valuing +the services of each. It is distribution by valuation, and it is +valuation by democracy. + +§ 8. #Wide acceptance of competition.# On purely abstract and _a +priori_ grounds competition cannot be accorded an ethical sanction, as +is sometimes assumed. But because of the qualities above outlined, and +because it meets in large measure the pragmatic tests, the competitive +rule of distribution appeals to all men (even to those who denounce +it) as having in many of its applications a moral character, as +compared with the other possible methods of distribution. Indeed, +the competitive rule is the only rule that does not involve either +personal and arbitrary judgment (force, charity, and authority) or +status. Even such measure of justification as is found in status (as +in property and inheritance laws) is traceable, in the long run, to +competition. The case for a limited application of status is based +upon its results in stimulating motives of effort and accumulation.[9] +When the rule of authority is applied to-day in the large field of +public regulation where _actual_ competition has become impossible, +almost the only guiding rule is _hypothetical_ competition. The +just rate is felt to be that which in the long run _would be_ just +sufficient to afford "normal" incomes to labor and to capital, to +call forth the necessary effort, skill, judgment, and forethought, +if competition _were_ at work, as it is not.[10] Only this rule +of hypothetical competition redeems these public rates from +arbitrariness, favoritism, and force. + +§ 9. #"Economic harmonies" and discords.# Every truth in political +philosophy finds some exaggerated expression. Competition, as +compared with status and custom, has some notable merits; and when the +eighteenth century was throwing off some of the burdens inherited from +the more static Middle Ages, competition appeared to be a panacea for +all the ills of society.[11] The belief in the benefits of competition +and the virtues of economic freedom found its extremist expression +in the first half of the nineteenth century in the doctrine of "the +economic harmonies." According to this, if men are left entirely free +to do as their interests dictate, the highest efficiency and best +results for all will follow; the economic interests of all men are in +harmony. Corresponding with this doctrine is the economic policy of +extreme _laissez faire._ + +But experience has shown that the economic interests of the +individuals in a community are only partly very rarely are they +wholly, in harmony. There are three species of competition in every +market: that between sellers, that between buyers, and that between +sellers on the one hand and buyers on the other.[12] If at any point +free competition is hindered, even the disciple of economic harmony +must, from the very nature of his doctrine, expect a discordant +result. In reality competition is rarely quite complete on both sides, +and when it is not the weak usually suffer. Men do not start with fair +opportunities. All that they may be entitled to have under competition +may be so little that social sympathy seeks to better the results; +hence poor relief, public and private. Society as a whole has an +interest in the outcome of the individual's economic struggle. +It cannot see men starving or driven into crime. Moreover, when +competition is the rule of valuation, it, like all valuations, +partakes of the quality of those choosing--wise or foolish, good or +evil.[13] And tho competition is the rule of democracy in economics, +yet democracy cannot permit the economic vote of a vicious or of +a foolish group to stand, where the goods, services, and prices +resulting offend the prevailing public judgment and social conscience. + +§ 10. #Competition modified by charitable distribution.# In practice +the competitive method of distribution always has been modified or +supplemented in varying degrees by the other methods. Important among +these is charitable distribution. Charitable is here used in its +original sense, as synonymous with benevolence and affection. First is +parental love, the root and type of all the forms of charity. There is +a complete lack of economic equivalence in the relation of parent and +child in early years. The helpless infant does nothing for the parent, +the parent gives all and does all for the child. Gradually, however, +the balance is regained; as the years go on, not only do children +repay in affection but in many cases they repay in material ways. +Especially in the factory districts and on the farm the child sooner +or later begins to reestablish the balance, becomes a worker, and +contributes to the family income as much as the cost of his support, +and finally more. A student of modern English town life has traced the +curve of poverty traversed by the average poor family as the children +are first an economic burden, and later an aid to their parents. In +the middle, or propertied, classes the children do not for many years +cease to be a financial burden to their parents, and in most eases the +economic balance is never reestablished. It is not to the parents, but +to the succeeding generation, that the debt is tardily paid. + +Friendship widens the range of generosity and multiplies the mass of +gifts. Broad sentiments of humanity lead to gifts outside the range of +personal affection and personal interest, to the beggar on the street, +to institutions devoted to charity. In New York state alone a sum of +more than $20,000,000 a year is expended by institutional charities. +About $512,000,000 in public benefactions were given in the United +States by private donors in the year 1915, and in this respect that +year was not exceptional. An enormous and increasing body of property +is thus being year by year socialized, largely through bequests +from persons without direct heirs. Great public subscriptions to +the sufferers from great disasters, such as the Irish and the Indian +famines, the Chicago fire, the Galveston flood, the San Francisco +earthquake, the great European war, bespeak a widening generosity. +Religion impels to the building of churches, to the support of +priests, missions, and manifold religious undertakings. Charity in +this connection is the expression of a sentiment that varies from +the most intense personal, affection to the broadest and most general +humanitarian sentiment. + +§ 11. #Competition modified by authoritative distribution.# Authority +is, after force, the oldest and was the earliest widely operative +method of distribution. It shades into force, status, and charity in +manifold ways, but it is essentially the assignment of a common, or +social, income to individuals by some person or persons chosen, or +accepted, by the society to perform this function. Thus it may be +distinguished from force, which takes for itself what belongs to +another; and from charity, which gives to another what belongs to +one's self; and from status, which transmits claims to income from one +generation to another by a fixed impersonal rule, not by a personal +judgment in the particular case. + +Authoritative distribution is the dominant method in patriarchal +tribes, in communal societies, and in monastic and other religious +orders. Each person works at what he is commanded to do, and some one +in authority (patriarch, head of the community, father of the monastic +order) portions out the tasks and the rewards. In the family this rule +largely prevails, and even after the children have come to years of +discretion they not infrequently accept, from habit or affection, the +will of the parents, and give up their entire wages to receive back +a portion. The method of charitable distribution while the child is +young gradually changes to authoritative distribution after the child +becomes a worker. The untrained and indocile youth, however, is made +the subject of compulsory distribution. + +The collection and distribution of taxes is by public authority. No +attempt is made to give back an exact equivalent to each taxpayer. The +money is taken and spent by authority. The new forms, or at least the +new extensions, of taxation, especially of incomes and inheritances +at progressive rates, are very important examples of authoritative +distribution.[14] The courts sometimes find themselves obliged to +apply the method of authoritative distribution, altho they do it +unwillingly. They try to confine their efforts to interpreting the +contracts men have voluntarily entered into, and they avoid, so far +as possible, the making of contracts or the fixing of rates. +Authoritative distribution is exemplified in the work of many +commissions appointed by law to fix rates or settle disputes, such as +boards of conciliation and arbitration and railway commissions. + +§ 12. #Meanings of socialism.# Our reason for leaving to the last the +discussion of _authority_ as a method of distribution is not that it +appeared last in historical development, but that it now is the most +strongly advocated as an alternative of competition. One of the most +striking developments of opinion in the nineteenth century was that +favoring an increasing use of authority in distribution. This was +meant not merely to supplement and modify competition, but to displace +it completely, or (in the more moderate program) in large part. This +opinion, or plan, has appeared under a variety of names, the main ones +being communism, collectivism, social-democracy, and socialism, of +which the last name has just now the greatest vogue. Socialism is +a word of manifold meanings no one of which is generally accepted. +Discussion is therefore often a Babel of tongues. + +Socialism designates (1) a social[15] philosophy (2) a mode of social +action, (3) a particular political party. There is thus philosophic, +active, and partisan socialism. Each of these may be taken either in +an absolute or in a more or less relative sense. The first meaning +is the most fundamental, the second less so, and the last the least +fundamental, but just now the most frequently used. + +§ 13. #Philosophic socialism.# As a philosophy socialism is related +to social just as individualism is related to individual. Socialism +is faith in the group motive and group action rather than in +self-interest and competitive action. Instead of social philosophy we +may say social faith, or social ideals. This faith may be absolute, +or radical, to the rejection of all economic competition; or it may +be moderate, and leave more or less place for self-interest and +competition. Every man of conscience and of ideals has moods that +are socialistic (in this sense) and dreams of a world without toil, +competition, or poverty. + +This social philosophy has taken form as "Christian Socialism" among +men of strong religious natures, in various religious denominations. +Great secular dreamers--Plato in his "Republic," Sir Thomas More, in +his "Utopia," Edward Bellamy, in "Looking Backward," William Morris, +in "News from Nowhere," and others--have painted beautiful pictures of +ideal economic states from which all of the great evils and problems +of our society have been banished. + +§ 14. #Socialism in action.# Active socialism is group action in +economic affairs. This may be by private voluntary groups, as a club, +church, or trade union, or by a public group, or political unit of +government, which has therefore a compulsory character. The radical +kind of active socialism would be the ownership by government of all +the means of production and the conduct of all business, assigning +men, by authority, to particular work and granting them such incomes +as the established authority thought they deserved. This kind exists +nowhere. A moderate kind of active socialism is represented by each +separate case of public ownership or industry. Even public regulation +by authority, of the many kinds described in this volume, is touched +with a quality of active socialism. In this sense there can be more or +less of active socialism in a community; a state may be more or less +socialized in its economic aspects. An English Chancellor of the +Exchequer declared in the last decade of the nineteenth century, "We +are all socialists now." The ever-increasing sphere of the state[16] +gives to that statement to-day a larger, fuller meaning than when it +was uttered. + +Socialism in action is of course always the expression of a more or +less socialistic philosophy shared by a majority of the people. This +great recent movement of socialization in industry is the expression +not of a radical but of a moderate social philosophy. It does not look +to the abolition, but only to the modification and limitation in +some directions, of private property and of competitive industry. The +spirit of this movement is opportunist, or experimental. It is ready +to try public action, but recognizes that it has difficulties and +limitations. The ultra-radical and the ultra-conservative alike +declare that these measures "logically" lead on to the complete +destruction of private property. But men find that they can warm their +hands without being "logically" compelled to thrust them into +the fire, and that they can quench their thirst without a growing +resolution to drink the well dry. When this governmental activity has +proceeded somewhat extensively and systematically in cities, as in +Great Britain, it is called municipal socialism; and in states, as in +Germany, it is called state socialism. + +§ 15. #Origin of the radical socialist party.# Socialism in the +partizan sense is an actual political organization. Both in Europe +and in America such organizations have been designated as +"social-democratic," "socialist labor," or "labor" parties. Socialism +in this sense of a party organization, or movement, is very different +from a social philosophy. In its partizan phase socialism exhibits all +of the baffling variability and elusiveness that it does in its other +aspects. However, in its printed program the socialist party sets +forth both a socialist philosophy and an ideal of active socialism in +their most radical forms. + +Modern political socialism traces its origin directly to the most +radical of German social philosophers, Marx, Engels, and Lassalle. +Karl Marx (1818-1883), preeminently the philosophic leader of the +movement, sought to give a solider foundation of reason to the +somewhat romantic socialist philosophy current in his day. His own +doctrine, first set forth connectedly[17] in the Communist Manifesto +in 1848, he called Communism. This has come to be called by his +followers, "scientific socialism." "Scientific" was meant to emphasize +the contrast with "Utopian" socialism, as Marx and Engels somewhat +scornfully characterized the older communist philosophy, romances of +the ideal state, and attempts to found and conduct small communistic +states. + +§ 16. #The two pillars of "scientific" socialism.# Scientific +communism was to be based upon two immovable pillars. The one was +"the labor theory of value," by which all profits and incomes +from investment were shown to be robbery of the wage-workers.[18] +"Capital," that is, the ownership of the means of production, was +declared to be the instrument of this "exploitation." The other +foundation stone was "the materialistic philosophy of history," that +is, the explanation of all the intellectual, cultural, and political +changes of mankind from the side of the material economic conditions +as causes. As Engels expressed it, "The pervading thought ... that the +economic production with the social organization of each historical +epoch necessarily resulting therefrom forms the basis of the political +and intellectual history of this epoch." This doctrine denies that, +in an equally valid sense, biological changes in brain, and cultural +changes in science, arts, and education, cause the mechanical +inventions and improved processes and thus alter the form bf economic +production. + +§ 17. #Aspects of the materialistic philosophy of history#. Marx's +general formula of economic materialism had three minor propositions +or corollaries: (a) The doctrine of the _class conflict_; all history +is a record of the class struggle between those who have property, +the ruling classes within the nations, and those who have not, the +oppressed working class, (a conception of history blind to most of the +great international conflicts). The class conflict was declared to +be more sharply marked and bitter than ever before; "the entire human +society more and more divides itself into two great hostile camps, +into two great conflicting classes, _bourgeoisie_ and proletariate." +(b) The doctrine of _increasing misery_; the conditions before +described must cause the steadily increasing degradation of the +masses. (c) The _catastrophic theory_; the final and inevitable result +of this movement must be a revolution, when the downtrodden workers +will throw off their chains and expropriate the expropriators. There +is no doubt that Marx, when he first formulated this philosophy, +believed that such a revolution, most violent in nature, would occur +within a few years. + +§ 18. #Utopian nature of "scientific" socialism#. The term +"scientific" set in contrast with "utopian" was meant to imply that +the doctrine of Marx was not "utopian" (a word which had come to mean +fanciful and impracticable). Marx had a contempt for the romances +of the ideal state and for what he deemed to be the unfounded +speculations of earlier prophets of communism. But utopian (from +_utopia_, Greek for no place) means nonexistent, and Marxian socialism +surely was that. "Experimental" or "actually at work" would have +been a more logical contrast with "utopian." Marx and his followers +likewise had a contempt for the communistic experiments, or +settlements and colonies, which by the scores had been started and had +failed, bringing discredit upon all communistic proposals. The beauty +of "scientific" socialism was that it never could be tried on a small +scale--or tried at all until a whole nation adopted it. + +The old time "scientific" socialist had a lofty scorn for any less +dogmatic philosophy than his own or for any less sweeping social +change than that he expected. Moderate social reform to him was but +temporizing; indeed, it was evil, inasmuch as it helped to postpone +the inevitable, but in the end, beneficent catastrophe of the +social revolution. A step-by-step movement toward socialism, state +socialism,[19] even of a pretty sweeping character, was, to the +old-time Marxians, not really socialism at all. A valid reason for +this attitude was found in the extremely limited manhood suffrage +and in the aristocratic class government of most European countries, +especially of Germany; so that, as the party socialists saw it, +multiplying state enterprises but increased the power of the ruling, +and eventually of the militarist, class. The social-democratic leaders +felt that until they themselves were in power, the growth of "state +socialism" would be a calamity for the nation. The events of 1914 may +make our judgment tolerant toward their feeling. + +§ 19. #Its unreal and negative character.# The so-called "scientific" +socialism had, therefore, a peculiarly unscientific spirit; for, in a +modern sense, science implies a patient search for truth, not a +sudden revelation; a constant testing of opinions by observation +and experiment, not a dogmatic conviction that refuses the test of +reality. "Scientific" socialists talked much (and still talk much) of +the "evolution" of social institutions; but they refused to admit the +essential condition for institutional evolution, the competitive trial +on a small scale, of a new form of economic organization to prove its +fitness to survive. Indeed, it had been tried on a small scale many +times, and had always failed in a brief time. + +Lincoln said that a man's legs ought to be long enough to reach to the +ground; but "scientific" socialism was not built on that plan. To be +sure it contained many elements of truth, but these were so distorted +that the result was a caricature of history, of philosophy, of +economics, and of prophecy. The most important influence of radical +socialism has been exerted through negative criticism. It has +performed the function of a party in opposition, relentlessly hunting +out and pointing out the defects of existing institutions, arousing +the smugly contented, and, by its very recklessness and bitterness, +inspiring at times a wholesome fear of more revolutionary evils. This +has been a real service to the cause of moderate and constructive +reform. + +§ 20. #Revisionism and opportunism in the socialist party#. Most +men have always agreed in an adverse judgment of the claims of +"scientific" socialism. The criticisms have been admitted in part even +by the intellectual leaders among the Social-democrats. They lost some +of their fantastic illusions, they tempered some of their exaggerated +claims of oracular inspiration. "Revisionism," the socialist higher +criticism, became influential in the party. Whenever the party gained +any success at the polls, the socialists in public office and the +party leaders found it necessary to "do something" immediately. +The rank and file might be willing to talk of the millennium, but +preferred to take it in instalments instead of waiting for it to come +some centuries after they were dead. And so the socialist party, as +fast as it gained any practical power, became "opportunist" and +worked for moderate practical reforms. The leaders did this with many +misgivings lest the masses might become so reconciled to the present +order that they would refuse to rise in revolt. In that case the +revolution never could happen (altho it was inevitable). + +As the party socialists did more to improve the present, they talked +less of the distant future state. They ceased their criticisms of +"mere temporizing" "_bourgeois_" reforms, and began to claim these as +the achievements of the socialist party. They began to write of the +remarkable growth of social legislation in Europe and America in the +past half century under such titles of "socialism in practice" and +"socialists at work." This was despite the fact that these reforms +were all brought about by governments in which the socialist party had +no part whatever or was a well-nigh insignificant minority. This bald +sophistry, or self-deception, was easily possible by confusing the +word "socialist" as relating to the abstract principle of social +action, with socialist as applied to their own party organization. It +is as if the Republican party in the United States were to claim +as its own all the works of the republican spirit and principles of +government in the world from the party's organization to the present +time. + +§ 21. #Alluring claims of party socialism.# In thus changing the +emphasis of its claims, the socialist party has been somewhat put to +it to retain any clear distinction between itself and other parties of +social reform. It has done this however by continuing to proclaim the +_ultimate_ desirability of reorganizing all society without leaving +any productive wealth in private hands. It has had no misgivings +prompted by the experience of the world. Its case continues to be far +the strongest in its negative aspect, the exposure of the evils in +present society. To many natures the claims of the socialist party +have all the allurements of patent medicine advertisements. These +describe the symptoms so exactly and promise so positively to cure +the disease, that they are irresistible--especially when the regular +physicians keep insisting that the only way to get well is to take +baths and exercise, and stop the use of whisky and tobacco. + +Those attracted to the socialist party by its sweeping claims are of +two main types. The one is the low-paid industrial wage-worker; the +other is the sympathetic person of education or of wealth (or of +both), who has become suddenly aroused to the misery in our industrial +order. To both of these types, feeling intensely on the subject, +the socialist party appeals as the only party with promises sweeping +enough to be attractive. The one becomes the proletarian, the +other the intellectual, the one becomes the workshop, the other the +parlor-socialist. Many of the latter type are persons overburdened +either with unearned inherited wealth or with an undigested education. +Many of them, having enjoyed for a time the interesting experience of +radical thought and of bohemianism, come later to more moderate social +opinions. + +§ 22. #Growth and nature of the socialist vote.# In 1912 the socialist +party in the United States polled 900,000 votes in the presidential +election. The socialist parties in the various lands have almost +steadily grown, and now cast votes numbering in the aggregate six +to ten million (as variously estimated, the name socialist being +elastic). The socialist parties may be expected to continue +growing. They will ultimately gather within their folds most of +the ultra-discontented, and others that are not able to find an +alternative economic philosophy and a plan that inspire their hopes. +But the socialist party vote is made up of men of many shades +of opinion, a large number of whom hold only the mildest sort +of socialistic philosophy. Not many of the more than 3,000,000 +social-democratic voters in Germany before the war were members of the +regular party organization; but they supported the party as the +one unequivocal way to declare themselves against militarism and +undemocratic class-government. In the United States only about one +tenth of the socialistic party voters have been enrolled as members of +the party. + +§ 23. #Economic legislation and the political parties.# This floating +socialist vote is now so large that it is eagerly sought by candidates +of the older parties. These independent voters care little for the +radical and distant tenets of the socialist party leaders, and these, +to attract wider support, are forced to place increasing stress upon +immediate and moderate reforms. On the other hand, men of larger +qualities of leadership in the older parties are constantly adopting +and advancing pending measures of social reform. Where this is not +done the socialist party tends more quickly to develop into the one +powerful party of protest and of popular aspiration, receiving support +from many elements of the middle and small propertied classes and from +non-radical wageworkers. This movement from both sides is leaving less +noticeable the contrast between the socialist party and other parties +claiming to be "progressive" or "forward looking." The strongest +allies of the more radical communistic faction of the socialist party +are those members of the conservative parties who fail to recognize +the need of humane legislation, who irritate by their unsympathetic +utterances, and who unduly postpone by their powerful opposition the +gradual and healthful unfolding of the social spirit, energy, and +capacity of the nation. The greatest problem of social and economic +legislation for the next generation is to determine how far, and how, +the principle of authority may wisely be substituted for the principle +of competition in distribution. + + +[Footnote 1: Distribution as a problem of incomes is not to be +confused with distribution of physical goods by transportation (as +on the railroads) or by commercial agencies transferring goods from +producer to consumer (as in coöperative distribution). Functional +distribution is the prime subject of the theory of value in Vol. I +(e.g., usance, value of labor, time-preference, profits), a study +of which is prerequisite to an intelligent study of the problems of +personal distribution.] + +[Footnote 2: See Vol. I, pp. 190, 223; and above, ch. 2, secs. 11-13.] + +[Footnote 3: See Vol. I, pp. 248-255, 297-298, 406, 408, 415-418, +480-481, 483-484: also Vol. II, pp. 22-23, 146-148, 161-162, 178-180, +283, and various passages in the chapters of this Part.] + +[Footnote 4: See above, ch. 2, sec. 7, on limitations upon bequest and +inheritance.] + +[Footnote 5: See ch. 18.] + +[Footnote 6: See ch. 12, sec. 14.] + +[Footnote 7: See ch. 2, sec. 10.] + +[Footnote 8: See Vol. I, pp. 54 and 66; also pp. 504 507 in an organic +theory of value.] + +[Footnote 9: See above, sec. 2, note 3.] + +[Footnote 10: Compare, e.g., portions of chs. 9, 15, 20, 21, 27; and +29, see. 17.] + +[Footnote 11: See ch. 2, sees. 11-13.] + +[Footnote 12: See Vol. I, p. 75.] + +[Footnote 13: See, e.g., Vol. I, pp. 25, 71, 205, 479, 509, 511, 513.] + +[Footnote 14: See above, ch. 18.] + +[Footnote 15: See Vol. I, p. 6, on "social" and the social sciences.] + +[Footnote 16: See e.g., ch. 9, secs. 2, 10; ch. 11, secs. 7, 8; ch. +16, secs. 3, 4, 12; chs. 18, 21, 22, 23, 27, 29, and 30.] + +[Footnote 17: See Vol. I, p. 502, on communism and value theory.] + +[Footnote 18: See Vol. I, pp. 210, 228, 502 on the labor-theory of +value.] + +[Footnote 19: See above, sec. 14.] + + + + +INDEX + +Accident insurance, +Agricultural credit, +Agricultural, decay, + economics, problems of, + prices, fall of, +Agricultural, and rural population, +Agriculture and crises, +Agriculture, exhaustion of the soil, + medieval, + number in, + the new, +Aldrich report, + Senator, + plan, +American Federation of Labor, +Appreciation and interest, +Arbitration, voluntary, + compulsory, +Assessment insurance, +Assessment of taxes, +Authoritative distribution, + + +B + +Balance of merchandise, +Balance of trade argument, +Bank, deposits as investments, + notes, + restriction act, +Banking, in the U.S., before 1914, +Banks, functions of, + in U.S., + taxes on, +Bellamy, Edward, +Bills of exchange, +Bimetallism, +Bonds, taxation of, +Bowley, statistician, +Boycott, +Building and loan associations, +Business cycle, + +C + +California Fruit Exchange, +Canadian Industrial Disputes Act, +Canals, +Capital, +Capitalistic monopoly, +Charitable distribution, +Capitalization theory of rises, +Charity, and control of vice, +Child-labor, +Christian socialism, +City growth, +Clark, John B., +Clay, Henry, +Clayton Act, + and farmers, +Cleveland, Grover, +Closed shop, see Open shop +Coal, +Coinage on governmental account, +Collective bargaining, +Combination, +Combinations, industrial, +Common law, on monopoly, +Comparative advantages, doctrine of, +Compensated gold dollar, +Compensation, for accidents, +Competition among employers, + among workers, + of railroads, + and monopoly, + as regulative principle, + merits of, + see also Monopoly +Competitive system, +Compulsory insurance, + economy of, +Consolidation, of railroads, +Consumers' League, +Contributory principle in insurance, +Coöperation, producers', + consumers', + among farmers, +Corporation taxation, + difficulty of, +Corporations, +Costs of production, and the tariff, +Crises, and industrial depressions, + and unemployment, +Custom, + + +D + +Davies, Joseph E., +Deferred payments, standard of, +Deposits, bank, +Debts, public, +Dingley Act, +Discrimination, railroad, +Displacement theory of immigration, +Distribution of incomes, +Doctrine of comparative advantages, +Dollar, +Dynamic conditions, + + +E + +Economic, harmonies, + problems, + system, the present, +Emerson's premium plan, +Employers, and immigration, +Employment offices, +Engels, Friederich, +Erdman act, +Eugenics, + + +F + +Factory conditions, +Fair competition, + see also Unfair practices +Fairchild, H.P., +Farm, stock, + raw materials, + and factory, + loans, +Farmer's income, + life, +Farming, commercial, + capitalistic, + diversified, + intensive, +Farms, area, + woodlots, + equipment, + in U.S., + size of, + and railroads, +Federal Industrial Commission, +Federal legislation against monopoly, +Federal Reserve Act, +Federal Rural Credits Act, +Federal taxation, +Federal Trade Commission Act, +Fiat money, +Finance, public, +Food prices, + supply, +Foreign, banking, + exchange, + trade, +Forestry, +Forests, +Fractional coins, +Franchises, railroad, + for public utilities, +Free trade, + see also Protective tariff + + +G + +Gambling, uneconomic character of, +Gantt's premium plan, +Gardner Land Bank Act, +Garfield, James A., +Ghent, unemployment insurance, +General property tax, see Property +George, Henry, +Glass-Owen bill, +Glut theories of crises, +Gold-exchange standard, +Gold, production, + standard, defectiveness of, +Gold-using countries, +Goldenweiser, E.A., +Governmental aid to railroads, +Graduated taxation, +Graduation principle, +Greenbacks, +Gresham's law, + + +H + +Hadley, A.T., +Halsey's premium plan, +Hamilton, Alexander, +Hancock, Gen. Winfield Scott, +Harrison, Benjamin, +Hayes, Rutherford B., +Home market argument, +Housing problem, +Hours and wages, public regulation of, + + +I + +Immigrants, and organized labor, +Immigration, and low wages, + and population, + economic aspects of, + and wages, + and farming, +Imports into the U.S. chart, +Income, taxation, federal, + taxes, +Independent treasury, +Index numbers, chart, +Industrial revenues of government, + remuneration, methods of, + monopoly, problem of, + trust, nature of growth, + depressions, see Crises +Infant industry argument, +Inheritance, + taxes, + limitations of, +Interest rate, and deferred payments, + and prices, + in crises, +Insurance, principles of, + companies, taxes on, + against unemployment, +Internal revenue, +International exchange, equation of, +International trade, +Interstate Commerce Act, +Invalidity pensions, +Investment banking, + + +J + +Jackson, Andrew, +Jenks, J.W., +Justice in taxation, + + +K + +Kemmerer, E.W., +Knights of Labor, + + +L + +Labor, legislation, + and social legislation, + exchanges, see Employment offices +Laissez-faire, +Land, taxation, reform of, + banks, +Large production, in public utilities, +Large industry, +Lassalle, Ferdinand, +Leclaire, profit sharing, +Legal tender, +Loans, governmental, +Lump of labor notion, + + +M + +McKinley Act, +McKinley, William, +Market, public, +Materialistic philosophy, +Marx, Karl, +Mediation, +Mercantilism, +Merchandise, imports and exports, +Militarism, and population, +Military power, maximum, +Mill, J.S., +Minimum wage, +Mitchell, Wesley C., +Monetary economy, + system, + theory of crises, +Money, nature, use, and coinage, + value of, + quantity theory, + per capita circulation, + fiduciary, + commodity, +Monopolistic nature of protection, +Monopoly, and labor organization, + in railroads, + industrial, + prices, + public policy in respect to, + in public utilities, +Moody, John, +Moral judgments of monopoly, +More, Sir Thomas, +Morris, William, +Mortality table for insurance, +Mortgage taxation, +Municipal ownership, + + +N + +National banks, + ownership, +National Monetary Commission, +Negro problem, +Natural agents, and monopoly, +Newlands act, + + +O + +Old-age pensions, +Open shop, +Opportunism, +Organized labor, + and legislation, +Ownership of farms, + + +P + +Paper money, +Par of exchange, +Paradox of value, +Payne-Aldrich tariff, +Personal taxes, +Picketing, +Piece work, +Plato, +Police state, +Political, money, + aspects of labor, + aspect of railroads, +Population, agricultural and rural, + and immigration, +Postal savings, +Power, +Precious metals as money, +Premium plans, +Price, standard, + common market, +Prices, general level, + changes in, + rising, + and international trade, + and monopoly, +Profit sharing, +Profits from monopoly, +Progressive taxes, see graduation, +Promoters of monopoly, +Property, private, + taxes on, + tax on, + concept, +Property tax, general, +Protection, "true principle" of, +Protective, tariff, policy of, + tariffs, prevalence of, + railroad rates, +Public finance, + view of trade unions, + and labor legislation, + inspection, + ownership, +Public utility commissions, +Public utilities, monopolistic nature of, + + +Q + +Quantity theory of money, + + +R + +Race problems, +Railroad mileage, + building, + problem, + commissions, +Resources, material, + of the nation, +Reserve, cities, + plan of insurance, +Reserves, bank, + against notes, + against deposits, +Restraint of trade, +Revenue tariff, +Revisionism, +Ricardo, David, +Rich man's panic, +Ripley, W.Z., +Roads, +Roberts, Peter, +Roosevelt, Theodore, +Root, Elihu, +Rowan's premium plan, +Rural, definition, + exodus, + + +S + +Saturation point of money, +Saving, and investment, +Savings, banks, + deposits, + insurance assets as, +"Scientific" socialism, +Seasonal fluctuations, and unemployment, +Seigniorage, + charge, +Seligman, E.R.A., +Sherman Anti-trust law, +Shifting and incidence, + of insurance premiums, +Shorter working day, +Sickness, insurance against, +Single tax, +Smith Adam, +Social, legislation, + protective policy of immigration, + agricultural policy, + effects of inheritance, +Social insurance, + by trade unions, +Social utility, +Social welfare, in taxation, + and shorter working day, +Socialism, some aspects of, + meanings of, + philosophic, + active, + Marxian, + political, + "scientific", +Socialist, party, + vote, +Standard money, + defined, + see also Deferred payments, +State, sphere of, + insurance, + ownership, +Status, +Strike, right to, +Strikes, + + +T + +Tabular standard, +Taft, William Howard, +Tariff, changes and crises, + and wages, + and unemployment, + reductions, harm of, + board, a permanent, + history, American, + rates, + for revenue, + "true principle" of, + "competitive principle" of, + and business depressions, +Task work, +Taxation, objects and principles of, + revenues from, + forms of, + as a public question, + separation of, + system of, +Taxes, effect upon property valuations, + property and corporation, +Taylor's premium plan, +Tenancy on farms, +Tilden, Samuel J., +Time work, +Trade education, +Trade unions, + see also Organized labor, +Transportation, + taxes on, +Trant, on trade unions, +Trust company, +Trust, definition, + see Monopoly, +Two-profits argument, + + +U + +Underwood tariff, +Unemployment, + in crises, + insurance, +Unfair practices, +Usance of wealth, + of labor, +Usury laws, +Utility, + + +V + +Van Hise, C.R., + + +W + +Wage contract, limitation of, +Wage-system, + growth of, + practicability of, +Wages, and tariff, + and general prices, +general, and organization, + particular, and organization, + maladjustment of, and unemployment, + and immigration, see Immigration, + see also Hours and wages, +Walker, Francis A., +Walker tariff, +Washington, Booker T., +Wealth, + the nation's, + taxation of, +"Wealth of Nations", +Weir's premium plan, +Wild-cat banking, +Wilson tariff act, +Wilson, Woodrow, +Wolman, L., +Women, working day for, +Wyman, Bruce, + + + + + + + + + +End of Project Gutenberg's Modern Economic Problems, by Frank Albert Fetter + +*** END OF THIS PROJECT GUTENBERG EBOOK MODERN ECONOMIC PROBLEMS *** + +***** This file should be named 12217-8.txt or 12217-8.zip ***** +This and all associated files of various formats will be found in: + https://www.gutenberg.org/1/2/2/1/12217/ + +Produced by Juliet Sutherland, Keren Vergon, Leah Moser and the +Online Distributed Proofreading Team. + + +Updated editions will replace the previous one--the old editions +will be renamed. + +Creating the works from public domain print editions means that no +one owns a United States copyright in these works, so the Foundation +(and you!) can copy and distribute it in the United States without +permission and without paying copyright royalties. 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You may copy it, give it away or +re-use it under the terms of the Project Gutenberg License included +with this eBook or online at www.gutenberg.org + + +Title: Modern Economic Problems + Economics Vol. II + +Author: Frank Albert Fetter + +Release Date: April 30, 2004 [EBook #12217] + +Language: English + +Character set encoding: ASCII + +*** START OF THIS PROJECT GUTENBERG EBOOK MODERN ECONOMIC PROBLEMS *** + + + + +Produced by Juliet Sutherland, Keren Vergon, Leah Moser and the +Online Distributed Proofreading Team. + + + + + + +Economics--Volume II + +MODERN ECONOMIC PROBLEMS + +BY + +FRANK A. FETTER, PH.D., LL.D. + +PROFESSOR OF ECONOMICS, PRINCETON UNIVERSITY + +1916 + + + + + TO + THE MOTHER + WITH A YOUTHFUL HEART AND + SYMPATHETIC INTEREST + IN ALL THINGS HUMAN + + + + +TABLE OF CONTENTS + + +PART I. RESOURCES AND ECONOMIC ORGANIZATION. + + 1. Material resources of the nation + + 2. The present economic system + + +PART II. MONEY AND PRICES. + + 3. Nature, use, and coinage of money + + 4. The value of money + + 5. Fiduciary money, metal and paper + + 6. The standard of deferred payments + + +PART III. BANKING AND INSURANCE. + + 7. The functions of banks + + 8. Banking in the United States before 1914 + + 9. The Federal Reserve Act + + 10. Crises and industrial depressions + + 11. Institutions for saving and investment + + 12. Principles of insurance + + +PART IV. TARIFF AND TAXATION. + + 13. International trade + + 14. The policy of a protective tariff + + 15. American tariff history + + 16. Objects and principles of taxation + + 17. Property and corporation taxes + + 18. Personal taxes + + +PART V. PROBLEMS OF THE WAGE SYSTEM. + + 19. Methods of industrial remuneration + + 20. Organized labor + + 21. Public regulation of hours and wages + + 22. Other protective labor and social legislation + + 23. Social insurance + + 24. Population and immigration + + +PART VI. PROBLEMS OF INDUSTRIAL ORGANIZATION. + + 25. Agricultural and rural population + + 26. Problems of agricultural economics + + 27. The railroad problem + + 28. The problem of industrial monopoly + + 29. Public policy in respect to monopoly + + 30. Public ownership + + 31. Some aspects of socialism + + Index + + + + +FOREWORD + + +The present volume deals with various practical problems in economics, +as a volume published a year earlier dealt with the broader economic +principles of value and distribution. To the student beginning +economics and to the general reader the study of principles is likely +to appear more difficult than does that of concrete questions. In +fact, the difficulty of the latter, tho less obvious, is equally +great. The study of principles makes demands upon thought that are +open and unmistakable; its conclusions, drawn in the cold light of +reason, are uncolored by feeling, and are acceptable of all men so +long as the precise application that may justly be made of them is +not foreseen. But conclusions regarding practical questions of public +policy, tho they may appear to be simple, usually are biased and +complicated by assumptions, prejudices, selfish interests, and +feelings, deep-rooted and often unsuspected. + +No practical problem in the field of economics can be solved as if +it were solely and purely an economic problem. It is always in some +measure also a political, moral, and social problem. The task of the +economist "as such" is the analysis of the economic valuation-aspects +of these problems. We may recall Francis A. Walker's comparison of the +economist's task with that of the chemist, which task, in a certain +case, was to analyze the contents of a vial of prussic acid, not to +give advice as to the use to make of it. Accordingly, in the following +pages, the author has endeavored primarily to develop the economic +aspects of each problem, and has repeatedly given warning when the +discussion or the conclusions began to transcend strict economic +limits. In many questions feeling is nine-tenths of reason. If the +reader has different social sympathies he may prefer to draw different +conclusions from the economic analysis. + +The outlook and sympathies that are expressed or tacitly assumed +throughout this work are not so much those personal to the author as +they are those of our present day American democratic society, +taken at about its center of gravity. When the people generally feel +differently as to the ends to be attained, a different public policy +must be formulated, tho the economic analysis may not need to be +changed. Therefore, in some cases, the author has discussed merely the +economic aspect, or has referred to the general principles treated in +volume one, and has purposely refrained from expressing his personal +judgment as to "the best" policy for the moment. + +The present volume was planned some years ago as a revision of a part +of the author's earlier text, "The Principles of Economics" (1904). +The intervening years have, however, been so replete with notable +economic and social legislation and have witnessed the growth of a +wider public interest in so many economic subjects, that both in +range and in treatment this work necessarily grew to be more than +a revision. Except in a few chapters, occasional sentences and +paragraphs are all of the specific features of the older text that +remain. Suggestive of the rapid changes occurring in the economic +field is the fact that a number of statements made in the manuscript a +few months or a few weeks ago had to be amended in the proof sheets to +accord with recent events. + +The author's debt for information, inspiration, and assistance in +various phases of the work is a large one. The debt is owing to +many,--authors, colleagues, and students. A few of the sources that +have been drawn upon will be indicated in a pamphlet following the +plan of the "Manual of References and Exercises in Economics," already +published for use in connection with Volume I; but the limits of space +will prevent a complete enumeration. I wish, however, in particular, +to acknowledge gratefully the aid and friendly criticisms given in +connection with the chapters on money and banking, on labor problems, +and on the principles of insurance, respectively, by my colleagues, +E.W. Kemmerer, D.A. McCabe, and N. Carothers. + +In completing, at least provisionally, the present work, the author +cherishes the hope that it will be of assistance not only to teachers +and to students in American colleges, but also to citizen-readers +seeking to gain a better and a non-partisan insight into the great +economic problems now claiming the nation's conscience and thought. + +F.A.F. + +Princeton, N.J., October, 1916. + + + + + +MODERN ECONOMIC PROBLEMS + +PART I RESOURCES AND ECONOMIC ORGANIZATION + + + + +CHAPTER I + +MATERIAL RESOURCES OF THE NATION + + Sec. 1. Politico-economic problems. Sec. 2. American economic problems + in the past. Sec. 3. Present-day problems: main subjects. Sec. 4. Attempts + to summarize the nation's wealth. Sec. 5. Average wealth and the problem + of distribution. Sec. 6. Changes in the price-standard. Sec. 7. A sum of + capital, not of wealth. Sec. 8. Sources of food supply. Sec. 9. The sources + of heat, light, and power. Sec. 10. Transportation agencies. Sec. 11. Raw + materials for clothing, shelter, machinery, etc. + + +Sec. 1. #Politico-economic problems.# The word "problem" is often on our +tongues. Life itself is and always has been a problem. In every time +and place in the world there have been questions of industrial +policy that challenged men for an answer, and new and puzzling social +problems that called for a solution. And yet, when institutions, +beliefs, and industrial processes were changing slowly from one +generation to another and men's lives were ruled by tradition, +authority, and custom, few problems of social organization forced +themselves upon attention, and the immediate struggle for existence +absorbed the energies and the interests of men. But our time of rapid +change seems to be peculiarly the age of problems. The movement of +the world has been more rapid in the last century than ever before--in +population, in natural science, in invention, in the changes of +political and economic institutions; in intellectual, religious, +moral, and social opinions and beliefs. + +Some human problems are for the individual to solve, as, whether it is +better to go to school or to go to work, to choose this occupation or +that, to emigrate or to stay at home. Other problems of wider bearing +concern the whole family group; others, still wider, concern the local +community, the state, or the nation. In each of these there are more +or less mingled economic, political and ethical aspects. Economics +in the broad sense includes the problems of individual economy, of +domestic economy, of corporate economy, and of national economy. In +this volume, however, we are to approach the subject from the public +point of view, to consider primarily the problems of "political +economy," considering the private, domestic, and corporate problems +only insomuch as they are connected with those of the nation or of +the community as a whole. Our field comprises the problems of national +wealth and of communal welfare. + +What then are our politico-economic problems in America? They are +problems that are economic in nature because they concern the way that +wealth shall be used and that citizens are enabled to make a living; +but that are likewise political, because they can be solved only +collectively by political action. + +Sec. 2. #American economic problems in the past.# With the first +settlements of colonists on this continent politico-economic problems +appeared. Take, for example, the land policy. Each group of colonists +and each proprietary landholder had to adopt some method of land +tenure whether by free grant or by sale of separate holdings or by +leasing to settlers. In one way and another these questions were +answered, but rapidly changing conditions soon forced upon men the +reconsideration of the problem as the old solution ceased to be +satisfactory. + +In large part our political history is but the reflection of the +economic motives and economic changes in the national life. Thus +the American Revolution arose out of resistance to England's trade +regulations, commercial restrictions, and attempted taxation of the +colonies. The War of 1812 was brought on by interference with American +commerce on the high seas. The Mexican War was the result of the +colonization of Texan territory by American settlers and the desire +of powerful interests to extend the area of land open to slavery. The +Civil War arose more immediately out of a difference of opinion as to +the rights of states to be supreme in certain fields of legislation, +but back of this political issue was the economic problem of +slave labor. Illustrations of this kind, which may be indefinitely +multiplied, do not prove that the material, economic changes are the +cause of all other changes, political, scientific, and ethical; for in +many cases the economic changes themselves appear to be the results +of changes of the other kinds. There is a constant action and reaction +between economic forces and other forces and interests in human +society, and the needs of economic adjustment are constantly changing +in nature. + +Sec. 3. #Present-day problems: main subjects#. The particular economic +problems in America at this time are determined by the whole complex +economic and social situation. Two main factors in this may be +distinguished: the objective and the subjective, or the material +environment and the population composing the nation. The one is what +we have, the other is what we are, as a people. These factors are +closely related; for what we are as a people (our tastes, interests, +capacities, achievements) depends largely on what we have, and what we +have (our wealth and incomes) depends largely on what we are. We may +consider the following phases; the first two of the objective factor, +and the last two of the subjective factor. + +(a) The basic material resources, consisting of the materials of the +earth's surface and the natural climatic conditions which together +provide the physical conditions necessary for human existence, and +which furnish the stuff out of which men can create new forms of +wealth. + +(b) The industrial equipment, consisting of all those artificial +adaptations and improvements of the original resources by which men +fit nature better to do their will. These two (a and b) become +more and more difficult to distinguish in settled and civilized +communities, and become blended into one mass of valuable objects, the +wealth of the nation. + +(c) The social system under which men live together, make use of +wealth and of their own services, and exchange economic goods. + +(d) The people, considered with reference to their number, race, +intelligence, education, and moral, political, and economic capacity. + +The particular economic problems which are presented to each +generation of our people are the resultant of all these factors taken +together. A change in any one of them alters to some extent the +nature of the problem. The problems change, for example, (a) with the +discovery or the exhaustion (or the increase or decrease) of any +kind of basic material resources; (b) with the multiplication or +the improvement of tools and machinery or the invention of better +industrial equipment; (c) with changes in the ideals, education, and +capacities of any portion of the people whether or not due to changes +in the race composition of the population; (d) with the increase or +decrease of the total number of people, and the consequent shift in +the relation of population to resources. Many examples of such changes +may be found in American history, and some knowledge of them is +necessary for an appreciation of the genesis and true relation of our +present-day problems. + +Sec. 4. #Attempts to summarize the nation's wealth.# If we seek to +compare the material resources of the nation at one period in our +history with those at another period, we find that it is impossible +to find a single satisfactory expression for them. Let us examine +the figures for the (so-called) "wealth of the people of the United +States",[1] as it has been calculated by the census officials. + + Average + total per capita + Population. "wealth." wealth. + + 1850 23,200,000 $7,136,000,000[a] $308 + 1860 31,400,000 16,160,000,000[a] 514 + 1870 38,600,000 24,055,000,000[a b] 624 + 1880 50,200,000 43,642,000,000 870 + 1890 62,900,000 65,037,000,000 1,036 + 1900 76,000,000 88,517,000,000 1,165 + 1904 82,500,000 107,104,000,000 1,318 + 1912 95,400,000 187,739,000,000 1,965 + + [Footnote a: Taxable only; all other figures include exempt.] + + [Footnote b: Estimated on a gold basis.] + +A detailed comparison of the classes of concrete things making up the +totals is possible only in the last three sets of figures (1900 to +1912), and they are here given (omitting 000,000). + + 1900. 1904. 1912. + 1. Real property (excepting + some items below) 52,538 62,331 110,700 + 2. Irrigation enterprises [a] [a] 360 + 3. Agricultural equipment + (livestock, tools, etc.) 3,822 4,919 7,706 + 4. Manufacturing equipment 2,541 3,298 6,069 + 5. Transportation agencies 11,249 14,434 22,360 + 6. Telegraph and telephones 612 813 1,304 + 7. Waterworks (privately owned) 263 275 290 + 8. Electric lighting plants 403 563 2,099 + 9. Products (still in trade)[b] 8,294 10,212 21,577 + 10. Direct goods in use[c] 6,880 8,250 12,758 + 11. Gold and silver 1,677 1,999 2,617 + + [Footnote a: No figures for these years.] + + [Footnote b: The main items are agricultural and mining products and + imported merchandise.] + + [Footnote c: The main items are clothing, personal adornment, furniture, + and carriages.] + +Sec. 5. #Average wealth and the problem of distribution#. The foregoing +figures make a most satisfactory showing, and appear to indicate +that mere economic problems are rapidly being solved by the growth +of national wealth. But unfortunately these figures have little +significance in connection with such an inquiry, if indeed they are +not badly misleading. + +In the first place, the final figures of "per capita wealth" are +merely averages; a per capita increase, therefore, may appear when +total wealth increases, altho the total may be due to the growth of +comparatively few very large fortunes. The fact is evident that vast +numbers of individuals and families are nearly propertyless and in +so far as this is true there is involved one of the greatest of our +socio-economic problems, that of the distribution of wealth and income +among the people. The more unequal the distribution, the greater, in +all likelihood, is the discontent; and the greater the effort of many +men to find some methods by which greater equality may be attained. + +Sec. 6. #Changes in the price-standard#. These figures, moreover, are +expressed in terms of the monetary price-unit, in dollars of the +gold standard, and therefore the increasing total figure (and +correspondingly, the increasing per capita) may be but the reflection +of a change in the value of the monetary unit. It is well known that +the gold dollar has now less purchasing power than in 1880, and less +also than at any intervening time.[2] To the extent that this is true +the increase in the figures of wealth (total and per capita) is only +nominal and does not indicate increase in the quantity and betterment +in the quality of real wealth. This fact is so evident that it would +seem unnecessary to call attention to it, if it were not constantly +overlooked in citing these figures. + +Sec. 7. #A sum of capital, not of wealth#. Consider further, that the +figures here given for wealth really express but the sum of capitals +of the individuals (or private corporations) of the nation. These +do not constitute a sum of social wealth in any proper sense of the +term.[3] Arithmetically it is a fallacious kind of a total, for the +sum of the individual capitals contains some items that should +be canceled to find the sum of wealth. Moreover, capital is an +acquisitive concept. It is an expression of the value of a man's +possessions, and not of the utility[4] of them. It measures intensity +of desire for goods and not necessarily the degree of welfare. Such a +total, therefore, embodies the difficulties of the paradox of value; +in some cases increased value reflects a growing scarcity and not +greater abundance.[5] + +For example, between 1900 and 1915, with the growth of population, the +total number of improved acres in farms in the United States increased +but little, and the per capita number diminished. At least in part +as a result of this fact, the prices of nearly all kinds of food rose +rapidly, as did also the price of farm land. The prices (and estimated +values) of farm lands are the expression of the individual capitals, +which formed each year an increasing statistical total of so-called +wealth. The people had less land per capita, and were poorer per +capita as respects this item of landed-wealth, had less meat per +capita, and had to give more labor in exchange for food, at the same +time that the statistical per capita of land values increased. + +So it may be as respects forests, coal, cotton, and eventually iron, +copper, and many other things. When forests were plentiful, lumber and +fire wood were free goods in many neighborhoods. Forests entered into +the total of national "wealth" in 1850 and 1860 at a comparatively +small sum. But in 1910 when the forests had been half used up they +appeared as a greater total and probably as a greater per capita +item of "wealth" than in 1850. The figures reflect changes in the +paradoxical section of the scale of values, and express scarcity +rather than wealth. + +Altho the wealth of a nation may not be expressed as a single sum of +values that accurately reflects the weal-bringing things composing its +environment, some conception of the situation is to be gained by an +enumeration of goods in their kinds and quantities and by studying +their relations to the life of the people. Objects of wealth may be +grouped in various ways. The following may serve our purpose of a +general survey of our present resources. + +Sec. 8. #Sources of food supply#. The land area of the country in 1910 +was about 1,900,000,000 acres, of which 879,000,000 acres were in +farms, this being 46 per cent of the total area. A very small part +of the remainder is used for residential and commercial purposes, +the rest being barren mountains, deserts, swamps, and forests. Of the +total in farms a little more than one-half was improved, 478,000,000 +acres altogether, a per capita average of 5.2 acres; and a little +less than one-half was unimproved, 400,000,000 acres altogether, a +per capita average of 4.3 acres. The improved land produced not merely +food but many kinds of materials, such as cotton, wool, hides, +and lumber, while much of the unimproved land was either in farm +wood-lots, or in rough range pasture. Of course the kinds and amounts +of produce per acre vary with the climate, particularly with sunshine +and rainfall; possibly the proportion of the area of the United States +that is true desert and infertile mountain land is greater than that +of any other equal area in the temperate zones. The actual productive +capacity per acre of the lands of America cannot be expressed in a +very helpful way as a general average per acre, but each area must be +carefully studied in respect to its climate, rainfall, and possibility +of irrigation and drainage. It is evident that a very large number of +economic problems must arise in connection with the land supply +for food: such as problems of land-ownership, taxation, irrigation, +drainage, forestry, and encouragement or limitation of population. We +are just beginning to awaken to the needs in this direction. + +The rivers, lakes, and ocean waters near our coasts are other great +sources of food, but no statistics are available to show adequately +their yield. Few of them are in private possession and they do not +appear at all in a total of "capitals," yet they are more important to +the nation than a large part of the land area. They are only beginning +to be developed artificially by the propagation of oysters, clams, and +fish. The development of a proper policy in this matter is one of our +economic problems. + +There were in 1910 (mostly on farms) about 64,000,000 beef and dairy +cattle, 60,000,000 swine, 56,000,000 sheep and goats, and there were +raised in the one year nearly 500,000,000 fowls of all kinds. + +Sec. 9. #The sources of heat, light, and power#. The law of the +conservation of energy expresses the fundamental likeness of heat, +light, and power. The principal sources from which man derives these +agencies are coal and falling waters, tho wood is of importance as +fuel in some localities. About 500,000 square miles of land (about 13 +per cent of the area of the country) are underlaid with coal. These +deposits are widely distributed, so that nearly every part of the +country is within 500 miles of a mine. The enormous deposits if used +at the present amounts per year would last probably 2,000 to 4,000 +years, but if used at the present increasing rate (doubling the +product every ten years) they would, it has been estimated, last but +150 years. What shall be the actual rate as between these extremes +is a question whose answer depends on our economic legislation as +to ownership, exploitation, prices, use, and substitution. This is +another of our important socio-economic problems. + +The one great available substitute for coal as a source of heat and +light and power is water power. It is estimated that in 1908 but +5,400,000 horse power was being developed from water falls, whereas +about 37,000,000 primary horse power[6] was available; but, by +the storage of flood waters so as to equalize the flow, at least +100,000,000 horse power, and possibly double that amount, could be +developed. As it requires ten tons of coal to develop one horse power +a year in a steam engine by present methods, there is here a potential +substitute for coal equal to two to four times our present annual use +of coal (about 500,000,000 tons in 1912). + +But this does not mean that it would be economical, at present costs +of mining coal and of building reservoirs, to make this substitution +now. To determine when, how far, and by what methods to develop this +water power from lakes and rivers for the use of the people and to +make this substitution, is another of our great economic problems. + +Petroleum and natural gas, of which our original reservoirs were +perhaps the richest in the world, are being rapidly exhausted. These +may be merely mentioned as being related to coal in the source +of their supply, in the nature of their uses, and in the economic +problems to which they give rise. + +Sec. 10. #Transportation agencies#. First to mention among the means of +transportation are the navigable waters--oceans, lakes, rivers, and +canals, with the necessary equipment of dredged inlets, harbors, +docks, locks, and lighthouses. Few of these appear in the total of +"capitals," for they are not in private possession. Yet a good system +of natural waterways may be greater wealth to one nation than costly +additional railroads are to another. Good natural harbors on the +waterways leading out to the oceans are a most important kind +of national wealth, as are the navigable great lakes within the +boundaries or on the borders of a country. Just in proportion as these +natural means of transportation are lacking, is the need to build +costly artificial means of transportation. + +Both in natural and in artificial means of transportation, America +is well provided. The straight coast line is 5700 miles long, and the +line following indentations of the coast is about 64,000 miles. The +Great Lakes with a straight shore line of 2760 miles are the most +important inland waterways in the world. The 295 navigable rivers in +the country have a length of 26,400 miles of navigable water. About +2000 miles of canals are still in operation. On the waterways some +27,000 American vessels are in use, with a capacity of 8,000,000 gross +tons.[7] + +There are about 250,000 route miles of steam railroads, or with +additional tracks, yard tracks, and sidings, a total of about 370,000 +miles. On these are over 63,000 locomotives, 52,000 passenger cars, +and 2,400,000 freight and company cars. Besides these are 45,000 track +miles of electric railways and nearly 100,000 cars. These railroads +include an enormous aggregate of works and structures in the form of +tunnels, cuts, banks, bridges, stations, and shops. + +There are in the country (1914) about 2,228,000 miles of public +roads, of which 10 per cent are "surfaced" roads. No figures are now +available of the number of wagons, horses, automobiles, and +other vehicles in use on the roads and streets for purposes of +transportation. + +Many of our economic problems are presented by these transportation +agencies, from the question of opening a new dirt road in a rural +township to that of building an inter-oceanic canal, from the question +whether to have free public roads or toll roads to that of regulating +the railroad rates on the whole railroad system of the country. + +Sec. 11. #Raw materials for clothing, shelter, machinery, etc.# The farm +lands supply, besides food, a large part of the raw materials for many +other goods, such materials as cotton, flax, wool, hides, feathers, +lumber, and firewood. The farm woodlots compose about 200,000,000 +acres, and the large forests, public and private, about 350,000,000 +acres, a total of about one-fourth the area of the country in +forests, containing about one-half of the lumber that the country once +possessed. The economic problem of a sound forestry policy is one of +the largest we have to solve. + +The most important other sources of raw materials for industry are +the mineral deposits in the earth's surface.[8] This country is stored +more bountifully, probably, than is any other country, with the metal +ores of iron, copper, lead, zinc, gold, and silver. Aluminum is the +most abundant metal, composing about 8 per cent of the crust of the +earth, but by present methods it can be extracted only at considerable +cost from certain compounds that are limited in amount. The details as +to our metal stores are too complex for fuller treatment here, and may +be found in treatises on economic geology or on industrial geography. +The determination of wise policies as to the use of these stores +involves many economic problems, private and public. + +Another great class of material wealth is in the form of tools, +machinery, and other agencies for carrying on the industrial +processes of farming and of manufacturing. These are sometimes called +instrumental goods, or the industrial equipment. Still another class +consists of the great mass of completed direct goods, such as houses +to live in, libraries, museums, school buildings, theaters, all kinds +of buildings and equipment for pleasure and entertainment, parks, and +pleasure resorts in mountains, at lakes or sea shore. The possession +and use of these forms of wealth give rise to some economic problems +of public ownership and to others connected with the institution of +private property in general, as sketched in the following chapter. + + +[Footnote 1: It is to be observed that these figures appear under +the general title of Part I, "Estimated valuation of national wealth: +1850-1912," and the tables are spoken of (volume on Wealth, Debt, and +Taxation, p. 20) as "estimates of the aggregate wealth of the nation +as prepared by the United States censuses," but the tables themselves +are described (pp. 23-25) as the "estimated true valuation of all +property," this phrase being used as equivalent to "wealth." For the +definitions of wealth and property see Vol. I, pp. 264-265.] + +[Footnote 2: This change will be described below in ch. 6, in treating +of the standard of deferred payments.] + +[Footnote 3: See Vol. I, pp. 265, 278, 508 for the distinction between +wealth and capital.] + +[Footnote 4: See Vol. I, p. 25, for the definition of utility.] + +[Footnote 5: See Vol. I, p. 510 on the paradox of value.] + +[Footnote 6: That is, "the amount which can be developed upon the +basis of the flowage of the streams for a period of two weeks in which +the flow is the least," all the rest being allowed to escape unused. +Van Hise, "Conservation of Natural Resources," p. 119.] + +[Footnote 7: These and other figures in this section relate to the +year 1913.] + +[Footnote 8: Coal has been mentioned above, sec. 9.] + + + + +CHAPTER 2 + +THE PRESENT ECONOMIC SYSTEM + + Sec. 1. The place of private property. Sec. 2. Nature of property. Sec. 3. + Relation of wealth, property, and capital. Sec. 4. Some theories of + private property. Sec. 5. Origin vs. justification. Sec. 6. Limitations of + private property. Sec. 7. Limitations of bequest and inheritance. Sec. 8. + Social expediency of private property. Sec. 9. The monetary economy. + Sec. 10. The competitive system. Sec. 11. Limitation of competition by + custom. Sec. 12. Effect of modern forces upon custom. Sec. 13. Adam + Smith's influence. Sec. 14. The wage-system. + + +Sec. 1. #The place of private property#. Of fully equal importance with +material wealth in determining the economic power of a people is the +_social system_ under which the nation lives. This is the term applied +to the whole complex of institutions and arrangements in which and +by which people live together in society. It is the embodiment of the +opinions, ideas, and habits of life inherited by each generation from +its forbears. It is, indeed, a people's whole state of civilization +with its political, economic, intellectual, scientific, religious, and +esthetic aspects. + +The most important economic aspect of the existing system is, broadly +speaking, the institution of private property. So closely connected +with this that they are hardly more than different phases of the same +thing, are the use of money (the monetary economy), the wage system, +and competition as a mode of distribution. "The institution of private +property" is the general expression for the way in which men in the +modern state make use of their own energies and of material wealth +within the nation. Nearly all the total of the things mentioned in the +table in Chapter 2, section 4, are owned by private citizens.[1] We +live in a regime of private property, and all our economic problems +are affected by that fact. The determination of the exact boundaries +of private property makes up a large part of the politico-economic +problems which the people in each generation have to solve. A large +share, possibly, in a certain sense, every one of the economic +problems that are discussed involve change, limitation, definition, +or, more radically, abolition of present laws of property. Broadly +understood, as above, therefore, determination of the nature of +private property is _the essential_ economic problem. + +Sec. 2. #Nature of property#. Property means ownership, and "ownership" +is the abstract noun expressing the quality of possessing a +thing. Correspondingly, "owner" is the Anglo-Saxon equivalent of +"proprietor." Property thus, fundamentally, means not an object held, +or possessed, but the right in or belonging to a person to control +something that he owns. Ownership is a legal right to control under +certain conditions.[2] Physical, possession of an object is not +necessarily ownership. + +There are different kinds of ownership. It may be private, as that +of individuals, families, partnerships, or corporations; or it may be +public, as that of nations, states, counties, cities and towns, owning +such things as public buildings, parks, highways, the Adirondack +forest-reserve, or the Erie Canal. These two kinds are equally +effective as against the claims of outsiders, but the rights of those +inside the circle of ownership differ. For example, the rights of one +shareholder against another, or the rights of one member of a family +as against another, are not the same as the rights against outsiders. +Private property is the characteristic feature of our present +industrial society, but it exists side by side with public property +and with many intermediate grades between private and common property. + +Tho property meant originally and essentially the intangible right to +a thing, the word came to be applied also to the object of the right. +This is done both in common speech and in judicial decisions, with +inevitable ambiguity. This may be readily seen by trying to substitute +the word ownership for property, a thing quite simple in some cases +but impossible in others. One would not point to a house and say, +"This is my ownership," but either, "This is my property," or "I +exercise ownership over it." It is well recognized that a man may have +a property right in this abstract sense in or over his own services, +as to practise a trade or in the "good will" of a business or in +an intangible patent or a copyright, quite as well as in a material +object. + +Sec. 3. #Relation of wealth, property, and capital#. A failure to see +this distinction and to keep it clearly in mind has led to confusion, +even on the part of legislatures, learned judges, and able economists. +If property is said to be (for example) a house and lot and at +the same time the right to that house and lot, then there are two +properties at once for each economic good, viz.: the object itself and +the right to it.[3] + +This difficulty could be avoided by the consistent definition and use +of terms. A material economic object is a good, is a form of wealth. +The usance of wealth and the service of laborers at the moment +rendered constitute forms of income. The right of ownership, i.e., the +right to control, use, or direct the use of wealth and services, is +property, which is therefore the right to receive incomes. The value +of the incomes of an individual constitute his capital. Goods, rights +to goods, value of rights to goods: these three things are clearly +distinguishable. + +Sec. 4. #Some theories of private property#. Various theories have been +framed to explain the origin and to justify the existence of private +property. The occupation theory is that property is based upon +the priority of claim of one who finds wealth without an owner and +appropriates it. This is not an explanation of the property rights +that are arising every moment, nor does it give a logical reason for +the continuance of ancient property rights. It is a statement applying +to a case that has rarely happened, the settlement of an unoccupied +territory. + +More adequate to explain many cases is the conquest theory, that +property is based on force; for nearly all lands to-day are occupied +by the descendants of conquering invaders who took the lands and +natural resources from the former inhabitants, who in turn had taken +them from other occupants, many centuries before. The conquest theory +applies, for example, to the invasion of the Roman provinces by +barbarian tribes who divided the country and developed the feudal +system based on land tenure. But it hardly applies to present-day +happenings, and at its best it cannot, to modern minds, "justify" +present property rights. + +The labor theory, meeting some queries where others fail, is that +ownership is based on the act of production. It is declared that +every man has a right to that to which his brain and his muscle +have imparted value. It is evident that this test leaves without +explanation or justification a great number of things that do exist +and have existed as property. Usually the basis of the labor theory +of property is declared to be each individual's natural right to the +results of his own labor, which claim is assumed to be an ultimate, +undebatable, axiomatic fact. However, that type of natural-right +doctrine, which makes no appeal to experience and results, is now +quite discredited in political science. + +Another form of natural-rights theory is that property is necessary +for the realization of the dignity of human nature and every +individual has the natural right to self-realization. This theory +is, in a way, based on an appeal to experience, as to the effect of +property on human character, and it has the virtue of expressing one +of the ideals of modern democracy. Altho, in common with various other +"natural-rights" theories, it must be deemed too absolute and too +individualistic, it contains a far-reaching truth, of which due +account must be taken in our social philosophy. + +The legal theory is that property exists because the law says it +shall. This expresses a truth, but is no more than a truism. The law +determines the limits of property, but what determines the limits of +the law? What practical or social justification is there for passing +and continuing such law? The legal theory does not contain a final +explanation. Each of these theories has its defects, but each points +to some fact important and significant, at certain times and places, +in the explanation of this widespread institution. + +Sec. 5. #Origin vs. justification#. The question of the origin is not the +same as that of the present justification of the existing system of +private property. The institution of private property has evolved +under diverse conditions. In early societies individual property +rights were not very clearly marked. Every tribe asserted against +other tribes, and tried to uphold by war, its claims upon its +customary hunting grounds; but the claims of the individual hunters +on land within the tribe did not often come into conflict. Private +property at the outset was in personal possessions, ornaments, +weapons, utensils, which were very meager in that primitive society +in which it was the custom "to go calling with a club instead of a +card-case." Only later came individual property in land. A few years +ago it was generally believed that the organization of the old German +tribes was politically an almost perfect democracy, and economically +a communism in which all had equal claims upon the land. To-day this +opinion is very seriously questioned. It seems probable that there was +a goodly measure of communism in the control and use of lands (tho not +in other things), but this was largely confined to an oligarchy of the +favored; whereas the masses lived in subjection, cut off from all but +a meager share in the common lands. However that may have been, strong +forces within historic times have put an end to the common ownership +and tillage of land as it existed among the peasants of Europe. That +system was shown by experience to be wasteful. Competition tended to +bring the economic agents into more efficient hands, and the movement +was furthered by many acts of injustice and violence on the part of +those in power. + +Inquiries into the origin and development of any social institution +are interesting and helpful in forming an estimate of its present +significance, but the problems of the past are not those of to-day. +Whether or not the ancient beginning of property in Europe was in +violence and evil has but a remote bearing on the question as to the +present working of it. Social conditions and needs have not changed +more than have the forms and limits of property itself. Each +generation has its own problems to solve, and ignoring for the most +part the evils of the distant past, each generation must test existing +institutions by their present results. + +Sec. 6. #Limitations of private property#. It is well, in discussing +private property, to rid the mind at once of the idea that it is an +absolute and unchanging thing. Few realize the manifold ways in which +property rights are limited. Unmodified private control of property is +unknown; the public makes many reservations in its own interest. There +is, first, a whole set of limitations to prevent nuisances. An owner +in many situations is not free to build a slaughter-house or to start +a glue-factory on his land. Property is governed by general public +utility, and anything that threatens to become a nuisance or a danger +may be excluded. Under the right of "eminent domain," the state or the +railroad takes the old homestead from the owner who would live and die +there. + +Altho pecuniary damages are paid to him, this is a limitation of his +property rights. Rights of way on property exist either by contract +or by prescription permitting its public use. Most important of all +limitations is the right of taxation, by which society takes more or +less of private incomes for purposes of which the individual owners +may not approve. + +The law enforces a multitude of private claims by some persons against +others. A variety of rights called easements or servitudes may attach +to private property, modifying its exclusive use. Leases for any +period are a limitation of the owner's control. Both the holder of +the lease and the owner of the property have certain rights before the +law. The lender of money secured by mortgage has a legally recognized +and enforceable interest in the mortgaged wealth. Property is left in +trust for the benefit of persons or of institutions or of the public, +and is administered by trustees who are strictly bound to execute the +terms of their instructions. Contracts of many sorts are entered +into by owners, limiting their control in manifold ways, and the +law enforces these contracts. These all form a complex of equitable +claims, which together equal in value one undivided property right, +which in turn equals the value of the wealth.[4] + +Sec. 7. #Limitations of bequest and inheritance#. The term bequest +implies a will, usually a written will in which the person, in +anticipation of death, expresses his wishes as to the disposition of +his property. It is said sometimes that bequest is a "logical" result +of private property, but the law does not treat it as such. The +right of bequest, or of gift at death, is limited in various ways +in different countries. In countries where hereditary aristocracies +exist, primogeniture is in some cases required by law, in others +so strongly favored by public opinion that it is practically always +followed. Custom limits bequests in England to members of the family, +and wills given outside the family are rare, and are almost always +broken in the courts. John Stuart Mill contrasted this with the +practice in America, frequent even in his day and still more frequent +now, of rich men giving for public purposes. In France the right of +bequest outside the family is legally limited; only the share of one +child can be willed away by the father, and the rest must be equally +divided among the children. Settlements and _fidei commissa_ are +limited in many countries, because of the recognized social evils +resulting from the tying up of estates for generations. Throughout the +history of England, Parliament has given attention to the question of +mortmain, which chiefly concerned the drifting of great estates into +the hands of the church or of corporations, as the result of bequests +by the pious. In England, of late (and to a less extent in this +country), the policy of permitting unlimited endowments to charitable +institutions has been seriously questioned, and by legislation some +of the old endowments have been diverted from their original purposes +when these have ceased to be of social utility. Inheritance, in +contrast with bequest, usually means succession to the property of +one who has died intestate, that is, has made no will. The law of +inheritance likewise varies greatly with time and place. + +Sec. 8. #Social expediency of private property#. In the light of present +political philosophy the explanation and justification of private +property must be on grounds of social expediency. This is a broad +explanation and it has the fault of a broad explanation, that it needs +to be further explained. Under it can be brought the many varying +conditions. Even if private property works hardship to individuals in +many cases, yet it may be justified if, on the whole, it is best for +the progress of society. Laws must be judged by their average working, +not by exceptional cases. In general, the system of private property +must be judged by this test: Does it further the welfare of the nation +better than would any alternative plan for the control of economic +wealth? The question is not whether it is faultless, for no human +institution is so. Nor must it be assumed that the rule of property +needs to be uniform in respect to all kinds of wealth. There are +many kinds of property, and the test may be applied separately to the +different forms and to the varying degrees of property rights. The +varied and often strict limitations of property mentioned above are +all determined by some thought, wise or foolish, of social expediency. +Different parts of wealth may be treated in different ways: there may +be private property in wagons, and public property in roads; private +property in houses, and public property in forests; private property +in automobiles, and public property in railway carriages. But any rule +of property, like any other workable human law, must be applicable to +all individuals that meet the conditions. + +The very acceptance of the theory of social expediency implies the +need of frequent readjustment of the institution of private property. +The essential thought in the various attacks on the institution of +property is that, because it either causes or makes possible the +inequality of incomes, it is not socially expedient. Private property, +as it is found to-day, is complicated by many historical accidents. +Survivals of ancient injustice and relics of feudal institutions that +rest on no vital reason remain in our new country as well as in the +older ones. The limits of property in many respects are determined not +according to the logic of expediency, but by the social inertia which +often governs successive generations. + +The question is raised in many minds: If private property is not an +absolute right, what shall be its limits? What changes should be made +in it? These questions put the greatest economico-political problem of +our day, one that contains within it, indeed, many minor problems. A +number of these will receive attention in the following pages. + +Sec. 9. #The monetary economy#. So greatly does the use of money +facilitate the transfer, buying, and selling of private property and +so closely are property and pecuniary trade connected in practice and +in the thoughts of men, that every radical proposal to abolish private +property has included a plan to do away with money also. But money and +private property are not essentially and logically bound up together, +for a certain measure of private property always has been found where +money was little or not at all used. True, if there were absolutely no +private property, there would be little use for money, altho it might +still be used as a form of counter by the communistic state. We have +already seen[5] how a monetary unit comes into use, and we shall treat +more fully of the nature of money in later chapters. We may note here +merely that the use of money is an outstanding feature of the present +economic system and gives rise to many of the problems of political +economy. + +Sec. 10. #The competitive system#. The existing system is likewise +characterized by competition[6] in the buying and selling of wealth +and of the usances and services of economic agents. By competition we +mean here the condition of political freedom on the part of each man +to trade his property (goods, uses, or services) as he chooses, and +this combined with the disposition on his part to get what he +values most highly for himself and his family. Whenever any one else +(official or citizen) forbids and prevents a man from getting all he +can, in so far competition is limited. Whenever any one is deterred by +fear of, or by affection for, some other trader, from getting all he +can, in so far competition is limited. Whenever any one conspires with +another trader to act together with him to withdraw or to alter his +bid, in so far competition is limited. Private property and economic +competition do not merely happen to exist side by side, forming more +or less favored conditions each for the other; they are essentially +connected.[7] + +It is not our task at this point to present the advantages and +disadvantages of competition, but merely to indicate its important +place in the actual economic world. Like private property, competition +is not the universal feature of our present system, but it is the most +general and characteristic method of valuation, of price fixing, and +of trade. + +Sec. 11. #Limitation of competition by custom.#[8] The relatively large +influence of competition in present society appears more plainly in +comparing the present system with that of an earlier state of society +or with that of a present savage tribe. A member of the lowest human +societies is subject to law; tho he is a savage he is not "untutored." +On the contrary he is bound in many ways to follow customary lines +of conduct, and a large part of his time is given to learning the +traditions and then to observing the ceremonials of the tribe. +Primitive customs always take on a religious sanction, and every +member of the tribe is piously bound to do as his fathers have done +and as his neighbors are doing. This limitation applies to the choice +of food to eat, clothes to wear, time to hunt, plant, and harvest, +weapons and tools to use, where and how to trade, how much to give or +take, and to countless other details of economic choice. So, in early +society, economic relations were complex and but slowly changing from +generation to generation. Custom, rather than competition, ruled in +manifold ways the economic actions of men. + +Custom continued to rule a large share of the individual life of the +peoples of northern Europe through barbarian and feudal times. Its +force has gradually decreased, but even yet is not entirely set aside. +Political and economic interests were not clearly distinct in the +Middle Ages. Land was the all-important kind of wealth. Military +and other public services were performed by the higher landlords (as +vassals of their overlords) who in this way paid at the same time what +we to-day would call rent and taxes. The landlord in turn received +from his underlings services and goods in kind (food and supplies) and +so (in modern eyes) was both a collector of taxes and a receiver of +rent. The rent, however, was not a competitive price, but consisted +of the dues and services which the forefathers had been accustomed to +pay. In many ways also in the towns, close organizations of craftsmen +and of merchants regulated prices and kept others out of their +industries. Industrial privilege pervaded the life of that time. + +Yet through all the Middle Ages ran the forces of competition. The +inefficiency of customary services and the high prices charged +by selfish privilege were constant invitations to men to become +competitors. Men strove to break over the barriers of custom and of +prejudice. Their efforts to attain freedom to compete was the vital +force of the time. The industrial history of the Middle Ages was +largely the story of the struggle of the forces of competition against +the bonds of custom and privilege. + +Sec. 12. #Effect of modern forces upon custom#. The industrial events +following the discovery of America strengthened the forces making for +economic freedom. Discoveries in the Western hemisphere opened up a +wide field for the adventure and enterprise of Europe. Commerce is the +strongest enemy of custom, and new opportunities gave a rude shock to +the conservatism both of the manor and of the village. With the rapid +growth of industry and manufactures, old methods broke down. In an +open market custom declines; it flourishes best in sheltered places. +Further, the movement of thought in the Reformation, and the spirit +of the times which expressed the principle of personal liberty +and allowed the individual to follow his own opinions and take the +consequences, were favorable to competition. Despite these facts, the +restraints of the national governments on trade continued great, +in some respects increasing during the seventeenth and eighteenth +centuries, in France, Holland, and England. The regulation before +attempted by towns and villages was employed on a larger scale by +national governments with their industrial systems. The colonies in +America were used for the economic ends of the "mother country" +and for the selfish interests of the home merchants in Europe. The +American Revolution was one of the bitter fruits of the English policy +of trade restriction. + +Sec. 13. #Adam Smith's influence#. "The Wealth of Nations," the first +great work on political economy, was published in the year 1776. That +was the "psychological moment" for its appearance, as public thought +was so prepared for it that it had its maximum possible influence. +The year of the American Declaration of Independence gave the most +striking object lesson on the evils of a selfish colonial policy that +interfered on a grand scale with economic freedom. The old customs had +become ill fitted to life, ill adapted to the rapid industrial changes +that were going on. What was needed in many directions, both +in politics and in industry, was merely negative action by the +government, the repeal of the old laws, the overthrow of old abuses. +The French Revolution, following a few years later, emphasized this +thought in the political field. The philosophers of the time believed +in a "natural law" in industry and politics. The reformers of the +time wished to throw off the trammels of the past and to give men +opportunity to exert themselves "naturally." In America the old abuses +never had taken deep root, as the conditions of a new continent were +not favorable to monopoly and privilege. Altho the movement for the +repeal of medieval laws has continued in Europe from 1776 till the +present time, yet custom still is stronger to-day in Europe than +in America. Serfdom was not abolished until the first half of the +nineteenth century in Austria and southeastern Europe, and not until +the last half in Russia. Many economic and cultured forces furthered +this movement, but the most powerful intellectual force in its favor +was the work of Adam Smith. So strong an impression did Smith's book +make, that in the minds of men "free trade" became almost identical +in thought with political economy, whereas that was but the temporary +economic problem of the eighteenth century. + +Many men then thought that in "free and unlimited competition" had +been found a solution of all economic problems for all time. But soon, +it was apparent that it was no such simple and absolute solution. +Indeed many of the present economic problems--in one sense all of +them--center around this one: to determine the proper forms and limits +of competition. The varied aspects that this problem takes will appear +in every portion of the following pages. + +Sec. 14. #The wage-system.# Viewed in another aspect the present economic +and social order is called the wage-system.[9] The wage-contract, like +the use of money, is not essential to the existence of a system of +private property. Communities such as the American colonies and as +many of the newly settled states, may consist almost entirely of +self-employed owners of land. Bulgaria, before the Balkan wars called +the peasant state, presented this organization (tho of course with +some wage-payment), as did also its neighbor Serbia. But given the +institution of private property with competition (freedom to buy +and sell), let manufactures and commerce develop to any extent, +and inequalities of fortunes increase while an increasing number of +persons work for wages. It is noteworthy that as this goes on (as +it has done in America at an increasing rate since the middle of the +nineteenth century) it is the agricultural and rural hand industries +that continue to be mainly worked by owner-managers and workers, +while it is the manufacturing, transporting, and large commercial +enterprises in which the labor is done for wages. The acceptance of +the wage-system thus far has been the inevitable price to be paid +for manufacturing and industrial development; and one of our economic +problems is to determine whether this must continue, and if so, +whether in the same measure as in the past. + + +[Footnote 1: The exceptions are probably unstated amounts of exempt +real estate (owned by municipalities, state, and nation), some of the +irrigation plants, part of the canals, and that part of the gold and +silver which is in the public treasury.] + +[Footnote 2: See Vol. I, pp. 264-267. The law makes between property +rights and equitable rights some subtle distinctions, which have their +reason in the history, if not in the logic, of the law but which are +not essential to economic discussion. In some states this distinction +has been in large measure abolished. What interests us are the rights +(claims) that men have to the control of wealth and services, whether +by technical law these are called legal or equitable, and this right +is what is meant by "property" in our discussion of it.] + +[Footnote: 3 This confusion has had important practical consequences +in the field of taxation. See Vol. I, pp. 265-267, and below, ch. 17.] + +[Footnote 4: These claims mutually delimit each other (whether they be +called equitable claims, or liens, or property rights), and wealth +is not multiplied by multiplying the claims, as is unfortunately +sometimes assumed to be the case. See above, sec. 3.] + +[Footnote 5: See Vol. I, p. 51.] + +[Footnote 6: See Vol. I, p. 73.] + +[Footnote 7: This will appear in comparing the competitive method of +distribution with other methods in ch. 31.] + +[Footnote 8: See Vol. I, p. 143, on medieval land tenures; p. 158, on +customary rents; p. 190, on the effect of caste.] + +[Footnote 9: See Vol. I, p. 227.] + + + + +PART II + + +MONEY AND PRICES + + + + +CHAPTER 3 + +NATURE, USE, AND COINAGE OF MONEY + + Sec. 1. Origin of money. Sec. 2. Qualities of the original money-goods. + Sec. 3. Industrial changes and the forms of money. Sec. 4. The precious + metals as money. Sec. 5. Gold-using countries. Sec. 6. Varying extent of + the use of money. Sec. 7. Money defined and reviewed. Sec. 8. Metal money + without or with coinage. Sec. 9. Technical features of coinage. Sec. 10. + Seigniorage defined. + + +Sec. 1. #Origin of money#. Everywhere in the world where the beginnings +of regular trade have appeared, some one of the articles of trade soon +has come to be taken by many traders who did not expect to keep or use +it themselves, but to pass it along in another trade.[1] This made it +money, for money is whatever comes to be used as a general price-good. +The character of a _general_ price good clearly distinguishes money +from goods bought and sold by a particular class of merchants, such +as grain, cattle, etc., to be sold again. It is only in so far as a +particular good comes to be taken by persons not specially dealing in +it, taken for the purpose of using it as a price-good to get something +else which they desire, that a thing has the character of money. The +thing called money thus is a durative good passing from hand to hand +in a community, and completing its use in turn to each possessor of it +only as he parts with it. + +The use of money is of such social importance, that it would be +impossible for modern industrial society to exist without it. The +discussion of money touches many interests, it raises many questions +of a political and of an ethical nature. There are perhaps more +popular errors on this than on any other one subject in economics, but +the general principles of money are as fully understood and as firmly +established as are any parts of economics. + +Sec. 2. #Qualities of the original money-good#. The selection of any +money-commodity has not been mere chance, but has been the result of +that object being better fitted than others to serve as a medium of +exchange. The main qualities that affected the selection of primitive +form of money were as follows: 1. Marketability (or saleability); that +is, it must be easy to sell. The first forms of money had to be things +which every one desired at some time and many people desired at any +time. That was the essential quality that made any one ready to take +it even when he did not wish to use it himself. Many kinds of food and +of clothing are very generally desired goods. But few of these classes +of goods have in a high measure certain other important qualities, now +to be named. + +2. Transportability; that is, the money material must be easy to +carry, it must have a large value in small bulk and weight. To carry +a bag of wheat on one's back a few miles requires as great an effort +ordinarily as does the raising of the wheat, and the cost of carriage +for fifty miles even by wagon will often equal the whole value of the +wheat. Cattle, while not comparatively very valuable in proportion to +weight, and not possessing the other qualities of money in the highest +degree, have the advantage that they can be made to carry themselves +long distances, and therefore they have been much used as money in +simpler economic conditions. + +3. Cognizability; that is, the money-good must be easy to know, and +to judge as to quality. If expert knowledge or special apparatus are +needed to test it in order to avoid counterfeits, few could be ready +to take it and trading would be a costly process. + +4. Durability; that is, the money-good must be easy to keep without +much loss in amount or in quality, perhaps for long periods, until it +can be passed on in trade. Few kinds of food answer very well to this +last requirement, being organic and perishable. But all four qualities +above named were pretty well embodied in primitive times in rock salt, +in rare flints and bits of copper suitable for tools and weapons, +in furs in northern countries, and in many articles of personal +adornment, such as beads, feathers, jewels, and metal ornaments. + +5. Divisibility; that is, the quality in the monetary material that +permits it to be divided easily into smaller amounts and then to be +united again into larger masses at little cost and without loss in +amount or in quality. This quality is present only when the material +is quite homogeneous throughout the whole mass, a condition fulfilled +more completely by the metals than by any other goods. This quality +makes it possible to put the governmental stamp upon the money +material, and to produce pieces, some of which are exact duplicates +and some exact multiples, of others. In this manner pieces of money +are provided suitable for transactions of different magnitudes, down +to small fractional amounts. A monetary system of this kind aids +greatly the development of the sense and habit of exact estimation of +price. + +Sec. 3. #Industrial changes and the forms of money#. The money use, as +has just been shown, is a resultant of a number of different motives +in men. The changing material and industrial conditions of society +change the kind of money that is used. Things that have the highest +claim to fitness for money with a people at one stage of development +have a low claim at another. The final choice of the money-good +depends on the resultant of all the advantages. Shells are used for +ornament in poor communities but cease to be so used in a higher state +of advancement, and thus their saleability ceases. Furs cease to be +generally marketable in northern climes, when the fur-bearing animals +are nearly killed off and the fur trade declines. When tobacco was the +great staple of export from Virginia, everybody was willing to take +it, and its market price was known by all. It served well then as the +chief money, but, as it ceased to be the almost exclusive product +of the province, it lost the knowableness and marketability it had +before. In agricultural and pastoral communities where every one had +a share in the pasture, cattle were a fairly convenient form of money, +but in the city trade of to-day their use as money is impossible. +Thus, in a sense, different commodities compete, each trying to prove +its fitness to be a medium of trade; but only one, or two, or three at +the most, can at one time hold such a place. + +While industrial changes and conditions affect the choice of money, in +turn money reacts upon the other industrial conditions. If a new and +more convenient material is found or the value of the money metal +changes to a degree that affects the generalness of its use, industry +is greatly affected. The discovery of mines in America brought into +Europe in the sixteenth century a great supply of the precious metals, +and this change in the use of money reacted powerfully upon industry. +Money, being itself one of the most important of the industrial +conditions, is affected by and in turn affects all others. + +Sec. 4. #The precious metals as money#. Certain of the metals early began +to show their superior fitness to perform the monetary function. The +metals first used as money were copper, bronze (an alloy of copper +with nickel), and iron. These were truly precious metals in +early times for they were found only in small quantities in a few +localities. They, therefore, were widely sought and highly valued as +ornaments and for use as tools and weapons. But as the great ancient +nations emerged into history, these materials were already being +displaced in large measure. Their value fell greatly as a result of +greater production due to somewhat regular mining. As wealth grew, as +trade increased, as the use of money developed, as commerce extended +to more distant lands, the heavier, less precious metals failed +to serve the growing monetary need, especially in the larger +transactions. Silver and gold, step by step, often making little +progress in a century, became the staple and dominant forms of money +in the world, while copper and nickel still continued to be used for +the smaller monetary pieces. Every community has witnessed some stages +of this evolution. In this contest silver had proved itself a few +centuries ago to be on the whole the fittest medium of exchange for +most purposes, though gold was at the same time in use in larger +transactions and in international trade. + +Sec. 5. #Gold-using countries#. At the beginning of the nineteenth +century nations were divided, in accordance with the metals they used +as standards, into two great groups, silver- and gold-using. Since +that time, and more rapidly after 1850, gold has displaced silver as +the standard money. In a higher degree than any other one material, +gold has the qualities of a good standard for rich and industrially +developed communities. England for a long period practically has had +gold as its standard money; the United States since 1834 (except for +the period of paper money from 1862 to 1879); France since about 1879, +having shifted gradually from silver, after 1855, under the working +of the bimetallic law; Germany since 1873; and Japan since the later +nineties. Other countries have been striving to attain it. Since +about 1890 some states (including Mexico) and some of the colonial +possessions of the great nations (including India and the Philippines) +have adopted the plan of "the gold-exchange standard." By this plan +gold is the standard price unit, while silver continues to be used +all but exclusively as the material in circulation, its amount being +controlled and its value regulated on principles to be explained below +under coinage, seigniorage, and foreign exchange. There are now left +but a few silver-standard countries, the most important being China. +There are, however, numerous countries, notably in South America and +Central America, which have fiduciary paper-money standards.[2] + +Sec. 6.# Varying extent of the use of money#. Trade by the use of money +at no time has become the exclusive method. Barter still lingers +to-day.[3] The extent to which, on an average, money is used in +different parts of the world differs widely. The use of money in +Siberia is less than in European Russia, and its use is less there +than in western Europe. The use of money as compared with barter is +generally much greater in the cities than in the rural districts. In +the cities of Mexico not only money, but banks and credit agencies are +in general use; whereas the rural districts are more backward and make +far more use of barter than is the case in the United States. At the +ports in the cities of China, India, and South America the use of +money may be very like that in European cities; but go a little way +into the interior of these countries and conditions as to the use of +money change greatly. + +However, the comparative per capita amounts of money (in terms of +American dollars) in circulation in different countries is far +from being a true index of their industrial development or of their +commercial activity. Indeed, beyond a certain point the larger average +amount of money in circulation in a country may indicate backwardness +in the development of banks and other credit agencies rather than +greater amount of wealth or of business. Notice, for example, the +medium position of the great commercial countries, Germany and the +United Kingdom, as compared with other countries above and below them +in the following list. + +PER CAPITA CIRCULATION OF MONEY IN LEADING COUNTRIES DECEMBER 31, +1912. + + France..................$48.91 America (U.S.)..........$32.98 + + Australia............... 38.45 Portugal................ 29.46 + + Canada.................. 33.57 Netherlands............. 26.86 + + Switzerland............. 24.32 Mexico.................. 9.17 + + Germany................. 21.36 Finland................. 8.38 + + United Kingdom.......... 21.21 Chile................... 8.24 + + Spain................... 19.96 Turkey.................. 7.09 + + Brazil.................. 18.79 Russia.................. 6.45 + + Denmark................. 17.73 Japan................... 5.68 + + Belgium................. 15.83 Bulgaria................ 5.57 + + Austria-Hungary......... 14.68 Serbia.................. 5.49 + + Rumania................. 13.24 Venezuela............... 5.51 + + Italy................... 13.09 India (British)......... 5.19 + + South Africa............ 12.93 Ecuador................. 4.62 + + Norway.................. 12.50 Peru.................... 3.17 + + Sweden.................. 11.59 Colombia................ 2.32 + + Greece.................. 11.02 Paraguay................ .57 + +7. #Money defined and reviewed#. Money may be defined as a material +means of payment and medium of trade, generally accepted as the +price-good and passing from hand to hand. The definition contains +several ideas. The words "generally accepted" imply that money has a +peculiar social character, is not an ordinary good. As a price-good, +money itself must be a thing having value, otherwise it could not be +accepted. Trade means the taking and giving of things of value. Money +is, therefore, not merely an order for goods, as a card or paper +requesting payment; it is itself a thing of value (tho this value may +be due partly or solely to its possessing the money function). Such +things as a telegram when transferring an order for the payment of +money, as the spoken word, and as a mere promise to pay, are not +money. Even checks and drafts are merely substitutes for money. Money +passes from hand to hand, is a thing that can be handled, and is or +can be bodily transported. + +The application of the definition is not always easy, for money shades +off into other things that serve the same purpose and are related in +nature. In many problems money appears to be at the same time like +and unlike other things of value, and just wherein lies the difference +often is difficult to determine. Even special students differ as to +the border-line of the concept, but as to the general nature of money +there is essential agreement. + +8.# Metal money without or with coinage#. In antiquity the metals +were used as money in bulk; that is, the amount was weighed at each +transaction and the quality was tested whenever there was doubt.[4] +In countries industrially backward, payments are still made in this +manner. For some time after the discovery of gold in California, gold +dust was roughly measured out on the thumb-nail. In shipments of gold +to-day by bankers to settle international balances, metal may be in +the form of bars that bear the mark of some well-known banking house. +In all of the cases of this kind the gold is money in fact, but not by +virtue of any act of government. The metal is simply a valuable good, +the receiver of which values it according to its weight and fineness. +This is true even when the government mint, for a small charge, tests +and stamps the bars at the request of citizens. + +Very early it became the practice of governments to shape and stamp +pieces of metal to be used as money, so as to indicate their weight +and fineness. The act of shaping and marking metal for this purpose is +called coinage.[5] The coinage by government had notable advantages in +giving to the monetary units uniformity of size, fineness, and value, +with the stamp that was readily recognized. But in its simplest form +coinage in no way changed the value of the money, and any other mark +equally plain put upon it would have served equally well, if only it +had carried with it equal assurance of the quality and weight of the +metal. + +9. #Technical features of coinage#. For each kind of metal money there +is an established _ratio of fineness_ for the more precious material, +which is mixed with baser metals used as alloys. In the United States +all gold and silver coins are made nine-tenths fine; in Great Britain, +eleven-twelfths. The established weight of the gold dollar in the +United States is 25.8 grains of standard gold which contain 23.22 +grains of fine gold. The _limit of tolerance_ is the variation either +above or below the standard weight or fineness that a coin is allowed +to have when it leaves the mint. This is different for each of the +principal coins, being about one-fifth of one per cent on a gold +eagle. The _par of exchange_ between standard coins of different +countries is the expression of the ratio of fine metal in them. +Thus the par of exchange between the American dollar and the English +sovereign (the "pound") is 4.866; that is, that number of dollars +contains the same amount of fine gold as an English gold sovereign. +The embossed design is merely to make the coins easily recognizable +and difficult to counterfeit; and milled or lettered edges are to +prevent clipping and otherwise abstracting metal from the coins. + +10. #Seigniorage defined#. Coinage, as practised by early governments +and rulers, came to be a function of great importance politically as +well as economically. The right to issue money came to be one of +the most essential prerogatives of sovereignty. The prince, king, or +emperor stamped his own device or portrait upon the coin; hence the +term seigniorage from _seignior_ (meaning lord or ruler). Seigniorage +meant primarily the right the ruler, or the estate, has to charge +for coinage, and hence it has come to mean also the charge made for +coinage, and often, in a still broader sense, the profit made by the +government in issuing any kind of money with a value higher than that +of the materials (whether metal or paper) composing it. Coinage is +rarely without charge, and often has been a source of revenue to the +ruler. In antiquity and in the Middle Ages this right was frequently +exercised by princes for their selfish advantage to the injury and +unsettling of trade. This introduced a very great problem of value +into the use of money. + +The coinage is said to be _gratuitous_ when no charge is made for +coinage. Coinage is said to be _free_ if the subject or citizen +may take bullion to the mint whenever he pleases, paying the +usual seigniorage. Coinage is _limited_ if the government or ruler +determines when coinage is to take place. Thus, coinage may be both +free and gratuitous, when citizens are allowed to bring bullion +whenever they please and have it converted into coins without charge +or deduction. But coinage is free without being gratuitous when any +citizen may bring metal to the mint, whenever he chooses, to be coined +subject to the seigniorage charge. + + +[Footnote 1: See Vol. I, pp. 15-16 and 50-53 for an introductory +statement of the origin of money in connection with markets.] + +[Footnote 2: See ch. 5.] + +[Footnote 3: See Vol. I, p. 43, on the decline of barter.] + +[Footnote 4: "I will ... refine them as silver is refined, and will +try them as gold is tried." Zech. xiii, 9. "I bought the field ... +and weighed him the money, even seventeen shekels of silver. And I ... +weighed him the money in the balances." Jer. xxxii, 9, 10. A shekel +was 224 grains, troy weight, which is about equal to six-tenths of the +pure metal in a silver dollar to-day and worth now about twenty-four +cents in gold. At that time, however, the purchasing power of silver +was many times greater than it now is.] + +[Footnote 5: From the French _coin_, in turn from Latin _cuneus_, +wedge, suggestive either of an earlier wedge-shaped piece, or of a +wedge-shaped mark on the piece. The German word _Muenze_ is from the +Latin _moneta_ (as is the English _mint_, the place where coins are +made), which meant money, that name being taken from the temple of +Juno, called _Moneta_, where coins were made.] + + + + +CHAPTER 4 + +THE VALUE OF MONEY + + Sec. 1. Standard-commodity money. Sec. 2. Alternative uses of the money-good. + Sec. 3. Money as a valuable tool. Sec. 4. Relative importance of + money. Sec. 5. Concept of the individual monetary demand. Sec. 6. Concept + of the community's monetary demand. Sec. 7. The money-material in + its commodity uses. Sec. 8. The general level of prices. Sec. 9. Effect of + increasing gold production. Sec. 10. The quantity theory of money. Sec. 11. + Interpretation of the quantity theory. Sec. 12. Practical application of + the quantity theory. + + +Sec. 1. #Standard-commodity money#. The actual money in use in almost +every country to-day consists of a wide and confusing variety: gold, +silver, nickel, copper, paper in various forms, issued by various +authorities under various conditions as to amount and as to +seigniorage. But among all the kinds, in each country some one kind +is found standing preeminent and in a peculiar position, as the +_standard_ money to which the value of all the other kinds of money is +in some manner adjusted. Usually this standard money is composed of +a material (gold or silver) which is a commodity; but there are +many examples of paper money being for the time the standard. The +difficulties of the money problem must be attacked at the point +of standard-commodity money, where it is nearest to ordinary value +problems and is less complicated than when the various other kinds of +money and the various money substitutes are included. + +We mean by standard money that kind, no matter what its form, which +serves in any country as the unit in which the value of other kinds of +money is expressed. The standard usually is a quantity of metal of a +certain weight and fineness, which, as a commodity, has a value also +in industrial uses. Coins of this standard are called full, or real, +money by some writers that deny the title of money to everything else. + +Sec. 2. #Alternative uses of the money-good.# Let us consider the +problem of money-value as it would present itself if only one kind of +commodity money were in use. This doubtless was in large measure, +if not entirely, the case for a time in early societies after one +material had proved itself to be the best suited for the purpose. The +history of many kinds of money may, we have seen, be traced back to +a point where they were not money, but commodities with a direct +value-in-use. Such were ornaments, shells, furs, feathers, salt, +cattle, fish, game, and tobacco. Each of these materials has, in each +situation, a value which is the reflection of its power to appeal +to choice. Now, if to the commodity-use is added the money-use, this +increases the demand for that good. No new theory is required to +explain the value of a commodity as it gradually acquires the added +use of a medium of trade. The money use is one that works no physical +or visible change in goods except a slight unavoidable abrasion, and +at any time a person receiving a piece of commodity money may retain +it for its use-value, as food, ornament, tool, or weapon, or may +retain it for a time and then spend it as money. This case of value is +no more difficult than that of anything else having two or more uses. +For example, cattle are used for milk, for meat, and as beasts of +burden. Each of these uses is logically independent as a cause +of value, yet all are mutually related, the value of cattle to a +particular person being determined by the consideration of all the +uses united into one scale of varying gratification. + +Sec. 3. #Money as a valuable tool.# Money is often, by a figure of +speech, called a tool. A tool is a piece of material taken into the +hand to apply force to other things, to shape them or move them. +Figuratively, this is what money does. A man takes it not to get +enjoyment out of it directly, but to apply force, to move something, +and that which he moves is the other commodity. Money thus (as money) +is always an indirect agent. Adam Smith aptly likened money to the +roads and wagons that transport goods, thus gratifying desires by +putting goods into more convenient places. The fundamental use that +money serves is to apportion one's income conveniently as it accrues +and as it is spent. The use of money increases the value of goods by +increasing the ease with which trade takes place. Like any tool or +agent, money is valued for what it does or helps to do. It enhances +the value of the goods that it buys and sells by dividing them into +quantities convenient for use and by making them available at +the right times. In the light of the principles of diminishing +gratification and of time-preference it is clear that the amounts in +which, and the times at which, goods are available have an essential +bearing on their values. Money is the most successful device ever +discovered for distributing the supplies of a journey along its +course, and the goods of daily need over a period of time. The use of +money as a storehouse of value by hoarding it is merely a more extreme +case of keeping income until a time when it will have a greater value +to the owner than it has in the present.[1] + +Sec. 4. #Relative importance of money.# Because money is the general +expression of purchasing power, and comes to symbolize all other +wealth, it often assumes undue and exaggerated importance in men's +eyes. Money is but one of many forms of wealth. It constitutes but a +small percentage of the total wealth of a country, and it is far from +being the most indispensable to human welfare. Yet its importance, +as a whole, in determining the form of industrial organization is +enormous. In a society without money, industrial processes would be +very different, and trade would be hampered in manifold ways. + +A poor community has little money because it cannot afford more; it +gets along with less money than is convenient just as it gets along +with fewer agents of every other kind that it could use. Pioneers in a +poor community where the average wealth is low cannot afford to keep +a large number of wagons, plows, good roads, or schoolhouses. If the +members of the community were wealthy enough each would have more +of these and of other things, and the sum total of money would be +greater. Great as is the convenience of money, poorer communities have +to do with little of it. It is, therefore, a confusion of cause and +effect when poor communities imagine that their poverty is due to lack +of money. + +Sec. 5. #Concept of the individual monetary demand.# Let us now seek +to get in mind the idea of an _individual monetary demand,_ as that +amount of money which at any time is required by an individual to make +his purchases in expending his income. Every man may be thought of +as having an average monetary demand, or his average individual cash +reserve, throughout a period. A man with a salary of $50 a month +paid monthly has ordinarily a maximum monetary demand of $50. If his +expenditures are made in two equal parts, the one on pay-day, the +other thirty days later, his average monetary demand during the month +is a little over $25. If most of his purchasing is done in the first +week of the month, his average monetary demand may be perhaps $10. +Many a workman purchases on credit, running accounts at the stores for +a month. Then on pay day he spends his entire month's wages the day +he receives it, and goes without money for the rest of the month. His +average monetary demand throughout the month would then be about +equal to one day's wages. Evidently any person's cash reserve may +be expressed as that proportion of his income that is to him of more +value retained in money form for any period than if at once expended. + +In this conception of the individual monetary demand, must, however, +be included not merely the demands of retail purchasers, made by +themselves, but also those of all agencies such as merchants, bankers, +and transportation companies, serving the needs of ultimate consumers +of goods. The use of money may be necessary several times before a +commodity completes its journey from producer to consumer. + +Of two persons whose expenditures of money are of the same kind and +made at the same rate, the one having the larger amount of purchases +to make has the larger monetary demand. But the amount of purchases +does not always vary directly with the amount of real income[2]; for +example, a farmer and a village mechanic may have at their disposal +incomes equal in the quantities of goods, such as food, fuel, +clothing, and house-uses (worth, let us say, $1000 for each), but the +farmer would be getting a larger part of his goods directly from his +farm and by his own labor, while the mechanic would be getting first +a money income to be expended afterward for food, clothing, and rent. +The mechanic would in this case have an average monetary demand much +larger than the farmer. + +We see thus that a person's monetary demand at any time is that amount +of money which rests in his possession as the necessary condition to +making his purchases as he desires. Individual monetary demand varies +in proportion directly to the delay, and inversely to the rapidity +with which the individual passes the money on; and directly to +the amount of the person's income that is received and expended in +monetary form. + +Sec. 6. #Concept of the community's monetary demand.# The monetary demand +of a community at a given time is the sum of the monetary demands of +the various individuals and enterprises. It is that stock of money +which is necessarily present to effect the exchanges of the community +in the prevailing manner at the existing price level. A single +dollar as it circulates helps to supply the monetary demand of many +individuals in turn: the more quickly each person spends the piece +of money he receives, the greater its rapidity of circulation. Let us +suppose that every piece of money passed from one person to another +once each day. Then a dollar would, in the course of a business year +(about 300 days), serve to buy (and at the same time to sell) $300 +worth of goods. If the average purchases of each individual amounted +to $1000 a year, the average monetary demand of each would be about +3-1/3 dollars. + +But every moment beyond the average time that any one kept money would +increase his monetary demand. If he delayed a day, a week, or a +month in spending the money, waiting until he could buy in some other +market, or until a better time to buy, he would thus increase insomuch +the amount of money needed to make the trade (on that scale of +prices). It requires more slow dollars than swift dollars to make a +given volume of purchases. + +Evidently the times of maximum monetary demand of the different +individuals do not coincide; rather they alternate with each other, +and the community's total monetary demand at a given time is a +composite of the many individual variations. The amount of money that +will remain in circulation in a community depends on several factors, +the chief among them being the amount of goods to exchange, the +methods of exchange, and the prevailing scale of prices. The amount +of goods to be exchanged may change even when the amount produced is +unaltered (e.g., a change from agricultural to industrial conditions). +The methods of exchange may alter so as to require either more money +(e.g., cash instead of credit business), or less money (e.g., use of +bank checks displacing use of money by individuals). Or, apart from +the other factors, the scale of prices may change as the conditions of +gold and silver production are altered. The interrelations of gold +and silver production, paper money issues, banking growth, and +money-inflow and outflow in foreign exchanges give rise to the most +interesting and important problems in the field of monetary theory. + +Sec. 7. #The money-material in its commodity uses#. We are now prepared +to take up the question: What determines the ratio at which money +exchanges for other goods? And, as money comes to be the unit in which +prices are generally expressed, the question becomes: What determines +the general level of monetary prices? We have this problem in its +simplest form in the case of a commodity-money such as gold. It may be +looked upon merely as so much precious metal. The problem of its value +as bullion is the same as that of the value of pig iron or of zinc, +of meat or of potatoes. There is here no special monetary problem. +The value of gold as bullion and its value as money are kept in +equilibrium by choice and by substitution. The several uses of gold +are constantly competing for it: its uses for rings, pens, ornaments, +championship cups, photography, dentistry, delicate instruments, and +as a circulating medium. If the metal becomes worth more in any one +use, its amount is increased there and is correspondingly diminished +in other uses.[3] + +When coinage is free and gratuitous[4] the standard money is a +commodity. Such coinage is essentially but the stamp and certificate +that the coin contains a certain weight and fineness of metal. Where +coinage is free and gratuitous each coin will be worth the same as the +bullion that is in it so far as the citizens exercise their choice. +They will not long keep uncoined metal in their possession when it is +worth more in the form of money, nor will they long keep money from +the melting-pot when it is worth more as bullion. Yet there may be +a slight disparity between the bullion value and the monetary value +before the metal is converted into coin or the coin melted down into +metal. + +This adjustment of the value of commodity-money to other things is +made also on the side of supply, in the use of labor and material +agents to produce the precious metals and to produce other things. +Gold-mining, for example, is one among various industries to which men +may apply their labor and their available material agents. Some mines +are superior, others medium, others marginal which it barely pays +to work. There is, therefore, a rise and fall of the margin of +gold production with changes in prices and changes in the cost of +production. Large new deposits of gold are discovered from time to +time and new methods of extracting gold are invented. If, when it +barely pays to work a mine, such changes occur, gold becomes worth +less, and the poorer mines eventually must go out of use. As gold +rises in value some abandoned mines again come into use. A similar +variation may be noted in the utilization of marginal land, marginal +factories, marginal forges, and marginal agents of every kind.[5] + +Sec. 8. #The general level of prices#. We come now to a more peculiar +aspect of the monetary value problem. In performing its function +as general medium of trade, money determines the general level +of monetary prices. We have the idea of a general level of prices +whenever we contrast the price ratio of money to other commodities at +one time with its ratio at another time. Now the monetary prices +of the various commodities are constantly changing, and in somewhat +different degrees, but on the average there may be a general trend +upward or downward, and this is called a change in the general scale +(or level) of prices, as contrasted with changes in the values of any +two commodities in terms of each other. The general price level will +be more fully discussed below (Chapter 6, section 3) in connection +with the method of measuring by index numbers its changes. This brief +explanation may, perhaps, be enough for our present purpose. Our +question now is: What is the effect of changes in the quantity of +money (considered apart from chance accompanying changes) upon the +general level of prices? + +Sec. 9. #Effect of increasing gold production#. Let us take a case where +gold is in general use as money, and where for some time there has +been no noticeable change in the amount of business, the methods of +trade, and the general scale of prices. What would happen when new +gold mines were found that were much easier to operate, and gold began +to be produced at a much more rapid rate than formerly? The amount +of gold as compared with other forms of wealth evidently would be +increased. What if all the increase went into the industrial arts? The +value of gold in its industrial uses would fall. Then a part of the +increase must be diverted to monetary uses. When any man, by reason of +the increasing gold supplies, gets a larger stock of money than he had +before, the proportion formerly existing between his use for money +and his monetary stock is altered. He has more money than meets his +monetary demand at the existing prices. As he seeks to reduce his +stock of money to due proportions by buying more goods, he thereby +distributes a part of the excess of money to others. This bids up the +prices of goods further until the total value of goods exchanged again +bears the same ratio as before to the average monetary demand of each +individual. + +Take an extreme case: if twice as many dollars get into circulation +in a community, either some few men may have far more dollars than +before, while others have nearly the same number; or every man may +have his due proportion of the new supplies, just twice as many as +before in proportion to his income. The latter result, "other things +being equal," is the logical one after equilibrium has been restored. +If prices of goods remained the same as before, there would be twice +as many pieces of money available to effect the same number of trades +at the same prices. There is no reason why each person should tie up +twice as large a proportion of his income in the form of money. If, +however, there is a concerted movement to spend the surplus money, +there results a general bidding down of the value of money, a general +bidding up of the prices of goods. At what point will this movement +stop? The rational conclusion must be that, other things being equal, +the new equilibrium will be established when the ratio between the +value of money and the price of the goods which each individual is +purchasing becomes the same as before. The money being doubled, prices +must be doubled, and likewise for any other change in quantity. + +Sec. 10. #The quantity theory of money.# This explanation of the effect +of changes in the quantity of money in a country upon prices (the +general scale of prices) is known as the quantity theory of money. +This theory has, for a century, been very generally accepted by +competent students of the money problem. It may be summed up thus: +other things being equal, the value of the monetary unit, expressed +in terms of all other commodities, falls as the quantity of money +increases, and _vice versa_. That is, prices rise and fall in +direct proportion to changes in the total quantity. This is a simple +explanation of a complex and difficult set of conditions. The phrase, +"other things being equal," betokens the statement of a tendency where +there are several factors. The quantity theory explains what happens +when there is a change in one of the factors--the number of pieces +of money. There are three large sets of facts to be brought into +relationship with each other in the quantity theory: (1) the amount +of business, or the number of trades effected; (2) the rapidity of +circulation, depending on the methods by which business is done; (3) +the amount of money available. According to the quantity theory we +must expect that, when conditions (1) and (2) remain fixed, the value +of money will vary inversely as its quantity. This quantity theory may +be expressed in the formula P = MR/N when P is the symbol for price, +or the general price level, N is (1) above, R is (2), and M is (3). +P, therefore, changes directly with either M or R, or inversely with +N.[6] + +Sec. 11. #Interpretation of the quantity theory.# The quantity theory +must be carefully interpreted to avoid various misunderstandings of it +that have appeared again and again in economic discussion. + +(1) It does not mean that the price level changes with the absolute +quantity of money, independently of growth of population and of the +corresponding growth in the volume of exchanges. + +(2) It is not a mere per capita rule to be applied at a certain moment +to different countries. For example, Mexico may have $9 per capita and +the United States $35, while average prices may not differ in anything +like that proportion. But in these two countries not only the amounts +of exchanges per capita but the methods of exchange and the rapidity +of the circulation of money differ greatly.[7] + +(3) It cannot be applied as a per capita rule to the same country +through a series of years, without taking account of the many changing +factors. It is estimated that in 1800 the money stock was about $5 +per capita in the United States, and in 1914 about $35[8], but average +prices have not necessarily changed in the same ratio. In a period of +years a country may change in a multitude of ways, in complexity of +industry, modes of exchange, transportation, wealth, and income. These +changes require, some larger, others smaller, per capita amounts +of money to maintain the same level of prices. For example, the +substitution of cash payments for book-credit in retail trade calls +for a larger per capita stock of money; whereas an increased use of +banks and checking accounts, by economizing the use of money, enables +a smaller amount of money to maintain the same level.[9] + +(4) Tho applied originally to standard money, the quantity theory +applies to all other kinds of money circulating side by side and at +a parity of value, so far as these fulfil the definition of money and +are not merely supplementary aids of money. These substitutes for, or +supplements to, money enable each dollar to do more work, to circulate +more rapidly. If the standard money alone were doubled in quantity, +while the various forms of fiduciary money (smaller coins, bank notes, +government notes) remained unchanged, the quantity of money as a whole +would not be doubled. Indeed, in such a case, the method of exchange +would be greatly altered. According to the quantity theory, therefore, +prices would not be expected to double. + +Sec. 12. #Practical application of the quantity theory#. Despite the +number of changing factors affecting the methods of exchange and +the amount of business, the quantity theory is a rule unable at any +moment. These various factors change slowly, and the quantity theory +answers the question: What general change occurs in prices as a result +of the increase or decrease of the money in a given community at a +given moment? Like the law of gravitation and the law of projectiles, +the theory must be interpreted with relation to actual conditions. + +The quantity theory makes intelligible the great and rapid changes in +prices which have followed sudden changes in the quantity of money. +Inductive demonstration of broadly stated economic principles is +usually difficult, but there have been many "monetary experiments" +to teach their lessons. Many inflations and contractions of the +circulating medium have occurred, now in a single country, again +in the whole world; and the local or general results have helped +to exemplify richly the working of the quantity principle. With the +scanty yield of silver and gold mines during the Middle Ages, prices +were low. After the discovery of America, especially in the sixteenth +century, quantities of silver flowed into Europe. The great rise of +prices that occurred was explained by the keenest thinkers of that day +along the essential lines of the quantity theory, tho there were many +monetary fallacies current at that time. The experience in England +during the Napoleonic wars, when the money of England was inflated (by +the forced issue of large amounts of bank notes) and prices rose above +those of the Continent, led to the modern formulation of the theory by +Ricardo and others about 1810. The discovery of gold in California +and Australia in 1848-50 greatly increased the gold supply, and gold +prices rose throughout the world. Between 1870 and 1890 the production +of gold fell off while its use as money increased greatly, and prices +fell. A great increase of gold production has occurred in the period +since 1890. In part the rising prices since 1897 are explicable as the +periodic upswing of confidence and credit, but in the main doubtless +they are due to the stimulus of increasing gold supplies.[10] These +are but a few of many instances in monetary history, which, taken +together, make an argument of probability in favor of the quantity +theory so strong as to constitute practically an inductive proof. + + +[Footnote 1: The old-fashioned miser, however, withdraws his hoarded +gold for the time from its usual monetary function as an indirect +agent and treats it as a direct good yielding to him psychic income by +its mere possession.] + +[Footnote 2: See on kinds of income, Vol. I, p. 26 ff.] + +[Footnote 3: See secs. 1 and 2 of this chapter; also Vol. 1, +especially pp. 31-38 and 353-355.] + +[Footnote 4: This means actually gratuitous, for any real difficulty +in getting metal to or from the mint operates as a cost in the +conversion of bullion into money, or _vice versa_; e.g., the gold may +be in Australia and the mint in London.] + +[Footnote 5: See Vol. I, pp. 138 ff. and 361 ff. + +FIG. 1. GOLD PRODUCTION OF THE WORLD, 1493-1914. + +The changes in gold production here shown have bearings not only +upon problems of money, but in some respects upon nearly every modern +economic problem. Compare in the present connection this figure with +Figure 3, in Chapter 6, Section 4, showing changes in index numbers of +prices. + +[Illustration: FIG. 1. GOLD PRODUCTION OF THE WORLD. 1493-1710. +AVERAGES FOR PERIODS BEFORE 1870]] + +[Footnote 6: This formula is presented by E.W. Kemmerer in "Money and +Prices" (2d ed., 1909), p. 15 ff.] + +[Footnote 7: See above, ch. 3, sec. 6, table.] + +[Footnote 8: + + PER CAPITA CIRCULATION OF MONEY (ESTIMATED) IN THE UNITED + STATES IN VARIOUS YEARS. + + 1800......$4.99 1850......$12.02 1890......$22.82 + 1810...... 7.60 1860...... 13.85 1900...... 26.93 + 1820...... 6.96 1870...... 17.51 1910...... 34.33 + 1830...... 6.78 1880...... 19.41 1915...... 35.44 + 1840......10.91 +] + +[Footnote 9: On the function of deposits, see below, ch. 7, sec. 11.] + +[Footnote 10: Consult Figure 1 in ch. 4 and Figure 2 in ch. 6 for the +graphic presentation of these and related facts.] + + + + +CHAPTER 5 + +FIDUCIARY MONEY, METAL AND PAPER + + Sec. 1. Commodity and fiduciary defined. Sec. 2. Present monetary system + of the United States. Sec. 3. Saturation point of fractional money. Sec. 4. + Light-weight fractional coins. Sec. 5. Worn coins and Gresham's law. + Sec. 6. A general seigniorage charge on standard money. Sec. 7. Coinage on + governmental account. Sec. 8. The gold-exchange standard. Sec. 9. Nature + of governmental paper money. Sec. 10. Irredeemable paper money. Sec. 11. + Theories of political money. + + +Sec. 1. #Commodity and fiduciary defined#. The actual moneys in +circulation in every modern country consist of a wide variety of +pieces, differing in denomination, physical size, shape and materials, +mode of issue, source or authority of issue, and legal character. +Among these kinds, one is the standard and is a commodity-money.[1] In +such cases the coinage is free and nearly gratuitous, and the value +of the money is kept close to parity with its value as bullion by +changing bullion into coin, or coin back into bullion, whenever there +is an appreciable difference between the values in the two uses. This +adjustment is brought about by the free action of the people. The +government, having declared what is the standard money unit, and +having provided a mint to make coins, leaves it to citizens, acting +from the ordinary competitive motives, to decide when they will reduce +or increase the number of coins in circulation. + +The other kinds of money are not commodity-money and the materials of +which they are made, whatever they be, are not worth as much in any +other uses as they are in their present monetary form. Their value is +always referred to, and adjusted to, that of the commodity-money, so +long as any of it is in circulation. In contrast with commodity-money, +these other kinds may be called fiduciary money. By fiduciary money +we mean money that has not a commodity value equal to its money value, +but which is generally accepted because each receiver has faith that +others in turn will take it in the same way.[2] + +Sec. 2. #Present monetary system of the United States.# Here is given a +summary of the main features marking the present monetary system of +the United States (in 1915). + +Not all this variety is essential to an efficient monetary system and +several of the kinds survive as the result of historical accidents +(political and legislative). But all are now kept in accord with the +value of the gold coin which, it will be observed, is the only kind +the amount of which is not artificially limited. Silver dollars are +no longer coined, subsidiary silver and minor coins are issued only +in exchange for other money, as are gold and silver certificates in +exchange for gold or for silver, which they merely represent while in +circulation. + +Sec. 3. #Saturation point of fractional money.# Fiduciary money is that +on which regularly the issuer makes a seigniorage charge.[3] Let us +consider now the effect of seigniorage on the value of money. + +Fractional coins are those of smaller denominations than the standard +unit of money, as shillings and pence in England, and half dollars, +quarter dollars, dimes, nickels, and cents in America. Money to serve +well a variety of uses must be of different denominations, and "small +change" is necessary to make small purchases and for exact settlement +in larger payments that are not multiples of the standard unit. The +amount required (or most convenient to use) in each denomination +of fractional coins is thus a more or less certain portion of each +person's monetary demand, shaped by experience and fixed by habit. For +example, within certain elastic limits of convenience quarters may be +used for halves, and dimes for nickels (and _vice versa_); but each +person has a point of preference. The total demand for each kind of +change is the sum of the individual demands. This point where the +amount of coins of any denomination (in relation to the whole monetary +system) is most convenient may be called the saturation point of that +kind of small change, up to which point the people prefer a share +of their money in that form, and beyond which they will, if free +to choose, exchange that kind for other denominations (smaller or +larger). Each kind of money, as the cent, nickel, dime, has its own +peculiar demand and its saturation point. + + MONETARY SYSTEM OF THE UNITED STATES, 1915 + + Metals | Weight, grains | Fineness |Ratio to gold + 1. Gold coins | 25.8 | .90 | 100 + 2. Silver dollar | 412.5 | .90 | 15.988 to 1 + 3. Silver, subsidiary | 385.8 | .90 | 14.953 to 1 + 4. Nickel (5 cents) | 77.0 | .25 | ........... + 5. Copper (1 cent) | 48.0 | .95 | ........... + ---------------------------------------------------------------- + Metal |Limit of issue | Legal tender for|Receivable for + | | private debts |public dues + 1. Gold coins | Unlimited. | Unlimited. |For all + 2. Silver dollar |Ceased in 1905 | Unlimited. |For all + 3. Silver, | Needs of the | $10 |$10 + subsidiary | people | | + 4. Nickel (5 cts.) | Do. | 25 cts. |25 cts. + 5. Copper (1 ct.) | Do. | 25 cts. |25 cts. + | \ | + _Paper_ | | | + 6. Gold certificates|Unlimited in ex-| No |For all + |change for gold | | + 7. Silver |In exchange for | No |For all + certificates | silver $ | | + 8. US notes | No new issues. |Unlimited. |Except customs + 9. Treasury notes | No new issues. |Unlimited |For all + of 1890 | | | + 10. National bank |Capital of banks|No |Except customs + notes. | | | + 11. Federal reserve |Per cent. of |At banks of |For all + notes. | gold reserves |reserve system | + ---------------------------------------------------------------------- + Metal |Exchangeable at |Redeemable at |In circulation + |treasury for | treasury in |Oct 1, 1915 + 1. Gold coins |Gold certificates| |616,000,000 + |U.S., Treas., or | | + |Fed, res. notes | | + 2. Silver dollar |Silver | |65,000,000 + |certificates | | + 3. Silver, |Minor coins |Lawful money[a]| + subsidiary | |in sums or mul-|162,000,000 + | |tiples of $20 | + 4. Nickel | | Do. \ + > 62,000,000[d] + 5. Copper | | Do. / + + Paper | | | + 6. Gold certificates| Subsidiary and |Gold coin |1,172,000,000 + | minor coins | |[e] + 7. Silver | Silver and |Silver dollars | 482,000,000[f] + certificates | minor coins | | + 8. US notes | Subsidiary and |Gold | 337,000,000 + | minor coins | | + 9. Treasury notes of| Silver and |Gold | 2,200,000 + 1890 | minor coins | | + 10. National bank |Subsidiary silver|Lawful money[b]|761,000,000 + notes |and minor coins | | + 11. Federal reserve | Gold[c] |Gold[c] |133,000,000 + notes | | | + ------------------------------------------------------------------- + Total[g]...........................................3,792,200,000 + + [Footnote a: "Lawful money" includes gold coin, silver dollars, U.S. + notes, and Treasury notes.] + + [Footnote b: Redeemable also in lawful money at bank of issue.] + + [Footnote c: Redeemable also at Federal reserve banks in gold.] + + [Footnote d: Not usually included in the estimates of total money + in circulation.] + + [Footnote e: Represented dollar for dollar by gold kept in the U.S. + treasury.] + + [Footnote f: Represented dollar for dollar by silver kept in the U.S. + treasury.] + + [Footnote g: Besides, there were about $312,000,000 in the U.S. + Treasury not offset by outstanding paper. The total money stock (in + circulation and in the Treasury, eliminating certificates representing + gold and silver), was about $4,233,000,000, of which 70 per cent was + metal (largely represented in circulation by paper certificates) and + 30 per cent was paper. Of the 70 per cent 50 was gold, 18 was silver, + and 2 was copper and nickel.] + +Sec. 4. #Light-weight fractional coins.# The standard metal is usually +too valuable to be suitable for coins of the smaller denominations. +Therefore, when gold is the standard, copper, nickel, and silver +remain in restricted use. But when coins of these metals are issued +at weights corresponding with their bullion value, difficulties arise. +Not only are they too heavy for convenience, but with every slight +rise in their bullion value as compared with that of the standard +metal, they become worth more as bullion than as coin and begin to +disappear from circulation. This happened often throughout the Middle +Ages and until the nineteenth century. The attempt was generally made +to coin gold and silver at a ratio of weight corresponding exactly +to their market values at a given moment and, every time the market +conditions varied, the best full-weight coins of one of the two metals +were taken out of circulation. [4]The country thus suffered for lack +either of the larger gold coins or of fractional coins. At length, to +remedy this difficulty, fractional silver coins, often called +"token coins," were issued, in limited numbers, of less than full +proportionate weight and bullion value. + +This plan, having been partially tried, was generally adopted by the +United States in 1853 at a time when the silver dollar of 371.25 fine +grains was legally rated at the same value as the gold dollars of +23.22 grains, and was freely coined. The fractional coins were made +a little over 6 per cent lighter per dollar than the dollar coin; two +half-dollars or four quarters or ten dimes contained 93.52 cents worth +of silver. Since then silver bullion has become worth much less in +terms of gold, and for years past the bullion value of the silver in +a dollar of silver small change has been between 40 and 60 cents. Why +then has the fractional coinage a monetary value equal to the standard +money, dollar for dollar? + +The answer is, because it is artificially limited in quantity, so that +it does not pass the point of saturation in the field of its use. Its +value rests on its monetary use; it is fiduciary money, not commodity +money. It is limited simply by letting "the needs of the people" +determine its amount. This is done by issuing it only in exchange for +other money of the larger denominations, and by redeeming it in other +money on demand. Fractional coins are issued on the request of banks +in exchange for standard money. One needing "change" gets it at the +bank; when the bank finds its supply falling short it gets more from +the government mints. As business increased in 1898, the demand for +nickels, dimes, and quarters became unprecedented, and the mints +worked night and day to supply them. If these coins were made in +great quantities and forced into circulation by the government through +paying them out to creditors and officials, their quantity would +become excessive and they would fall in value (be at a discount) +compared with standard money. But as this is not done, and as, +moreover, they are redeemed on demand at the treasury (and practically +at every bank and post office) in other money, any slight tendency +to depreciation in any locality is at once corrected. As it is, the +government makes a seigniorage profit on the fiduciary coinage, as +shown in the following table. [5] The fractional coinage is maintained +at a parity with the standard money in accordance with the monopoly +principle, expressed in the limitation of the amount. + + _Receipts:_ + + Earnings (charges for refining, assaying, manufacture + for other countries, etc.)......................... $392,000 + Bullion recovered, by-products, old materials, etc... 143,000 + Profits on seigniorage, subsidiary silver............ 3,013,000 + Profits on seigniorage minor coinage and recoinage... 2,387,000 + ---------- + Total receipts.......................................$5,935,000 + + _Expenditures_: + All kinds............................................$1,138,000 + ---------- + Net revenues from mint service.....................$4,797,000 + +Sec. 5. #Worn coins and Gresham's law.# Coins may be light-weight as the +result of another cause--namely, the abrasion (wearing off) of the +coins in circulation. Nearly always when this has occurred the worn +coins have still been accepted as money,[6] and ordinarily without any +depreciation. That is to say, they have a value as money greater than +the value of the bullion that is in them. Everybody takes them without +hesitation as readily as if they were full weight. If, however, at +this point, new full-weight coins are put into circulation, these at +once disappear while the old ones remain in circulation--a fact that +has always been somewhat mystifying. + +In explanation of the phenomenon was formulated "Gresham's law" of +the circulation side by side of coins of different bullion value: bad +money drives out good money. Sir Thomas Gresham (whose name has but +recently been given to this so-called law), explained the principle +to Queen Elizabeth when counseling her regarding the recoinage of the +debased money of the realm as was done in 1560. He showed that when +old, worn coins were in circulation and the mint began putting out +full-weight coins, the old lighter ones remained as money, while the +new ones, being heavier, were picked out by jewelers and by those +needing to send money abroad. + +Gresham's law has a paradoxical wording and is frequently +misunderstood. "Bad" money means not counterfeit money, but merely +money that has not as great a bullion value compared with its money +value as some other kind of money then in circulation. But not every +piece of such money will drive out every piece of good money. The law +applies only under certain conditions, and within certain limitations. +The "good" will be driven out only if the total amount of money in +circulation is in excess of what would be needed if all were of full +weight and of best quality. Paradoxically speaking, if there is not +too much of the bad money, it is just as good as the good money. But +even if good money is driven out, it may not leave the country. It +may be hoarded, or be picked out by banks and savings-institutions to +retain as their reserves, or be melted for use in the arts. Gresham's +"law" becomes thus a practical precept. As applied to the plan of +recoinage it is: Withdraw the worn coins as rapidly (in equal numbers) +as you put new coins into circulation. + +The continued circulation of "bad" money along side of "good" money +(light-weight along side of full-weight coins), so long as the total +number of coins is not in excess of the money demand for full-weight +coins, is explained thus on just the same principle as is the +circulation at parity of a light-weight fractional coinage, in the +preceding section. + +Sec. 6. #A general seigniorage charge on standard money.# The fiduciary +coinage problem presents itself under a some-what different guise in +case a seigniorage charge is made on all coinage, even of that metal +used as the standard unit. In this case coinage is free but not +gratuitous. In this case no bullion is brought to the mint unless the +coined pieces the owners receive have a value equal to the bullion +value plus the seigniorage charge. The power to impose a seigniorage +charge is a monopoly power. Artificial limitation is present. +Evidently, the number of coins that can be issued without depreciation +is limited to that number which would circulate if they were made +full weight without a seigniorage charge.[7] This number of pieces of +full-weight metal is the saturation point of the money demand of the +country. If more than that could in any way be put into circulation it +would become worth less as money than as bullion, and would be melted +or exported. + +Assume that this full supply of money at a given moment is 100,000 +pieces or dollars; then consider the effect of imposing a seigniorage +charge of ten per cent on further coinage. The government alone having +the right of coinage, the need of money would give the circulating +medium a monopoly value. The value of the money would rise. When +it had risen until the coin would buy any more than one-ninth more +bullion than was in it, the citizens would begin to take metal to the +mint. After the ten per cent charge was taken out they would receive a +coin which, the containing one-tenth less bullion, would be worth +very nearly the same as the metal taken to the mint. No considerable +depreciation could take place unless the volume of business fell off +so that less money was needed than before. In that case there would +be no outlet for the excess of coins until they fell to their bullion +value, i.e., till they lost the entire value of the seigniorage, the +monopoly element in them. Melting or exporting them before that point +was reached would cause to the owner the loss of whatever element of +seigniorage value they contained. We thus have arrived at the general +principle of seigniorage: when the number of coins issued is limited +to the saturation point, a seigniorage charge does not reduce their +money value; they are worth more as money than as bullion. And this +holds good of a large seigniorage charge as well as of a small one, +even up to the extreme limit of a charge of 100 per cent. In this last +case the government would retain the whole of the bullion brought to +it and would give in return a piece of money made of material (metal +or paper) with a negligible value. + +Sec. 7. #Coinage on governmental account.# The fiduciary coinage problem +may be presented also when coinage is not free, and the times and +amount of coinage are determined by law or by legally authorized +officials. In this case the bullion must be obtained by purchase +in the open market (and paid for by some form of legal money, or by +bonds). Coinage is then said to be "on governmental account." + +Now, assuming that the normal money-demand (the volume of business, or +sum of exchanges) remains unchanged, let us consider what will result +if the government begins to issue money in this way, when, as in the +preceding case, 100,000 units of full-weight money are in circulation. +This action might be taken most simply by recoining all the +full-weight pieces that came into the treasury, making them contain +1/10 less precious metal, and paying out 1111 pieces for every 1000 +received. Every time this was done there would be an excess of 111 +pieces above the normal money-demand, and 111 full-weight pieces would +be exported or melted (Gresham's law). The process (in strict theory) +may be repeated 90 times, at which point 90,000 full-weight coins have +been received, 100,000 light-weight coins have been issued to take +their place and 10,000 full-weight coins have gone out of circulation. +The total seigniorage charge would be 1-10 of 90,000, or 9000 units. +No depreciation has taken place, and the pieces, by reason of their +limitation, bear a money value in excess of the bullion that is in +them. + +Now the government, with the next 1000 pieces collected by taxation, +could buy enough bullion (in the open market) to make another 1111. +The excess of 111 pieces could not now be promptly removed by the +melting down or exporting of 111 coins, for all those remaining in +circulation have a bullion value 1/10 below their money value. As this +process is repeated the excess must continue to grow from 100,000 to +111,111, and the value of the money piece in terms of bullion continue +to fall from 10 to 9. At this point the 111,111 pieces would contain +just the same amount of bullion and have just the same value as the +100,000 pieces did before. Thereafter no further profit would accrue +to the government from issuing coins of that weight. To make a further +profit it must again reduce the amount of pure metal in the coin. + +This process was often repeated in the Middle Ages. A ruler, either by +making a higher seigniorage charge or by coining on his own account, +debased the quality or reduced the weight of the money of his realm. +For a time the new coins, having the same monetary use, circulated at +par with the old coins. The ruler, pleased with this almost magical +power of getting a revenue with little trouble, continued to issue +coins until suddenly the heavier coins began to be exported or melted, +and the value of the other money fell, to the mystification alike of +the prince and of his people. The reason is now perfectly plain: the +number of coins was not kept within the proper limits and they went +down to their bullion value. The only way a further profit could be +made in this way was to debase the coin again. By successive steps the +coinage came to consist almost entirely of cheaper alloy. + +Sec. 8. #The gold-exchange standard.# In a number of silver-using +countries and colonial dependencies near the end of the nineteenth +century, the fluctuations of the value of silver in terms of gold was +a constant source of difficulty in the payment of foreign obligations +to gold standard countries. Yet there were strong reasons in the +habits of the people and in the industrial conditions of the country +to forbid the adoption of gold and the disuse of silver as the actual +money in circulation. The method adopted, that of the gold-exchange +standard, involved these features. + +(1) Closing the mints of the country to the free coinage of silver, as +was done most notably in India in 1893 and in Mexico in 1904. + +(2) Adoption of a fixed ratio of exchange between the silver coins in +circulation and some gold coin which is made the standard of value in +all transactions (as the dollar or the pound sterling), the money in +circulation thus being all or nearly all of a fiduciary nature. + +(3) Regulation and limitation of the amount of money in circulation so +that a fixed parity between it and gold may be maintained (a) by the +limited issue of coins only on governmental account, (b) by the sale, +at a fixed rate, of foreign exchange bills payable abroad in the +standard unit, the money paid for the bills being withheld from +circulation in a special reserve, (c) by the purchase of foreign bills +of exchange at a fixed rate, thus paying out and putting again into +circulation some of the fiduciary money in the special reserve. + +These monetary changes furnish numerous illustrations and +demonstrations of the quantity theory of money as applied to the +entire circulating medium of a country.[8] + +Sec.9. #Nature of governmental paper money.# The problem of seigniorage +presents itself in its most extreme form when money is made of paper. +Paper money is issued either by a government or by a bank. We will +consider governmental notes here, reserving until Chapter 7 the case +of bank notes. + +The issue of paper money in some cases grew out of the practice of +debasing metal. However this may have been, governmental paper money +may be looked upon as money for which a seigniorage of one hundred per +cent is charged. The gain of seigniorage from paper money is greater +and is just as easily secured as that from coinage of metals. +Governmental paper money is called "political money," in contrast +with commodity money. However, all coins that contain an element of +seigniorage, or monopoly value, are to that degree "political money." +The typical paper money is irredeemable; that is, it cannot be turned +into bullion money on demand. It is simply put into circulation, +usually with the "legal-tender" quality. Money has the _legal-tender_ +quality (as the term is used in the United States) when, according to +law, it must be accepted by citizens as a legal discharge for debts +due them, unless otherwise provided in the contract. The prime purpose +of making money legal tender is to reduce the danger of dispute as to +payments; but another purpose often has been to force people to use a +depreciated money whether they would or not. The purpose of the issue +of political money is usually to gain the profit of seigniorage for +the public treasury, and often it has been the desperate expedient +of nearly bankrupt governments. Governmental paper money differs +from bank notes in that its value does not necessarily depend on the +promise of redemption by the issuer. It differs from promissory notes +and bonds in that its value is not based on the interest it yields, +but mainly on its monetary uses. The issue of paper money may save the +government the payment of interest on an equal amount of bonds. The +promise to receive paper in payment for taxes or for public lands may +help to maintain its value by reducing its quantity, but nothing short +of its prompt redemption in standard coins makes it truly redeemable. + +Sec. 10. #Irredeemable paper money.# The most notable examples of paper +money in the eighteenth century were the American colonial currencies, +the continental notes, and the French assignats. In all the American +colonies before the Revolution, notes or bills of credit were issued +which were in most cases legal tender. Parliament forbade the issues, +but to no effect. Without exception they were issued in large amounts +and without exception they depreciated. The continental notes were +issued by the Continental Congress in the first year of the war +(1775), and for the next five years. The object at first was to +anticipate taxes, and it was expected that the states would redeem and +destroy the notes, but this was not done. The notes passed at par for +a time, but depreciated rapidly as their number increased. It has been +estimated that the country had less than $10,000,000 of coin before +the war, and when, in 1780, over $200,000,000 of notes were in +circulation they were completely discredited: hence the phrase "not +worth a continental." Specie then quickly came back into use. A few +years later the leaders of the French Revolution, failing to learn the +lesson of the American experience, issued, on the security of land, +notes called assignats in such enormous quantities that they became +worth no more than the paper on which they were printed. The paper +money issued under the English bank restriction act of 1797-1820 is +especially notable because it gave rise to the controversy which did +much to develop the modern theory of the subject. Parliament forbade +the Bank of England to redeem its notes in coin because the government +wished to borrow the coin the bank held. The result was the issue of +a large amount of bank money not subject to the ordinary rule of +redemption on demand. It was virtually governmental paper money. The +notes depreciated and drove gold out of circulation, and it was not +until 1821 that specie payments were definitely resumed. + +The United States, under the Constitution, did not try legal-tender +paper money till 1862 when paper notes (called greenbacks, because of +the color of ink with which the reverse side was printed) were first +issued, later increased to a total of about $450,000,000. Other +interest-bearing notes were issued with the legal-tender quality and +circulated as money to some extent. Greenbacks depreciated in terms +of gold, and gold rose in price in terms of greenbacks until, in June, +1864, it sold at 280 a hundred. Fourteen years elapsed after the war +before these notes rose to par, in terms of gold (in December, 1878), +and they became legally redeemable in gold January 1, 1879. This was +called "the resumption of specie payments." + +Almost every nation has at some time issued political money. During +the Franco-Prussian War in 1870, France, through the medium of its +great state bank, made forced issues of notes of a political nature, +which only slightly depreciated. Many countries--Russia, Austria, +Portugal, Italy, and most of the South and Central American +republics--have had or still have depreciated paper currencies. + +At once, at the outbreak of the great war in 1914, the governments of +the warring nations began to exercise a strict control over the issue +of paper money, sought to gather into the public treasury all the +specie, and to give paper (either governmental notes or bank +notes) practically a forced circulation, making it almost the sole +circulating medium. The values of the paper moneys have fallen in all +the countries, especially in Germany and Russia. In such cases the +money partakes somewhat of the characters both of bank notes and of +political money. Resorted to in desperate extremities, political +money has usually proved to be a costly experiment. A result usually +unintended is the derangement of business and of the existing +distribution of incomes. The rapid and unpredictable changes in prices +gives opportunity for speculative profits, but injure legitimate +business. This incidental effect on debts and industry offers the main +motive to some citizens for advocating the issue of paper money. It +is peculiarly liable to be the subject of political intrigue and of +popular misunderstanding. It is this danger, more than anything else, +which makes political money in general a poor kind of money. + +Sec. 11. #Theories of political money.# There are two extreme views +regarding the nature of paper money, and a third which endeavors +to find the truth between these two. First is that of the +cost-of-production theorists, who declare that government is powerless +to influence value, or to impart value to paper by law. They deny that +there is any other basis for the value of money than the cost of the +material that is in it. Money made of paper, on a printing press, has +a cost almost negligibly small, and, therefore, they say it can have +no value. The facts that it does circulate and that it is treated as +if it had value are explained by the cost-of-production theorists as +follows: while the paper note is a mere promise to pay, with no value +in itself, it is accepted because of the hope of its redemption, just +as any private note. Depreciation, according to this view, is due +to loss of confidence; the rise toward par measures the hope of +repayment. + +Taking a very different view, the extreme fiat-theorists assert that +the government has unlimited power to maintain the value of paper +money by conferring upon it the legal-tender quality. The meaning of +_fiat_ is "let there be," and the fiat-money advocates believe that +the government has but to say, "Let there be money," to impart value +to a piece of paper. The typical fiat-money advocates in the United +States were the "Greenbackers," who wished to retain the greenbacks +issued in the Civil War and to increase the amount greatly. They saw +in paper money an unlimited source of income to the government. +They proposed the payment of the national debt, the support of the +government without taxes, and the loan of money without interest to +citizens. All might live in luxury if the extreme fiat-money theorists +could realize their dreams. The depreciation that has taken place +in nearly every case where government notes have been issued, the +fiat-theorists declare to be due to a mild enforcement of the law of +legal tender. To them the fact that paper money may circulate for +a time at par appears a reason why it always should. They do not +recognize that there is a saturation point in the use of money, and +that its use is still further limited by the fear of larger issues. + +The almost universally accepted opinion among economists rejects both +of these views, tho recognizing in each a certain limited aspect of +the truth. The cost-of-production view quite overlooks the features +in which paper money differs from ordinary credit paper. The value of +one's promises to pay depends on his reputation and his resources; the +resources constitute the basis of value. Bonds have value because they +yield interest and are payable at a definite time in standard money. +But paper money, lacking this basis for its value, has another basis +in its money use, in its power to buy goods. + +The theory of paper money here outlined makes the value of paper money +a special case of monopoly value. As the power of any private monopoly +over price is relative, not absolute, so is that of the government +over the value of political money. The money use is the source +of value of the paper notes. It is this which gives the economic +condition for value in paper money and strictly limits the power of +the government--a fact overlooked by the fiat-theorists. Business +conditions remaining unchanged, the limit of possible issue without +depreciation is the number of units in circulation before the paper +money was issued, the saturation point of full-weight and full-value +coins. Whenever governments have failed to stop at that point, +paper money has depreciated. But under wise and honest control and +regulation political paper money might serve the monetary function +very effectively. + + +[Footnote 1: The problem of a legally authorized double standard, +bimetallism, is treated in the next chapter. An irredeemable paper +money may be, for a time, the standard money.] + +[Footnote 2: The faith _(fides)_ is not always that the issuer of the +money (whether it be a bank or the government) will redeem the money +on demand at any future time; for fiduciary money may circulate while +irredeemable, that is, either carrying no promise of redemption in the +standard money or in fact not being redeemed. Yet undoubtedly actual +redemption on demand or a good prospect of future redemption is one +of the circumstances stimulating the faith and the readiness of each +person in turn to receive fiduciary money.] + +[Footnote 3: In the broad sense as above defined, ch. 3, sec. 10.] + +[Footnote 4: See next section on worn coins.] + +[Footnote 5: Receipts and Expenditures of Mint Service in 1914:] + +[Footnote 6: It makes no difference what may be deemed the cause of +their acceptance; whether it be habit, public opinion in business +circles, or the act of law making them a legal tender; the essential +thing is that they continue to be accepted as money.] + +[Footnote 7: In this and following numerical examples no account is +taken of the possibility that the standard metal may depreciate in the +world market in terms of all other goods as a result of its diminished +use as money in one or more countries. This properly belongs in a +complete theoretical treatment of the subject.] + +[Footnote 8: See "Modern Currency Reforms" (1916), by E.W. Kemmerer, +professor of Economics and Finance in Princeton University, for a +detailed treatment of this remarkable series of monetary changes, +probably unequaled in instructiveness to the student of monetary +theory.] + + + + +CHAPTER 6 + +THE STANDARD OF DEFERRED PAYMENTS + + Sec. 1. Relative positions of gold and silver; historical. Sec. 2. Gold + production, first half of nineteenth century. Sec. 3. Concept of the general + price level. Sec. 4. Index numbers. Sec. 5. Gold production and monetary + legislation, 1850 to 1879. Sec. 6. Definition of the standard of deferred + payments. Sec. 7. Increasing importance of the standard. Sec. 8. Fluctuating + standard and the interest-rate. Sec. 9. Notable changes in prices. + Sec. 10. Nature and object of bimetallism. Sec. 11. The movement for + national bimetallism in America. Sec. 12. Rising prices after 1896. Sec. 13. + Defectiveness of the gold standard. Sec. 14. Various ideal standards + suggested. Sec. 15. The tabular standard. + + +Sec. 1. #Relative positions of gold and silver: historical.# It is not +possible within the limits of our space to enter here into the details +of the world's monetary history. It must suffice for our purpose to +sketch briefly the period preceding the nineteenth century. Both +gold and silver were used as moneys in Europe in the Middle Ages, tho +silver was much the more common. The two metals continued to be used +side by side in Europe and in the new settlements in America, silver +for the smaller and gold for many of the larger transactions. +Both were made legalized forms of money (and standards of deferred +payments) in units of specified weights and fineness, the weights +bearing a certain ratio to each other. Thus it was possible for a +debtor to discharge his obligations with that one of the two metals +that at the moment was the cheaper at the legal ratio. Fluctuations in +the prices of gold in terms of silver were at times such as to cause a +large part of the full-weight coins of one or the other metal to leave +circulation (in accordance with Gresham's law). So from time to time +the ratio was slightly changed by law in the various countries to +permit the circulation or to bring back the kind of money that had +been undervalued in terms of the other. But it is a very remarkable +fact that from the time of Xenophon until the discovery of America +(a period of nearly 2000 years), the market ratio of silver to +gold bullion in Europe remained pretty close to 10 to 1, being only +temporarily altered by sudden and unusual occurrences. From 1492 to +1660 the ratio changed to 15 to 1, where it remained with remarkable +stability until about the year 1800. At the establishment of the mint +of the United States in 1792 that ratio was found to exist. Men +had come to look upon the ratio of 15 to 1 as the natural order, +determined (it was sometimes said) providentially by the deposit of +the two metals in due proportion in the earth's surface. But as we +now see it, this in part was mere chance and in part was due to the +equalizing effect of the wide use of both metals so that the one could +be easily substituted for the other in case of a divergence of the +market ratio from the legal ratio as money. From the year 1500 until +1800 the Western hemisphere was the main source of the precious +metals, the alluvial deposits were widely scattered, were gradually +discovered, were usually found in small quantities, and were +extracted in primitive ways. The existing stock of precious metals, +gold and silver, more than other products of mine and field, is at any +time the accumulation of many years' production, and is changed very +little, proportionally, by a large change of output in any year or +short period. It changes in volume as does a glacier fed by the snows +of many years, not as does a river, filled by a single rainfall. For +a short time after the discovery of America (from 1493 to about 1544) +the average coining value[1] of the world's production of gold, +nearly all found in America, was about 1-1/2 times as great as that of +silver; but thereafter for three centuries from about 1545, the annual +value of silver produced was between 1-1/2 to 4 times as great as that +of gold, averaging about twice as great. Silver was the money chiefly +in use in the ordinary transactions in all of the principal countries +of the world. + +Sec. 2. #Gold production, first half of nineteenth century.# We have now +to note some great changes in the production of gold in the nineteenth +century, changes both absolute and relative to that of silver. The +market ratio of the two metals had been gradually changing before 1792 +and continued to change. Gold was slowly becoming more valuable in +terms of silver and the legal ratio of 15 to 1 in the United States +(at which both metals were admitted free to the mint) proved to have +undervalued gold. Gold largely left circulation and silver and bank +notes formed the greater part of our circulating medium. Then, in +1834, soon after the production of gold had begun to increase somewhat +more rapidly than that of silver, the legal ratio of the United States +was changed to 16 to 1. This brought a good deal of gold back into +circulation and gradually drove out most of the silver (the heavier +coins disappearing first). + +In the decade 1841-50 the average annual value of the gold production +had, for the first time since the early sixteenth century, exceeded +that of silver. Then, from 1848 to 1850, came the great gold +discoveries in California and in Australia. In 1851 the value of gold +produced was one and one-half times that of silver; in 1852 was three +times, and in 1853 four times as great; and then slowly declined, but +continued every year as late as 1870 to be over twice as great. +This caused the displacement of silver by gold and drove out a large +proportion of the silver coins of smaller denominations. This led to +the law of 1853, authorizing subsidiary coinage (on government account +only) of lighter weight.[2] Let us observe the effect on prices that +was brought about by the discoveries of 1848-49, and, first, we +must consider briefly the method of measuring and expressing general +changes in prices. + +Sec. 3. #Concept of the general price level.# The price of any good +is some other good or group of goods given for it in trade.[3] The +standard unit of money coming to be the most convenient expression for +price (whether or not money be actually passed from hand to hand in +that particular trade), prices usually are monetary prices, and +more specifically are prices in gold, or in silver, or in whatever +constitutes the standard money unit. But the price of each good is +a definite, separate fact, which expresses the ratio at which that +commodity is sold. The price of any particular kind of goods may +fluctuate in either direction as compared with the prices of other +goods at the same time. For example, iron and many other goods +may rise while wheat and many other goods fall in price. There is, +therefore, no such thing as an actual _general_ change in the prices +of goods in terms of money, but it may be seen that the prices of +large classes of goods, often of nearly all goods, change upward or +downward at the same time and in the same general direction. We +thus have need to distinguish between changes in the valuations of +particular kinds of goods in terms of each other and general changes +in the valuation of a number of different goods in terms of the +monetary unit. + +To get some idea of whether such a general trend occurs, the algebraic +sum of all the changes in the particular prices of a selected group +of goods may be taken, and for convenience this may be reduced to an +average price (by dividing the sum by the number of articles). Such +an average is called a general price and, when comparing it with +the general price of another time, we speak of changes up or down +in _general prices,_ or in the _general scale of prices,_ or in the +_price level._ + +When gold is the standard unit, its value is the converse of general +prices; as prices go up the value of gold goes down, and gold is said +to _depreciate_. As prices go down, the value of gold goes up and gold +is said to _appreciate_. Rising prices mean falling value of gold (and +at the same time falling purchasing power), and _vice versa._ + +[Illustration: FIG. 2. INDEX NUMBERS OF PRICES. The four series of +prices here shown begin at different periods; the American in 1840 +(Aldrich report 1840-1889 and Bureau of Labor from 1890 on); the +English in 1846; the German in 1851; the French in 1857. We have +adjusted each of these series to a base of the average prices for +1890-1899, in accord with the basic period used by the American Bureau +of Labor. + +The reader must be on his guard against misunderstanding the diagram. +It does not represent the heights of the prices of the different +countries compared with each other either at any one date or for the +entire period. For example, the heights of the lines at the year +1860, do not indicate that American prices were lowest and French the +highest at that date, or, indeed, tell anything whatever directly +on that point. The various series of prices are compared within +themselves, every year with the average of the prices for 1890-1899 in +each country, respectively. The only comparison allowable, therefore, +between the several lines, is that between the fluctuations, both as +to their times and as to their directions, both as to the larger tidal +movements and as to the lesser wave-like movements within the business +cycles. The Figure does indicate that both American and German prices +have risen somewhat as compared with the English and French prices, +since the period before 1860. + +This figure should be studied in connection with Figure 1, in ch. +4, sec. 9, on gold production. The Figures indicate that the rapidly +growing monetary use of gold offset a large part of the effects of +increasing gold production between 1840-1860 and 1884-1914. Between +1884 and 1896 prices actually continued to fall after gold production +had begun to climb. Likewise the growing monetary use of gold +accentuated strongly the effects, between 1873 and 1883 of a +comparatively small decrease in gold production.] + +Sec. 4. #Index numbers.# The process of calculating general prices and +changes in them has in it, inevitably, something of arbitrariness and +incompleteness. For not all prices can be included, but only those +of articles of somewhat standardized grades and those that are pretty +regularly sold in markets where prices are publicly quoted. Any list +of articles that can be selected is of unequal importance to different +persons and classes of persons, at different places, at different +times, and for different purposes. And yet the study of general prices +as shown by any broadly selected list reveals changes which in some +measure affect the interests of every member of the community. + +General prices are conveniently compared from one time to another +through the use of index numbers. An _index number_ of any article is +the per cent which its price at any certain date is of its price at +another date (or of the average for a series of prices) taken as a +base or standard. Thus if the average price of cotton in the base year +were 10 cents (taken as 100) and the price rose to 12 cents, the index +number would be 120. _A tabular index number_ is the per cent which +the price of a selected group of articles at any certain date is of +the price of the same group of articles at a date which has been taken +as the base.[4] + +The principal index numbers of the leading countries are here shown. +The fact that from 1862 to 1879 inclusive prices in the United States +were expressed in an irredeemable paper standard makes comparisons for +that period misleading. A better idea is obtained by using as the base +for each of the several series, the average of prices in each country +for the years 1890 to 1899. + +Sec. 5. #Gold production and monetary legislation, 1850 to 1879#. The +unprecedented increase in gold production between 1849 and 1853, and +the continuance of production in volume about four-fold as great as +that of the decade 1840-49 was reflected at once in a rise of prices. +This was a period of prosperity in business culminating in the +crisis of 1857 (felt more or less in all the leading countries). This +prosperity accelerated the effect of increasing quantities of the +standard money. Credit was stimulated and the rate of circulation and +the efficiency of money were increased. Prices rose to a temporary +maximum in 1857 and then fell as a great international financial +crisis occurred. The great new supplies of gold had been readily taken +("absorbed") into the monetary circulation of the world, to meet +the needs of rapidly growing commerce and industry. In the European +countries,[5] prices in terms of gold, tho fluctuating somewhat, kept +at about the same level from 1860 to 1870. The years 1871 and 1872 +were very prosperous and showed rapidly rising prices which reached a +maximum in 1873, when a financial panic occurred. + +In that very year, just as the gold production for the first time +since 1851 had fallen below $100,000,000, several notable changes in +monetary legislation were made which made gold more important in the +circulation of a number of countries. + +In 1873 Germany made gold the standard throughout the new German +Empire (having prepared the way by legislation in 1871 which made +gold a legal tender alongside of silver), and provided that silver was +thenceforth to be used only in the subsidiary coinage. The same year +Belgium, and the next year the other countries of the Latin Union +(France, Switzerland, and Italy) took steps which resulted in +demonetizing silver; that is, in limiting its coinage to governmental +account, and in making gold their one standard money. + +The United States at that time had neither gold nor silver regularly +in circulation (except in California), and there was a long-continued +discussion of "a return to specie payments," which meant the return +to a metallic standard, and the redemption of greenbacks on demand. +Meantime in 1873 a law was passed making the gold dollar "the unit of +value," and dropping out the standard silver dollar from the list of +coins authorized to be issued at the mint.[6] From 1873 until 1879, +prices (in greenbacks) were falling in this country very rapidly +because the country with the increase in population, wealth, and +business, was "growing up to" its unchanging currency supply. For a +like reason at the same time gold prices throughout the world were +falling. While this country was lowering its level of prices from an +inflated paper money to a gold commodity basis, the gold basis itself +was sinking to a lower level. The very demand of our treasury and +banks for gold caused the retention of our own gold product (which +between 1864 and 1876 had been nearly all exported) and required an +enormous net importation of gold between 1878 and 1888. This +reduced suddenly by one-half the amount available each year from our +production for the rest of the world. + +Sec. 6. #Definition of the standard of deferred payments.# These various +changes in the purchasing power of the standard money had great +effects upon industrial conditions. Particularly had they shifted the +positions and claims of debtors and creditors, because of the enormous +importance of money as "the standard of deferred payments," Let us now +get a more definite understanding of that term. + +As a medium of exchange, money comes to be the unit in which most +prices are expressed and compared; in other words, it becomes +the common denominator of prices.[7] This makes it also the most +convenient unit in which to express the amount of credit transactions +and of existing debts.[8] A credit transaction is a trade lengthened +in time; one party fulfils his part of the contract, the other party +promises to give an equivalent at a later date. The equivalent may be +in any kind of goods; for example, in barter one may part with a horse +on the promise of a cow to be received later; or a small horse on +the promise of a large one; or a flock of sheep on the promise of +its return at the end of the year with a part of the increase of the +flock. A simple standard in which to express the debt is the thing +borrowed, as horse, sheep, wheat, house. Again, the thing to which +the value of debts is referred may be a thing quite different from the +goods borrowed and, with the growth of the monetary economy and the +use of the interest contract, money comes more and more to be used as +the standard. At length the law declares that, in the absence of any +other agreement, the amount of a debt is to be payable in terms of the +unit of standard money, which thus is made legal tender as well as +the customary standard of deferred payments. A _standard of deferred +payments_ is the thing of value in which, by law or by contract, the +amount of a debt is expressed and payable. + +Sec. 7. # Increasing importance of the standard.# Until the use of money +develops, the use of credit is difficult and limited; it becomes +easy when the value of all things is expressed in terms of a common +circulating medium. It therefore generally is true that the importance +of money as the standard of deferred payments increases with the +use of money as a medium of trade. The volume of outstanding debts +expressed in terms of money now very greatly exceeds the total value +of the circulating medium. Changes in the general level of prices +have, therefore, great effects upon all existing debts. The value of +all debts changes in the same proportion as does that of the standard +unit of money; when this rises or falls in value, it means increase +or reduction, in the same ratio, of the purchasing power of every +creditor. It is as if he had in his possession metal dollars equal +in amount to the face of the debt, and they had changed by so much +in purchasing power. The debtor's interests in such changes are, of +course, just the reverse of the creditor's interests. + +Outstanding contract debts may be roughly divided into two classes: +short-time loans, running less than a year; and long-time loans, +running for a year or more.[9] Fluctuations are rarely rapid and great +enough to affect appreciably the debtors and creditors in the case +of short-time loans. The results are appreciable in the case of loans +running from one to five years, and may be very great in the case of +loans made for still longer periods, such as the bonded indebtedness +of nations, states, municipalities, and business corporations, and +as mortgages given by farmers on their land or by owners of city real +estate. A multitude of interests are thus affected by a change in the +value of money. When money rises in purchasing power, receivers of +fixed incomes are gainers. When it falls in purchasing power, they +lose. Receivers of fixed incomes from loans include not merely private +investors, but also many educational and charitable institutions which +dispense their incomes for public purposes. Wages and salaries of many +kinds go up and down less rapidly than do other prices, and thus +to some extent wage-earners are in the position of passive +capitalists[10] as regards changes in the monetary standard. In a +capitalistic age, therefore, almost every individual is affected in +some way by a change in the value of money. + +Sec. 8. #Fluctuating standard and the interest-rate.# In connection with +the standard of deferred payments there is presented a problem of +the effect that fluctuations of the standard may have upon the +interest-rate.[11] As the general price-level falls or rises, the +monetary standard conversely appreciates or depreciates.[12] If these +changes are slight in amount and imperceptible in their direction +they may not affect considerably the motives of borrowers and lenders. +Therefore, the rate of interest this year in long-time loans would be +just that resulting in the expectation, on all hands, of a stationary +level of general prices. Suppose that rate to be 5 per cent on the +standard investment (such as real-estate loans and good bonds). Then +the lender of $1000 will receive each year a $50 income and at the end +of the investment period $1000 principal, each dollar of which will +purchase the same composite quantum of goods that a dollar would have +purchased at the time the loan was made. Likewise, the borrower would +pay interest and principal in a standard that reflected an unchanging +general level of prices. But, now, if the general level of prices +unexpectedly falls 1 per cent within the year, the creditor of a loan +maturing at the end of the year would receive (principal and interest) +$1050 which will purchase 1 per cent more goods per dollar than the +sum he loaned, or (approximately) $1060 worth of goods. Hence, he +has received, in quantum of goods, a yield of 6 per cent on his +investment. If this change continues for five years, the lender of a +five-year loan would receive each year $50 having a purchasing power +successively 1, 2, 3, 4, and 5 per cent greater than the same sum +had at the making of the loan; and at the end of the five years would +collect the principal, having a purchasing power 5 per cent greater. +The lender, on his part, would have to pay interest and repay the +principal in a money that is to be obtained only in exchange for a +larger sum of goods than that which could be bought with each dollar +that he borrowed. This means that, with individual exceptions, +creditors generally gain and debtors lose by falling prices. + +But this is fully true only in respect to loans already made. For just +to the extent that such a movement of prices comes to be more or less +regularly in the same direction, both borrowers and lenders are able +to take it into account, and as experience shows, do take it into +account.[13] When prices fall men become more eager to sell wealth, to +lend the proceeds, and more reluctant to borrow for investment at the +prevailing rate of interest and at the prevailing prices. There is an +incentive to divest one's self of ownership (e.g., by selling stocks) +and to become a lender (e.g., by buying bonds). This whole situation +is reversed in a period of rising prices. The result is that the rate +of interest in any long continued period of falling prices (such as +from 1873 to 1896) has a trend downward and in a period of rising +prices (such as from 1897 to 1915) has a trend upward. This movement +of readjustment would not go on indefinitely, even if the same +trend of prices continued; for in the strict theory of the case the +adjustment would be complete when the interest rate had changed by +just the amount of the annual change in the level of prices. For +example, if 5 per cent is the static normal rate of interest, then +when prices are falling 1 per cent each year, the adjusted rate of +interest would be 4 per cent; and when prices were rising 1 per cent +each year, the adjusted rate of interest would be 6 per cent. Such +adjustments serve to some extent to neutralize the effects of changes +in the standard of deferred payments so far as concerns new loans made +in view of just such a change and in expectation of its continuance. +But no one can foresee exactly, and most persons take little account +of, such a change until it has continued for several years in the +same direction. The adjustment is therefore never very prompt or very +exact. In some years the general level of prices has risen more than +5 per cent, or more than enough to offset the entire interest received +by most lenders. A man with dollars to invest would have been as well +off if he had kept them buried during that period.[14] + +Sec. 9. #Notable changes in prices#. In most cases the true effects of +monetary changes escape recognition. In a few cases, however, the +change has been so great as to cause an economic revolution. Such +was the change in prices following the discovery of America, which +occurred soon after the old feudal dues had come to be generally +expressed in terms of money instead of labor services. In modern +times, since the mass of debts has become greater than ever before, +such changes bring even graver economic consequence. The increase in +the output of gold in 1849-57,[15] caused what was the most rapid, if +not the greatest money inflation that had occurred since the sixteenth +century. The substitution of gold for silver by some countries at that +time, by making a great additional market for gold, helped to check +the fall in its value. Indeed, a considerable decline in the output +of gold after 1870 combined with its widening use to cause in 1873 the +beginning of a great fall of gold prices. The resulting increase +in the burden of outstanding debts was felt by all debtors, but +particularly by great numbers of the agricultural classes both in +Europe and in America. Their tribulations were aggravated by the fact +that at that time (especially from about 1873 to 1896) the prices +of their products were falling much more rapidly than were general +prices, as a result of the very rapid extension of the agricultural +land supply.[16] There was complaint, agitation, and demand for relief +on the part of many interests in France, Germany, England, and the +United States. As a result, the money question became in this country +a leading political issue and continued to be such between 1873 and +1900. + +Sec. 10. #Nature and object of bimetallism.# First came "the greenback +movement," which, lasted until after 1880.[17] This then gave way to +an agitation for bimetallism. _Bimetallism_ is the plan of using two +metals as standard moneys. Bimetallism is legally authorized when both +metals are admitted to the mints for free coinage at an established +ratio of weight. Bimetallism may be legally authorized, but not +actually working, for, if the market-value long continues to vary +appreciably from the legal ratio, only one of the metals may in fact +be left in circulation. This situation is called _limping_ bimetallism +(or the halting double standard), tho this is a contradiction of +terms. National bimetallism is confined to a single country, as was +the case in the United States before the Civil War, or in France +before 1867. International bimetallism is that resulting from an +agreement among several nations to use two metals on the same terms. + +The theory of bimetallism is that the government can act on the value +of the two metals through the principle of substitution. The metal +tending to become dearer will not be coined, the other will be coined +in greater quantities. The degree of influence that can thus be +exerted on the value of the two metals depends on the size of the +reservoir of the metal that is rising in value. When it all leaves +circulation, the law on the statute book permitting it to be coined +becomes a mere phrase. In such a case there is bimetallism _de jure,_ +but monometallism _de facto._ The greater the league of states the +greater is the likelihood that the plan will continue to work. The +only notable historical instance of international bimetallism is +that of the Latin Union, which united France, Belgium, Italy, and +Switzerland in an agreement remaining actually in force from 1866 to +1874. A strong movement developed between 1878 and 1892 in favor of +forming a great international bimetallic union of states. + +One object of the movement was to put an end to the great fluctuations +in the rates of exchange of money between the silver-using and +gold-using countries, fluctuations which occasioned much uncertainty +and loss to individuals engaged in foreign trade. The rise in the +price of gold-exchange in the silver-using countries (notably India) +meant also an increase in their burden of taxation. These countries +collected their revenues in silver, but they had to pay their debts, +principal and interest, in gold. Another object of this movement was +to prevent the burden of individual debts from increasing by reason +of the rise in the value of the single standard, gold. It was, indeed, +hoped that by bringing silver much more into use, the value of gold +would be reduced, thus bringing relief to the debtor classes. Still +another object of the bimetallic movement was to aid the silver miners +and silver-producing districts by creating a larger market for silver. + +Several international conferences were held which were taken part +in by some of the leading financiers of the world representing their +respective governments. The United States was foremost in advocating +the policy, France at first favored it, as did in large measure the +British Indian administration, tho England was in the main opposed. +The movement came to nothing. + +Sec. 11. #The movement for national bimetallism in America#. When all +hope of international bimetallism failed, the efforts of many of its +advocates were turned to the plan of legalizing national bimetallism +in the United States at a ratio of 16 to 1. This was very different +from the market ratio. Gold had become before 1860, in fact, the +standard of our money system, and after 1873 it was the only metal +admitted to free coinage. Silver, little by little, had been losing +purchasing power in terms of gold, until from being worth, in 1873, +one-sixteenth as much, ounce for ounce, it became, in 1896, worth but +one-thirtieth as much as gold. The power of silver to purchase general +commodities fell much less than the change in its ratio to gold would +indicate, gold having risen in terms of most other goods as well as +of silver. Nevertheless, the proposal to open the mints to the free +coinage of silver at the ratio of 16 to 1 in the year 1896 threatened +a sudden and marked cheapening of money.[18] Probably gold would have +been entirely driven out as money and silver would have taken +its place as the standard. In any event "free silver" would have +accomplished the purpose of making the standard of deferred payments +cheaper. It was at first a debtors' movement, but to succeed it had +to enlist the support of other large classes of voters. And thus +it developed into the more sweeping theory that wages, welfare, and +prosperity were favored by a larger supply of money quite apart from +the effect it would have upon debts. + +In its extreme form the free-silver plan was a fiat scheme, for some +of its supporters believed that by the mere passage of the law the two +metals could be made to bear to each other any ratio desired. But its +most intelligent advocates recognized that the force of the law was +limited by economic conditions. The victory of the gold standard in +the campaign of 1896 was, it would seem, due more to the well-founded +fear that a sudden change of the money standard would cause a panic +than to a popular understanding of the question. + +The free-silver advocates got what they desired, a reversal of +the movement of general prices, through an occurrence for which no +political party could claim the credit. In 1883 the gold production of +the world was less than $100,000,000. From that date, with the opening +of newer gold-yielding territory in South Africa and in the Klondike, +the annual output of gold had been increasing rapidly and almost +steadily. The methods of extracting gold theretofore had still been in +large part of a primitive sort. But intricate machinery was taking the +place of crude tools, chemical processes had been introduced (notably, +the cyanide process), and the principal product began to come from +the regular and certain working of deep mines rather than from chance +surface discoveries. In many parts of the world were enormous deposits +of low-grade ores, before useless, that could be worked economically +by the new methods. + +The general price level fluctuated, but on the whole tended downward +between 1884 and 1893 (the year of panic), and reached a minimum in +the year 1895 in Germany, 1896 in England, and 1897 in America. It +is noteworthy that the very year 1896, which marked the height of the +political agitation to abandon the gold standard for silver, saw the +gold production for the first time in all history surpass the two +hundred million dollar mark. The gold output had caught up with, and +began to surpass, the normal monetary demands of the world, meaning by +that phrase, the amount of gold needed to maintain a stationary level +of prices. + +Sec. 12. #Rising prices after 1896#. The whole character of the monetary +problem then changed. A period of rising prices set in, which has +continued to the present time. By 1913 prices had risen just about 50 +per cent above the low level of 1896. The rise has been, and still +is, at the average rate of nearly 3 per cent each year. This caused a +reversal of the former positions of advantage and disadvantage on the +part of debtor and creditor respectively. The purchasing power of a +3 per cent annual interest on notes and bonds has been offset by the +decrease in the purchasing power of the principal of the debt. The +burden of the average debt began relatively to decrease. A wide field +for enterpriser's profits was opened up by the rapid displacement of +prevailing prices in all quarters of the industrial world. The price +of manufacturer's products rose in advance of the rise of costs of +many raw materials and especially of the labor costs of manufacture. +The average enterpriser's gain was the average wage-worker's loss. +Wages (and salaries), as nearly always in the case of a change of +price levels, moved more slowly than did the prices of most of the +commodities which are bought with wages, thus causing great hardship +to large classes living on comparatively slowly moving incomes.[19] +Extremes meet, and these classes include both those living on +passive investments, and those dependent on their daily labor for a +livelihood. + +Thus we escape the evils of a rising standard of deferred payments, +only to meet those of a falling standard. And as long as we have so +fluctuating a standard these difficulties must arise again and +again, continually repeated, causing unmerited gains and losses +to individuals. Let us conclude with a brief consideration of the +fundamental principles involved in this problem. + +Sec. 13. #Defectiveness of the gold standard#. Money is, in general, for +both borrowers and lenders the most convenient standard of deferred +payments. But from the usage of speaking of all things in terms of +gold, arises the popular notion that the value of gold is always +the same, while the value of other things changes. In truth, a fixed +objective standard of value is not possible of attainment. Altho the +value of gold is stable as compared with most things, it rests on the +estimates made by men and is constantly changing with conditions. The +current new supplies of gold are comparatively regular. For centuries +at a time there was little change in the methods of mining gold and +there were no radical changes in its output. The nature of the use of +gold, likewise, is such as to made changes in the amount of it needed, +under ordinary conditions, more stable than is that of most other +goods. Moreover, the stock of gold in monetary uses is but slowly +worn out; it is, therefore, a large reservoir into which flows a +comparatively small stream of annual production; the existing stock +is twenty or thirty times the annual output. Yet the value of gold +expressed in other things is never quite stable, and sometimes +several influences combine to affect it greatly and suddenly. Recent +inventions, chemical and mechanical, moreover, have considerably +altered the conditions of production. While, therefore, it is the +best standard yet devised and put into actual practice, it is very +imperfect. A standard better than a single metal, more stable than a +single commodity, is desirable if it can be found. + +Sec. 14. #Various ideal standards suggested.# It may, perhaps, be agreed +that the ideal standard of deferred payments is one that would insure +justice between borrower and lender. Yet different views may be and +have been taken as to what constitutes justice in this matter. The +suggestion is attractive that repayment should involve the return of +enjoyment equal to that which could be purchased with the sum at the +time of the loan. Such a standard is impossible of perfect realization +in any general way, for men's circumstances are constantly changing. +To insure even to the average man the same amount of enjoyment is only +roughly possible. The same goods do not afford the same enjoyment +when conditions, either subjective or objective, have changed. Another +suggestion is that the goods returned should represent the same +sacrifice as those loaned. Here again the difficulty is in the lack of +a standard applicable to all men. Whose sacrifice? That of the lender, +who may be rich, or that of the borrower, who may be poor? Some have +supposed that the condition of equal sacrifices was met by the labor +standard, according to which the sum returned should purchase the same +number of days of labor as when borrowed. But what kind of labor is to +be taken, that of the lender or that of the borrower or that of some +one else? Labor is of many different qualities, which can be exactly +compared only through their objective value in terms of some one +good.[20] + +It must be recognized that any possible concrete standard of deferred +payments will sometimes work hardship in individual cases. The best +average results for justice and social welfare will be secured by +measuring debts in some standard that will change least often, and +least rapidly, in relation to the great majority of people of all +classes in the community. + +Sec. 15. #The tabular standard.# Apart from the difficulties of its +practical operation, a standard better than a single metal and +more stable than a single commodity would be a _tabular standard_, +consisting of a number of leading commodities in fixed proportions, +such as is used in calculating index numbers expressing the general +scale of prices. Such a standard averages the fluctuations of +particular goods and would give a fair approximation in practice to +the ideals of equal sacrifice and equal enjoyment (on the average tho +not in individual cases). While some natural materials are growing +more scarce and call for more sacrifice, other products are by +industrial progress becoming more plentiful. This kind of standard has +been viewed with favor by many monetary authorities, and despite the +administrative difficulties ways may yet be found for putting it into +practice. + +After determining the tabular standard, the actual regulation of the +quantity of money to make prices conform to the standard might be +accomplished in one of several ways. It might be done by letting the +value of the gold dollar fluctuate as it does now, while requiring +a greater or less number of dollars to be given in fulfilment of all +outstanding contracts. For example, if prices by the tabular standard +fell from 100 to 95 in the time between the origin of a debt of $100 +and its payment, the debt would be discharged by paying $95; if prices +rose to $110, the debt would be discharged only by the payment of +$110. + +By the plan of a "compensated gold dollar" the legal weight of the +gold coins would be increased or decreased from time to time to +conform with the tabular standard. Still a third method would be to +regulate the issue of standard paper money, contracting and expanding +its amount by issue and redemption, by deposit in and withdrawal from +depository banks, at regular intervals to bring prices into conformity +with the tabular standard. These are as yet but distant possibilities, +and for some time to come gold will continue to serve as the standard +money in the same manner as in the past. + + +[Footnote 1: The amount of silver is here expressed at its coining +value; this is not the commercial value, but rather the number of +silver dollars 371.25 fine grains weight that could be made out of +the silver produced. Silver and gold of equal coining value are, +therefore, as to weight always in the ratio of 16 to 1.] + +[Footnote 2: See above, ch. 5, sec. 4.] + +[Footnote 3: See Vol. I, p. 45 ff. See also above, ch. 4, sec. 8.] + +[Footnote 4: Numerous tabular index numbers have been worked out for +different countries and periods. The main results of the more recent +ones have been brought together with critical comments, by Professor +Wesley C. Mitchell, in Bulletin 173 of the U.S. Bureau of Labor +Statistics, July, 1915, from which the figures here used are quoted.] + +[Footnote 5: The price movements in the United States between 1860 and +1879 must be left out of consideration here, for the excessive issues +of greenbacks drove gold out of circulation and made greenbacks the +standard money, except in California and elsewhere on the Pacific +Coast where, by public opinion, gold was retained as the circulating +medium.] + +[Footnote 6: This change was what later was referred to in political +discussions as "the crime of '73." The dollar referred to was the +_standard_ silver dollar; at the same time the coinage of a _trade_ +dollar was authorized (intended to be used only in foreign trade), +which, after 1876, was not legal tender in the United States.] + +[Footnote 7: See Vol. I, p. 262.] + +[Footnote 8: See Vol. I, p. 263, on credit transactions, and p. 302, +on the interest contract.] + +[Footnote 9: See Vol. I, p. 304.] + +[Footnote 10: See Vol. I, p. 319.] + +[Footnote 11: This could not be treated in connection with the +interest-rate in Vol. I, Part IV, for the reason that even its +elementary treatment must presuppose the fuller study of the nature of +money and the study of changes in the level of prices, that has just +been given in this and the three preceding chapters. The theory of +interest in Vol. I, therefore, is a static theory in respect to the +standard of deferred payments, and requires adjustment to apply to a +condition of a changing price-level.] + +[Footnote 12: See above, sec. 3.] + +[Footnote 13: Mention was made in Vol. I of the prospect of profit +as affecting the motives of commercial borrowers; e.g., pp. 298, 335, +348, 495.] + +[Footnote 14: The modern explanation of this phenomenon was worked out +in the period of falling prices before 1896 and hence was referred to +as the theory of "appreciation and interest" (meaning the relation of +the appreciating dollar to a falling rate of interest). More generally +the theory is that of the relation of a changing standard of deferred +payments and the rate of interest.] + +[Footnote 15: See ch. 4, sec. 12, and above secs. 1, 2, 4, 5.] + +[Footnote 16: See Vol. I, on agricultural leases, p. 159, wheat +prices, p. 436, and changes in the land supply, p. 442.] + +[Footnote 17: See ch. 5, sec. 11.] + +[Footnote 18: The advocacy of this proposal was called "the +free-silver movement" because it involved resuming the free coinage of +silver at the legal ratio of 16 to 1.] + +[Footnote 19: This happened to coincide with a relative increase of +the price of food-products and of other necessities of daily life at +a greater rate than general prices. This aspect of the much discussed +rising cost of living must be carefully distinguished from that of +the change of the _general_ price level, and also from that of the +relatively slower change of wages. See Vol. I, pp. 437, 445-446 on +population and food supply.] + +[Footnote 20: See on the labor theory of value, Vol. I, pp. 210, +228-229, 502.] + + + + +PART III + + +BANKING AND INSURANCE + + + + +CHAPTER 7 + +THE FUNCTIONS OF BANKS + + Sec. 1. Nature and classes of banks. Sec. 2. Functions of banks. Sec. 3. The + essential banking function. Sec. 4. Time deposits. Sec. 5. Demand deposits. + Sec. 6. Discount and deposit. Sec. 7. Nature of banking reserves. Sec. 8. Bills + of exchange, domestic. Sec. 9. Issue of notes. Sec. 10. Divergent views of + typical bank notes. Sec. 11. Banking credit as a medium of trade. Sec. 12. + Productive services of banks. Sec. 13. Income of banks. + + +Sec. 1. #Nature and classes of banks.# Banks perform a variety of useful +functions in every modern community. All these functions touch in some +way upon the use of money, and banking problems always are related to +money problems. It is our purpose now to understand the general nature +and work of banks in relation to the general business activity of the +community. A bank, as one first comes to know it, is a building (or +a room in some building) in which there is a fire- and burglar-proof +safe. In this room are men receiving and paying out money and acting +as bookkeepers. Gradually one comes to understand that the bank is +perhaps not the building but the business organization that is there +performing these transactions. + +In the United States there were in 1913 about 26,000 banks +reported.[1] These may be classified first according to the source +from which they derive their charters or authority to do a banking +business as: national, state, and private. The last are unchartered +and act under the general state laws governing private contracts; +in general they are unsupervised.[2] Banks may be classified also +according to the two main types of business they perform, as banks +for savings and commercial banks. Most banks do mainly a general +commercial business; some are distinctly banks for savings; but in +truth this dividing line can be less and less sharply drawn between +banks as wholes; rather the distinction must be made between the +savings function and the commercial discount function, which are more +and more being performed by one and the same bank. The trust company +usually well exemplifies this union of functions. This will best be +explained in connection with the subject to which we now turn, the +analysis of the functions which banks perform. + +Sec. 2. #Functions of banks.# Almost every bank performs various +functions useful to its customers, but some of which are not +essentially bound up with banking, and may be performed by +institutions that are not truly banks. Among these are: + +(a) Maintaining a safe deposit vault, where space may be rented by an +individual to keep his valuable papers, jewels, etc. The customer +does not usually deliver to the bank possession of the valuables, +but himself retains the key to the box which the bank has no right +to open. In larger cities this work is often done by separate +institutions. + +(b) Acting as money-changer to buy and sell moneys of different +nations. This function is of less importance in America than elsewhere +because of the great size of our country and of the small portion +of our boundaries touching those of other nations using different +monetary units. Moreover, the function is in large part performed for +Americans by ticket agencies at the ports of embarkation and by the +steamship companies en route. + +(c) Selling bonds and other investments to customers. In smaller +communities the customers of a bank turn to it as the best source +of information for safe investments of personal or trust funds. This +opens to it a new possibility of service. Large investments, however, +are usually made through the agency of more specialized investment +brokers. + +(d) Acting as trustee and business manager for passive investors, and +especially as executor and administrator of estates or as guardian of +a minor heir. This function has been taken up rapidly since about 1890 +by the trust company[3] organized under state laws. + +Sec. 3. #The essential banking function.# The one essential function of +a bank, however, is selling (lending) its credit to its customers in +some form which will conveniently serve the same function as money. A +bank is sometimes defined as a business whose income is derived from +lending its promises. The bank's credit is sold in the form of its +promises, the evidences of which are its receipts, depositors' +account books, drafts and checks on other banks, and bank notes. The +indispensable condition to the exercise of this function by a bank is +public confidence in its ability to fulfil its promise to pay whenever +it is due. This confidence is built upon the bank's paid-up capital; +its surplus and undivided profits: the further liability of the +stockholders to make good any losses up to an amount equal to the +capital stock each holds ("stockholder's double liability"); +the financial prestige of the bank's officers, directors, and +stockholders; the bank's established reputation and "good will" in the +community after a period of successful operation; the character of +its loans and of the securities which it owns; and, finally, by the +reliance placed in the control and inspection by official examiners. +The bank may then sell its credit in any one or in all of the +following five ways: (1) by receiving time deposits; (2) by receiving +demand deposits; (3) by the method of discount and deposit; (4) by +selling exchange of funds to distant points; (5) by issuing bank +notes. + +Sec. 4. #Time deposits.# Time deposits are funds to the credit of +customers which, by agreement, are to be left for some specified +minimum time or on condition that the bank may require notice in +advance of the depositor's intention to withdraw them. The notice that +may be required is usually thirty to ninety days; but only in times +of general financial crises or of runs on particular banks is this +requirement enforced. A sufficient deterrent to irregular withdrawal +of funds is usually found in the loss of interest if deposits are +withdrawn at other than stated times. The bank's right to require +notice makes prudent the investment of a much larger proportion of its +deposits and for a longer time; it reduces the proportion of deposits +needed for reserves, and yet reduces the danger of a "run" upon the +bank in time of financial distress. These are reasons why banks can +and usually do pay interest on time deposits (at from 2 to 4 per +cent), as until more recently they rarely did on demand deposits[4]. +From the standpoint of the depositor a time deposit is, by its very +nature, an investment and not a demand credit available for current +monetary uses. Only that portion of a person's capital that for some +more or less considerable period is not likely to be needed for other +purposes ought to be put into time deposits. A bank, however, is +generally a much safer place in which to keep a fund of purchasing +power for the future than is the strongest private treasure box. +Receiving time deposits is the one essential function of savings +banks, but this function is increasingly performed by other banks[5]. +Sometimes time deposits are cared for by a separate department and +kept separate from the general business of a commercial bank. + +Sec. 5. #Demand deposits#. Demand deposits are those payable on demand, +the demand in practice being by means of personal checks requesting +the bank to pay to (or on the order of) a specified person, or to pay +to bearer. A customer's bank account consisting of demand deposits is +called a checking account. Since the turn of the century it has become +increasingly the practice to pay a low rate of interest (about 2 per +cent) on current balances, oftener to large depositors. Banks attract +demand deposits mainly by the convenience and economy which they offer +to their customers in the guarding of funds from theft and fire and +in saving the time, trouble, and expense of carrying money for making +payments. A deposit in a bank is to the depositor for most purposes +"just as good" as money in the pocket and for many purposes is +even better. Thus the banks have become the custodians of a large +proportion of the money (or funds) needed for current use by +individuals and business corporations. + +Sec. 6. #Discount and deposit#. The process of discount and deposit is +the purchase of the promissory note of a customer,[6] the price being +a credit in the form of a demand deposit on the books of the bank. +This--the central and most characteristic banking operation--has +something of mystery in it at first view. The simplest idea of making +a deposit is that of bringing to a bank window bags and rolls of money +or other funds (credit papers such as checks and drafts, calling for +the payment of money). The bank in that case becomes the debtor and +the depositor becomes the creditor of the bank. But in discount and +deposit the depositor brings no money, and the credit paper that he +gives is his own promise to pay whereby he becomes the bank's debtor. +For example, when a bank discounts a thousand dollar note for three +months and credits its customer with the proceeds, its deposits are at +that moment increased (let us say) $985. Notice that hereby the bank +does not add a cent to the cash in its vaults while it has added to +its liabilities payable on demand. As an off-setting asset it holds +the note of its customer receivable at some future time. + +Sec.7. #Nature of banking reserves#. Banks would have nothing to gain by +receiving deposits or by issuing notes if they were obliged to keep +in the vaults actual money to the amount of their deposits and +outstanding notes (unless they were paid by depositors for taking care +of deposits). Banks have found it necessary in practice to keep on +hand money amounting to only a fraction of all their outstanding +obligations in order to be able to pay promptly all due demands, +excepting in periods of general financial distress. The sum thus kept +on hand is called the _reserve_ or the _reserves_ of the bank, and +this is frequently expressed as a percentage of reserves against +deposits or against note issues, respectively. Frequently, as in the +United States, a minimum percentage of reserves is fixed by law.[7] + +A bank's reserves consist, first, of the lawful money which it +actually holds in its vaults at any moment and secondly, of certain +other credit items in other banks or with the government, of such +a nature that a bank is permitted to count them as tho immediately +available. + +The explanation of the adequacy of a mere fractional reserve is +found in the nature of the individual monetary demand[8] and in the +effective way in which a checking account serves as a substitute for +actual money.[9] Every customer, if he would avoid overdrawing his +account, must at most times keep a goodly balance to his credit that +he does not immediately need. Many individuals and corporations must +at times keep very large balances. The times of maximum monetary need +of the customers of a bank never exactly coincide and many payments +are made among the customers of a single bank, requiring only +bookkeeping transfers. A fractional reserve is therefore ordinarily +fully adequate, altho with any less than a 100 per cent reserve +any bank would be insolvent if all of its demand obligations were +presented at the same instant. Such a contingency is made impossible +by business custom and public opinion especially among the larger +customers of banks, but the panic of small depositors often brings +about dangerous conditions. + +Sec. 8. #Bills of exchange, domestic.# Foreign and domestic exchange +is the sale of orders for the payment of specified sums of money +at distant points. But for this, payments at distant points would +ordinarily have to be made by sending the money in some way. It must +often occur, for example, that hundreds of payments, aggregating +millions of dollars, must be made by persons in and near Chicago to +those in and near New York, while, at the same time, equally large +sums are due from New York to Chicago. The wasteful process of +shipping these sums back and forth is avoided by the cancellation of +indebtedness between the two localities. It has been the practice for +each small bank to keep a part of its legal reserves in correspondent +banks in one or more of the larger cities on which it draws bills +of exchange for its customers and to which in turn it remits for +collection drafts and checks which it has received. From time to +time, as balances of accounts increase on the one side or the other, +shipments of actual money become necessary, but these are only a small +fraction of the total amount of the bills of exchange. Similarly, the +settlement of accounts between any two localities can be made by +the shipment of comparatively small sums of money. Under the Federal +Reserve Act the reserve banks are in various ways assuming the +functions of the correspondent banks. + +The wider use and acceptance of individual checks at long distances +from the banks upon which they are drawn limit by so much the +proportion of special bills of exchange drawn by the banks themselves. +Domestic exchange involves just the same principles as foreign +exchange of funds, except that in the latter, usually, two different +units of standard money are used. In connection with the discussion of +foreign trade below, foreign exchanges will be explained and further +light will be thrown upon the adjustment of the money supplies and +levels of prices of the various sections of a single country as well +as between different countries. + +Sec. 9. #Issue of notes#. The issue of bank notes as a mode of lending a +bank's credit calls for consideration here. Yet it must be observed +at once that comparatively few banks in the world have now the legal +right to issue their own notes. In some cases the right has been +granted as a monopoly to certain banks in return for specified +payments and services. But in general the function of bank note +issue has come to be treated as so closely connected with that of +the coinage and regulation of the standard money that it has been +increasingly limited in each country to a central national bank, +or group of banks, which is in many respects practically if not +technically an organ of the government. This public nature of bank +note issues has been strikingly evident in Russia, England, France, +Germany, and other countries since the outbreak of the war in 1914. + +No two countries have quite the same system and kind of bank notes. +It is well to consider first, therefore, the qualities of typical bank +money. This consists of notes issued by banks on the credit of their +general assets, without special regulation by law. With such a form of +note we have had until 1914 no experience in the United States since +1866, at which time a federal tax of 10 per cent on state bank notes +made their issue unprofitable. Since the passage of the Federal +Reserve Act we have temporarily two kinds of national-bank notes, the +old bond-secured notes, in use since 1863 (very different from the +typical form),[10] and the new kind of Federal reserve notes very +nearly typical in character but issued only by the Federal reserve +banks, not by individual banks. + +A bank, by the issue of notes, puts into circulation as money its own +promises to pay. The customer, in borrowing money or in withdrawing +deposits or cashing checks and drafts from other banks, is paid with +the bank's notes instead of with standard money. These notes may be +returned to the issuing bank either to be redeemed in specie or to be +paid in some other form of credit, such as deposits or exchange. The +limit of the issue of such notes is the need of the community for that +form of money, and if they are promptly redeemed in standard money on +demand, they never can exceed that amount. A holder of a note (in the +absence of special regulations) has the same claim on the bank that +a depositor has. As it is to the interest of the bank to keep in +circulation as many notes as possible, there is a temptation to abuse +the power of note issue, to which many banks in America yielded in the +period of so-called "wild-cat" banking before the Civil War. + +Sec. 10. #Divergent views of typical bank notes#. Some persons seeing in +bank notes but a form of ordinary commercial credit (like a promissory +note or an individual's check) have contended that their issue should +be entirely unlimited and unregulated except by the ordinary law of +contract which makes the bank liable to redeem the notes on demand. +Such bank notes would not be legal tender, and every one would be free +to take or refuse them as he pleased. Each bank would thus put into +circulation as many notes as it could, and as they would constantly +be returned for redemption when not needed as money their volume would +expand and contract with the needs of business. + +It may be conceded that there is much truth in this view, but not the +whole truth. For, in reality, when bank notes are in common use, every +one is compelled to take the money that is current. This offers a +constant temptation to the reckless and unscrupulous promotion of +banking enterprises, as has been repeatedly shown (notably in America +in the days of "wild-cat" banking before 1860). The average citizen +cannot know the credit of distant banks, and thus has not the same +power of judging wisely in taking bank notes that he has even in +making deposits in the bank of his own neighborhood. Between bank +notes and ordinary promissory notes there are other differences. Bank +notes pass without endorsement and thus depend on the credit of the +bank alone, not, like checks, on the credit of the person, from whom +received. Unlike ordinary promissory notes, they yield no interest +to the holder. They go into circulation and remain in circulation for +considerable time by virtue of their monetary character in the hands +of the holders. Thus they approach political money in their nature, +and the banks are near to exercising the sovereign right of the issue +of money. + +At the other extreme of view have been those who consider bank notes +to be essentially of the nature of political money. If they are so, it +is argued, the power of issue should not be exercised by any but the +sovereign state. In this view it is overlooked that bank notes, unlike +inconvertible paper money, depend for their value on the credit of the +bank, not on their legal-tender quality and on political power.[11] +They must be redeemed on penalty of insolvency; government notes need +not be, and yet will circulate at par if properly limited. Adequate +provision for the prompt return and redemption of bank notes makes +them "elastic" in their adaptation to monetary needs, which fluctuate +with changes in commerce and industry from season to season and even +from day to day. + +The predominant opinion to-day is that in their economic nature bank +notes share to some extent the character both of private promissory +notes and of political paper money. They stand midway between the two. +Everywhere it has come to be held that the issue of paper money of any +kind is in its nature a public monopoly, and yet everywhere the +bank note policy has come to be that of permitting the issue only to +certain institutions, under strict public legislation and regulation, +and of requiring in return for this privilege some substantial +services or payments to the government. + +Sec. 11. #Banking credit as a medium of trade.# The credit which, in five +ways, banks sell (see above, section 3) serves, in most cases, the +purposes of money to their customers. This is least true of time +deposits, for the motive of the depositor in such cases is usually to +_invest_ his funds for a time rather than to keep them available as +money. However, there are many cases in which persons save for some +moderately distant use--such as the purchase of furniture, of a piano, +of a house. The safety and convenience of time deposits, combined +with the reward of a small rate of interest, cause great sums, in the +aggregate, to be deposited as _temporary_ savings, which otherwise +would be hoarded in the form of money and thus withdrawn from +circulation. In all such cases the time deposit is serving both as +an investment and as a monetary fund for future use. This is a great +economy in the use of money, for experience shows that in the savings +banks of America the average reserves of actual money kept against +deposits are only about 1-1/2 per cent. In countries where banks are +little known, the amount of actual money hoarded is therefore vastly +greater than it is in the United States where there are $5,000,000,000 +of individual deposits in _regular_ savings banks, besides large sums +in time deposits in commercial banks. + +Demand deposits, while not money, clearly perform the function of a +reserve of purchasing power for depositors and reduce by so much the +amount of money each must keep at hand to meet his current needs of +purchasing power. If the depositor's credit balance bears no interest, +he has no motive to keep a balance greater than he would require +of actual money, and he has the motive to spend it or invest it in +income-bearing capital whenever his balance (plus his cash in hand) +exceeds his monetary needs.[12] Thus demand deposits are often spoken +of (somewhat inaccurately) as "deposit currency," being funds at +the command of depositors which are as disposable and as active and +current for the monetary function as so much actual money would be. +It is estimated that the rate of turnover of deposits in the United +States is about 50 times a year. We may view the demand deposits +subject to check as either a substitute for money or as a means by +which the rapidity of circulation and the monetary efficiency of +actual money held in bank reserves is multiplied many fold.[13] + +The method of payment by bank drafts in domestic exchange reduces the +need for, or increases the efficiency of, money in just the same way +as does the use of checks. By the mutual credit of banks in different +parts of the country, very large payments may be made in both +directions with the movement of only the comparatively small amount +of physical money needed to pay the balance after the cancellation of +drafts, bills of exchange, and checks. + +The use of bank notes reduces the amount needed of other kinds +of money more directly, tho not more effectively, than do deposit +accounts. Bank notes _are_ money, and so long as their amount is +limited by prompt redemption they circulate _instead of_ so much of +other kinds of money. Redemption is possible by the use of a reserve +of standard (or of legal tender) money very much smaller than the +amount of notes outstanding. + +Sec. 12. #Productive services of banks.# There have always been some +erroneous ideas regarding the magic power of banks to multiply the +power of money. But there should be no more of mystery about +banking credit than about the nature of money itself. Banks are the +labor-saving machinery of finance. They gather loanable funds, reduce +hoarding, make money move more rapidly, and create a central market +between borrowers and lenders for the sale of credit. While not +creating more physical wealth directly, they add to the efficiency +of wealth; they simplify and quicken the movement of nearly all +commercial transactions. Banks perform incidentally a further service +in developing better business methods in the community. They enforce +promptness and exactitude in business dealings. In supplying credit to +enterprises, banks are constantly passing judgment on the collateral +security presented to them and on the soundness of the enterprises +that are seeking support. This gives to bankers great economic power, +capable at times of misuse in political and social affairs, especially +where a group of selfish men come to exercise a practical monopoly of +business credit in any community. + +Sec. 13. #Income of banks.# The income of banks is drawn from different +sources, according to the size of the community and the nature of the +banks. While in the villages and smaller cities the commercial banks +perform a number of functions, in the larger cities they usually +specialize in a far greater degree. The trust companies, however, with +their greater versatility, are increasing in number. The income +of banks is derived from discounts, interest on their own capital, +charges for exchange and collection, dividends, interest and rents on +investments, and profit from their bank notes. The capital with which +a bank starts in business[14] could be loaned with less trouble and +more cheaply without starting a bank, but used as a banking capital it +can be loaned in part while still serving to attract deposits, which +are the main source of the income of banks to-day. Charging smaller +customers for exchange is a source of income to some banks, but in +many cases this service is freely performed for regular customers and +becomes a considerable expense. Banks make few investments in real +estate or other physical property; it is, in fact, their duty to keep +out of ordinary enterprises, but they are forced sometimes to take for +unpaid debts things that have been held as security. Profits on +bank notes have at times been the main, almost the sole, motive for +starting banks; but that is not the case to-day when the right of +issue is so strictly limited. + +[Footnote 1: These are classified as follows: + + _Number_ --_Per Cent_-- + _National charter_: 28.56 + National banks 7,404 28.56 + _State charter_: 67.52 + State banks 14,011 54.05 + Loan and trust companies 1,515 5.84 + Savings banks 1,978 7.63 + _Private_: 3.92 + Private banks 1,016 3.92 + ------ ------ ------ + 25,924 100.00 100.00 +] + +[Footnote 2: Opinion favors prohibiting the use of the word bank +to any except regularly incorporated organizations, or at least +subjecting private banks to the same supervision as the chartered +banks.] + +[Footnote 3: Not to be confused with a trust in the sense of a +monopolistic enterprise, with which it has no connection except by +mere verbal accident, through the word trust.] + +[Footnote 4: See next sec.] + +[Footnote 5: The Federal Reserve Act of 1913 has given encouragement +to this practice by reducing to 5 per cent the reserve required to be +kept against time deposits. See ch. 9, sec. 7.] + +[Footnote 6: Usually with deduction of interest in advance; a process +called discount. See Vol. 1, pp. 275, 302.] + +[Footnote 7: The legal requirements as to minimum reserves vary +greatly from no specific per cent to 40 or more in different +countries, for different classes of banks, and for different purposes. +Some examples of legal reserve requirements in the United States occur +in the two following chapters.] + +[Footnote 8: See above, ch. 4, sec. 5.] + +[Footnote 9: See below, sec. 10.] + +[Footnote 10: Including, now, some Federal Reserve bank notes secured +by United States bonds.] + +[Footnote 11: In some cases, as during the bank restriction in +England, 1797-1821, bank notes become inconvertible--practically +political money.] + +[Footnote 12: Payment of interest on credit balances reduces the +motive to withdraw for investment elsewhere any such excess, and +mingles in the depositor's thought monetary and investment motives.] + +[Footnote 13: In the United States in 1914 there were individual +deposits reported in banks other than savings banks to the amount of +about $13,400,000,000 + + In national banks .................................. $6,000,000,000 + + In state banks ..................................... 3,250,000,000 + + In loan and trust companies .......................... 4,000,000,000 + + In private banks ..................................... 150,000,000 + +Nearly all these were doubtless demand deposits (what proportion were +time deposits we have no data for determining), and were available as +immediate purchasing power for the depositors. The total money (other +than bank notes) in the commercial banks of the country was hardly 11 +per cent of this amount. In that year the total amount of money of all +kinds in circulation (and in banks) in the United States (outside the +Treasury), including gold and silver and certificates represented +by bullion in the treasury, United States notes of all kinds, and +national bank notes, was about one fourth of the amount of these +individual deposits in commercial banks. This may suggest the enormous +influence that banking has in determining the average efficiency of +the circulating medium of the country.] + +[Footnote 14: See above, sec. 3.] + + + + +CHAPTER 8 + +BANKING IN THE UNITED STATES BEFORE 1914 + + Sec. 1. The First and Second Banks of the United States. Sec. 2. Banking + from 1836 to 1863. Sec. 3. National Banking Associations, 1863-1913. + Sec. 4. Defects of our banking organization before 1913. Sec. 5. Lack of + system. Sec. 6. Inelasticity of credit. Sec. 7. Periodical local congestion of + funds. Sec. 8. Unequal territorial distribution of banking facilities. + Sec. 9. Lack of provision for foreign financial operations. Sec. 10. The + "Aldrich plan." + + +Sec. 1. #The First and Second banks of the United States.# + +A knowledge of the history of banking is helpful to an understanding +of the present banking system in our country. The form of our present +banking system has been affected by various economic and political +events which will be sketched here in broad outline to give a +background for our present study. + +Alexander Hamilton, the great first Secretary of the Treasury in +Washington's cabinet, advocated the charter of a central national +bank as one portion of his larger plan of national financiering. His +purpose was realized in the chartering, in 1791, of the First Bank of +the United States, for a period of twenty years. The capital for this +institution was in small part subscribed by the government, but mostly +by private capitalists. The management of the bank was left almost +entirely in private hands. The central bank established branches +in many parts of the country, issued bank notes which circulated +everywhere without depreciation, acted as the governmental depository +of funds and as governmental agency in various ways. It seems to +have been successful and useful as a banking institution until +the expiration of its charter in 1811, but it was touched by the +contemporary controversies over state rights and was from the first +opposed by those who feared the growth of a strong central government. +This opposition prevented the extension of its charter. + +In 1816, however, after only a moderate discussion, the Second Bank +of the United States was chartered for a period of twenty years. This +also, in its purely banking aspects, seems to have been distinctly +successful, conducting numerous branches in various parts of +the country, maintaining at all times the parity of its notes, +facilitating domestic exchange throughout the country, and enjoying +unquestioned credit and solvency. However, this bank became, even in +a greater degree than did the First Bank, the creature of political +rivalries. In the period of rising democratic sentiment typified +and led by Andrew Jackson, the bank came to be looked upon as the +embodiment, or the stronghold, of plutocratic interests, and Congress +permitted its charter to expire by limitation in 1836, near the close +of Jackson's administration. + +Sec. 2. #Banking from 1836 to 1863#. The Federal Government, which up to +that time had deposited its funds in the central bank and its branches +and in local state banks, established the "independent treasury," in +1840 (abolished in 1841 and re-established in 1846). By this plan the +government kept its money of all kinds in various depositories (or +sub-treasuries) in charge of public officials. While from 1792 to 1836 +almost continuously a central banking system was in operation, other +banks, organized under state charters, were steadily increasing in +number. They received deposits, issued bank notes under state laws, +and cared for local commercial needs. The abolition of the central +national bank in 1836 left to the various state banks for twenty seven +years all the banking functions of the country. The banks of some +states (notably those of New England and New York), under careful +regulation and held to strict standards by public sentiment, for the +most part maintained a high credit; but many banks, under lax laws and +regulations, were guilty of great abuses of credit and of downright +dishonest practices. The evils were more especially evident in +connection with excessive issues of bank notes. + +Sec. 3. #National Banking Associations, 1863-1913#. The next step in +federal legislation was taken in 1863 in the midst of the Civil War by +chartering local "national banking associations." The purpose was in +part to provide banks under national charters for banking purposes +(both of deposit and of issue), and in part it was to make a wider +market for United States bonds at a time when government credit was +at low ebb. The plan adopted followed the experience of New York state +(1829 on) with a system of bond-secured bank notes. Congress provided +that every bank taking out a national charter must purchase bonds of +the United States and deposit them with the treasurer of the United +States, in return for which it would receive bank notes to the amount +of 90 per cent of the denomination or of the market value of the +bonds.[1] Bank notes issued on this plan, being secured by the bonds, +rest ultimately on the credit of the government, not on the credit of +the bank. They are not promptly sent back for redemption to the banks +issuing them, as should be done if they were typical bank notes. They +may circulate thousands of miles away from the bank that issued them, +and for years after the bank has gone out of business. They are not +an "elastic currency," increasing or diminishing with the needs of +business. The changes in their amount depend upon the chance of the +banks to make more or less in this way than by any other use of their +capital, and this in turn depends largely on the price of bonds and on +the rate of interest they bear. From 1864 to 1870, fortunes were made +from this source, but thereafter banks could make little more from +note issues than they could by investing the same amount in other +ways. Many banks for a long period did not avail themselves in the +least of their privilege of issue. The notes were subject to a tax.[2] + +A national bank (as the law now stands) may be organized, with $25,000 +capital in towns not exceeding three thousand population, with $50,000 +in towns not exceeding six thousand, with $100,000 in cities not +exceeding fifty thousand, and with $200,000 in large cities. Three +cities, New York, Chicago, and St. Louis, have long been designated as +central reserve cities, and some 47 other cities as reserve cities, +in which the reserves of banks were required to bear a considerably +larger proportion to their deposits than in other cities.[3] Other +banks might count as part of their legal reserves their deposits in +reserve city banks, up to a certain proportion. The national banks in +the larger cities thus became the great capital reservoirs of cash for +the whole country. + +National banks have been subject to stricter inspection than have been +the banks in most of the states, a fact which has strengthened public +confidence in their stability. Except in this and the other respects +above mentioned, a national charter offered few, if any, attractions +to small banks, a majority of which have found it more advantageous to +operate under state charters because of less stringent regulations as +to amount of capital, reserves, and supervision. + +Sec. 4. #Defects of our banking organization before 1913#. Taken +altogether, the banks in the United States since 1868 have represented +great banking power and very efficient service for the community in +times of normal business. But in several respects it long ago became +evident that our banks were operating less satisfactorily than those +of several other countries. American banking organization had failed +to keep pace with the increasing magnitude and difficulty of its +task. Especially at the recurring periods of financial stress, such as +occurred in 1893, 1903, and 1907, our banking machinery showed itself +to be wofully unequal to the strain put upon it. Financial panics +were more acute here than in any other land, and the evil clearly +was traceable in large part to defects in the banking situation. In +academic teaching and in public conferences of bankers, business men, +publicists, and students, the subject was continually discussed +after 1890. At length Congress in 1908 created a "National Monetary +Commission" to inquire into and report what changes were necessary and +desirable in the monetary system of the United States or in the laws +relative to banking and currency. After the most extended inquiry +and discussion that the subject had ever received, the commission +submitted its report in January, 1912. The defects to be remedied, +as enumerated in the report,[4] may be reduced to the following five +headings: (a) Lack of system, (b) Inelasticity of credit, (c) Periodic +local congestion of funds. (d) Unequal territorial distribution of +banking facilities. (e) Lack of provision for foreign banking. + +Sec. 5. #Lack of system#. Only in a loose sense could the banks of the +United States be said (before 1914) to constitute a system at all. +Both national and state laws dealt with individual banks only. It was +not legal for a bank to establish branches in another city as is done +in most countries. The several national banks in one city were legally +quite separate. It was only by voluntary agreement that in some of +the larger cities they came together into clearing-house associations. +They made possible some measure of cooeperation which, small as it +was, proved at times of stress to be of much service within a limited +sphere for the local communities. But even with the aid of these +organizations the banks were unable in times of emergency to avoid the +suspension of cash payments. + +There was no provision whatever for the concentration of bank revenues +so that each bank would be supported by the strength of the other +banks, if a movement began to withdraw deposits in unusual amounts. +Each bank then was compelled for self-protection to call for any sums +it had deposited with other banks,[5] and to keep for its own use all +the reserves it might have in excess of its own immediate needs. This +threw a great strain upon the banks in the reserve cities, which +in normal times had become the depositories of a good part of the +reserves of the banks in other places. Thus developed a spirit of +panic, like the fright of theater-goers crowding toward the door at +the cry of fire. + +The maintenance of the government's independent treasury contributed +to the difficulties by causing the irregular withdrawal of money from +circulation and thus depleting bank reserves in periods of excessive +government revenues and by returning these funds into circulation only +in periods of deficient revenues. Efforts to modify this system by +a partial distribution of the public moneys among national banks had +resulted, it was charged, in discrimination and favoritism in the +treatment of different banks and of different sections of the country. + +Sec. 6. #Inelasticity of credit#. Our banks, considered both separately +and collectively, were unable to increase their loaning powers +quickly and easily to respond to business needs. The need of greater +elasticity of credit was felt in the more or less regular seasonal +variations within the year, and in the more irregular variations +in cycles of years from periods of prosperity to those of panic and +depression in business. The inelasticity was necessitated by illogical +federal and state laws restricting absolutely the further extension of +credit when the reserves fell below the percentage of deposits (15 or +25 per cent) fixed by law. Reserves thus could not legally be used to +meet demands for cash payments at the very time when most needed. +This feature has been likened to the rule of the liveryman who always +refused to allow the last horse to leave his stable so that he would +never be without a horse when a customer called for one. The refusal +of credit by the banks at such times when they still had large amounts +of cash in their vaults increased the need and eagerness of the public +to draw from the bank all the cash they could, and often precipitated +the insolvency of the banks. Clearly some means were needed to enable +the loaning power of the individual banks to be increased at such +times, so that no customer with good commercial paper need fear to +be refused a loan, even tho the rate of interest might have to be +somewhat higher for a few days or weeks than the normal rate. + +Our bond-secured bank notes lacked almost entirely the quality of +elasticity needed to meet these changing business needs.[6] Their +value being dependent primarily upon the amount and price of United +States bonds, they might be most numerous just when least needed as a +part of our circulating medium. + +Sec. 7. #Periodical local congestion of funds#. In times of general +confidence each bank finds it profitable, and is tempted, to extend +its credit to the extreme limit permitted by the law governing the +proportion of reserves to deposits. Of the 15 per cent reserves +required in most banks, three-fifths (9 per cent) might be kept in +banks in reserve cities, and of the 25 per cent in reserve city banks, +12-1/2 per cent might be kept in central reserve cities, where it +counted as part of the depositing banks' legal reserves, was a fund +upon which domestic exchanges could be drawn, and usually earned a +small rate of interest (usually 2 per cent). Very large reserves were +kept in New York city where they could be loaned "on call," and the +largest use for call loans was in stock-exchange speculation. Thus +every period of prosperity encouraged an unhealthy distribution of +reserves, gave an unhealthy stimulus to rising prices, and "promoted +dangerous speculation." + +Sec. 8. #Unequal territorial distribution of banking facilities.# Another +aspect of this concentration of surplus money and available funds in +the larger cities was the comparatively ample provision of banking +facilities in the cities and in the manufacturing sections, and +imperfect provision in the agricultural districts. The whole financial +system seemed designed to induce the poorer country districts to lend +funds at low rates of interest to be used speculatively in cities, +instead of enabling the richer districts, the cities, to lend to the +rural districts for productive enterprise. The rates of bank +discount in different sections of our country have long been most +unequal--lowest in the largest cities, and highest in the rural South +and West--whereas in all parts of Canada, with a different system of +banking, the rates have long been much more approximately uniform. + +Indeed, our national banking development has been predominantly urban +and commercial to the neglect of rural and agricultural interests. +National banks were (until 1913) forbidden to make loans on real +estate, and this greatly "restricted their power to serve farmers and +other borrowers in rural communities." There was "no effective +agency to meet the ordinary or unusual demands for credit or currency +necessary for moving crops or for other legitimate purposes." The lack +of uniform standards of regulation, examination, and publication of +reports in the different sections prevented the free extension of +credit where most needed. Finally, the methods and agencies for +making domestic exchange of funds were, compared with other countries, +imperfect and uneconomical even in normal times and could not "prevent +disastrous disruption of all such exchanges in times of serious +trouble." + +Sec. 9. #Lack of provision for foreign financial operations.# Not without +its influence on public opinion was the consideration that we had "no +American banking institutions in foreign countries." Many bankers and +business men felt, as did the commission, that the time had come when +the organization of such banks was "necessary for the development of +our foreign trade." Foreign banks in South America and the Orient, +handling American trade, were believed to favor their own countrymen +rather than the interests of American merchants. In contrast with the +European nations with their centralized control of banking, we had "no +instrumentality that" could "deal effectively with the broad questions +which, from an international standpoint, affect the credit and status +of the United States as one of the great financial powers of the +world. In times of threatened trouble or of actual panic these +questions, which involve the course of foreign exchange and the +international movements of gold, are even more important to us from a +national than from an international standpoint." + +Sec. 10. #The "Aldrich plan."# The National Monetary Commission submitted +with its report a plan which was known by the name of the commission's +chairman, Senator Aldrich. This plan was embodied in a bill for +a National Reserve Association, a bank for banks which bore some +likeness to the great central banks of Europe. In the many details +of the plan an effort has been made to remedy every one of the +difficulties above described and to supply all the needs indicated. +The plan was favored pretty generally by bankers, but called forth +many adverse opinions. In the year of a presidential election, +however, Congress took no action in the matter. All parties were +pledged to some kind of banking reform, but particular proposals were +not discussed in the campaign. + + +[Footnote 1: Whichever was the smaller. In 1900 this was changed so +that notes could be issued to the full amount of the denomination of +the bonds.] + +[Footnote 2: In recent years this has been one half of 1 per cent when +2 per cent bonds, and 1 per cent when bonds bearing a higher interest, +were deposited.] + +[Footnote 3: In reserve cities 25 per cent and in other cities 15 per +cent. The details of the regulations in the old law (given in part +below, sec. 7) were ll altered by the legislation of 1913.] + +[Footnote 4: The expressions within quotation marks in the following +sections are taken from this report.] + +[Footnote 5: See further on this in sec. 7 on periodical congestion of +funds.] + +[Footnote 6: See above, sec. 3.] + + + + +Chapter 9 + +THE FEDERAL RESERVE ACT + + Sec. 1. General banking organization. Sec. 2. The Federal Reserve Board. + Sec. 3. Federal reserve banks. Sec. 4. Federal reserve notes. Sec. 5. Reserves + against Federal reserve notes. Sec. 6. Reserves against Federal reserve + bank deposits. Sec. 7. Reserves in member banks. Sec. 8. Rediscount by + Federal reserve banks. Sec. 9. Changes in national banks. + Sec. 10. Operation of the Act. + + +Sec. 1. #General banking organization#. President Wilson and the newly +elected Congress with its Democratic majority made banking reform one +of the main objects on the program for the special session beginning +March 5, 1913. The result was the Glass-Owen bill, which became law +as the Federal Reserve Act December 23 of that year. The bill was +actively discussed within and without the halls of Congress, and +many of its features were attacked by bankers individually and acting +through the bankers' associations, at various stages of its progress. +As a result it underwent numerous amendments in details, and tho it +remained in most essentials as it was first proposed, it was at last +accepted even by its critics as on the whole a beneficent act of +legislation. Indeed, its strongest critics had been the friends of +the Aldrich plan, and the Federal Reserve Act embodies, in a greater +degree than its authors were ready to admit, the main features of the +Aldrich plan. In one important respect, however, it is different; it +provides for more decentralization of control and of reserves than did +the Aldrich plan. It created not one central banking reserve, but, in +the end, twelve regional, or district, banks each to keep the reserves +of its district. The Jacksonian tradition of opposition to a central +bank[1] in part helps to explain this; in part the contemporary +congressional investigation and discussion of the so-called +"money-trust" and the consequent desire to decrease the importance of +"Wall Street" and of New York city banking power. + +On the accompanying map are given the outlines of the districts as +constituted and altered down to 1916.[2] + +[Illustration: FEDERAL RESERVE BANK DISTRICTS] + +Sec. 2. #The Federal Reserve Board#. At the head of the banking system +stands the Federal Reserve Board of seven members, five of them +appointed by the President and Senate of the United States for this +purpose, and two serving _ex-officio_--the Secretary of the Treasury +and the Comptroller of the Currency. One of the five shall be +designated by the President as Governor and one as Vice-Governor of +the Board, but the Secretary of the Treasury is _ex-officio_ chairman. +The term of the appointive members is ten years and the salary is +$12,000 a year. + +The powers of the board are numerous and important. The board is made +the head of a real _system_ of banking, the twelve parts of which can, +in times of emergency, and at the board's discretion, be compelled +to combine their reserves by means of lending to each other +(rediscounting), to the very limit of their resources, at rates fixed +by the board. By this means the reserves of the several district banks +may be "piped together" and thus be practically made into one central +bank under governmental control, altho centralization was in outward +form avoided by the bill. Alongside of the Reserve Board, is placed a +Federal Advisory Council, consisting of one member from the board of +directors of each of the twelve district banks. This council has only +the power to confer with, make representations and recommendations to, +and call for information from, the Federal Reserve Board. + +Sec. 3. #Federal reserve banks#. The twelve Federal reserve banks which +opened for business November 16, 1914, are of a type of institution +new in our financial history. They are "banks for banks" belonging to +the system in their respective districts. Every national bank must, +and any state bank or trust company may,[3] subscribe for stock to +the amount of 6 per cent of its capital and surplus, and thus become +a "member bank." The capital of each Federal reserve bank was to be +at least $4,000,000; in fact only two of those organized (Atlanta and +Minneapolis) had at their opening less than $5,000,000 capital; the +largest (New York) had $21,000,000, and the average was $9,000,000. +The member banks are to receive dividends of 6 per cent, cumulative, +on this stock, and net earnings above that amount are to be paid to +the Government as a franchise tax.[4] + +Each reserve bank has nine directors, consisting of three classes of +three men each. Classes A and B are elected by the member banks by a +system of group and preferential voting designed to prevent the large +banks from outvoting the smaller ones. Directors of class A are chosen +by the banks to represent them, and are expected to be bankers; those +of class B, tho chosen by the banks and tho they may be stockholders, +shall not be officers of any bank, and shall at the time of their +election be actively engaged within the district in commerce, +agriculture, or some other industrial pursuit. Directors in class +C are appointed by the Federal Reserve Board, one of them being +designated as chairman of the board of directors and as Federal +reserve agent. They represent the public particularly, and may not be +stockholders of any bank. + +Any Federal reserve bank may: + +a. Receive deposits from member banks and from the United States. + +b. Discount upon the indorsement of any of its member banks negotiable +papers, with maturity not more than ninety days, that have arisen +out of actual business transactions, but not drawn for the purpose of +trading in stock and other investment securities. + +c. Purchase in the open market anywhere various kinds of negotiable +paper. + +d. Deal anywhere in gold coin and bullion. + +e. Buy and sell anywhere bills, notes, revenue bonds, and warrants of +the states and subdivisions in the continental United States. + +f. Fix the rate of discount it shall charge on each class of paper +(subject to review by the Federal Reserve Board). + +g. Establish accounts with other Federal reserve banks and with banks +in foreign countries or establish foreign branches. + +h. Apply to the Federal Reserve Board for Federal reserve notes to be +issued in the manner below indicated. + +Sec. 4. #Federal reserve notes#. In 1914 there were outstanding about +$750,000,000 of what we may now call the old-style bank notes +(bond-secured). These were by the new act not forcibly retired at +once; but, as the law is shaped, they probably will be retired at +the rate of about $25,000,000 a year, and will all disappear from +circulation in thirty years.[5] + +Whenever the banks having old-style bank notes outstanding desire to +retire any of their circulating notes, the Federal reserve banks +are required[6] to purchase the bonds in due quota (not to exceed +$25,000,000 in any one year). On the deposit of these bonds with the +Treasurer of the United States, the Federal reserve banks may receive +other circulating notes (essentially of the old style) called Federal +reserve bank notes, or may receive 3 per cent bonds not bearing the +circulating privilege. + +The new kind of notes provided by the act are called Federal reserve +notes. They are not secured by the deposit of government bonds, but +they are secured beyond all question in other ways. First, they are +obligations of the United States receivable for all taxes, customs, +and other public dues, and are redeemable in gold on demand at the +Treasury of the United States. Secondly they are receivable by all +member banks in the twelve districts and by all Federal reserve banks, +and redeemable by the latter in gold or lawful money (which includes +greenbacks and gold and silver certificates). Thirdly, their credit +and prompt redemption is insured by certain elastic rules as to +reserves in gold which must be kept for the redemption of outstanding +notes. Fourthly, they are secured by collateral, consisting of notes +and bills accepted for rediscount from member banks, which must be +deposited by a Federal reserve bank with the Federal reserve agent of +its district, dollar for dollar for every note it receives. Fifthly, +the notes become "a first and paramount lien on all the assets of the +bank." This is what gives the notes their character of asset currency. +It is evident that the notes unite in a manner without example +the characteristic of asset bank notes with the characteristics of +political paper money.[7] + +No notes, it will be observed, are issued by or on request of the +member banks, but only on request of a Federal reserve bank. After the +notes have been issued, the bank may reduce its liability any day by +depositing lawful money with the Federal reserve agent who is right +there in the bank. The Federal reserve banks and the United States +Treasury must promptly return to the banks through which they were +issued all notes as fast as they are received, and "no Federal reserve +bank shall pay out notes issued through another on penalty of a tax of +ten per centum." The regulations do not apply to the member banks, +but their effect must be to keep notes from circulating long in any +district except that for which they were issued. + +Sec. 5. #Reserves against Federal reserve notes.# The rule applying in +normal times to reserves against note issues is that each bank must +provide a reserve in gold equal to 40 per cent "against the Federal +reserve notes in actual circulation, and not offset by gold or lawful +money deposited with the Federal reserve agent." At least 5 per +cent is to be on deposit in the Treasury of the United States. The +proportion of reserves to the liability for note issues by any bank, +however, may be allowed to fall below 40 per cent, on condition that +the Federal Reserve Board shall establish a graduated tax of not more +than 1 per cent per annum (it evidently might be made less if the +board chose) upon such deficiency, until the reserves fall to 32-1/2 +per cent and thereafter a graduated tax of not less than 1-1/2 +per cent on each additional 2-1/2 per cent deficiency or fraction +thereof.[8] + +This tax must be paid by the reserve bank, but it must add an amount +equal to the tax to the rates of interest and discount charged to +member banks. The effect of these rules is to give a power of note +issue in time of emergency without compelling the reserve banks to +lock up their reserves held against notes. Suppose for example that +the circulating notes were in normal times $1,000,000,000 and the +reserves, therefore, were $400,000,000 and the rate of discount 5 per +cent. Then the circulation might be doubled with the same reserves, +the proportion thus falling to 20 per cent of outstanding notes, and +the rate of discount to customers rising to 13.5 per cent (5 plus +8.5). Or, to take a most extreme supposition, suppose that the +withdrawal of gold had been so great as to reduce the reserves against +notes to $50,000,000; yet outstanding notes might be doubled (becoming +$2,000,000,000,) the proportion falling to 2.5 per cent, the rate of +discount rising to 24 (5 plus 19). + +Sec. 6. #Reserves against Federal reserve bank deposits.# Every Federal +reserve bank shall, under normal conditions, maintain reserves in +lawful money of not less than 35 per cent against its deposits. But +the Federal Reserve Board may suspend any reserve requirement in the +Act for a period not exceeding 30 days and from time to time renew the +suspension for periods not exceeding 15 days; but in that case it +must establish a graduated tax upon the amounts by which the reserve +requirements may be permitted to fall below the levels specified as to +note issues. Altho the amount of the tax on the deficiency of reserves +against deposits is not indicated in the act (as it is in respect to +excess note issues) it is plainly the thought that the Board, to which +discretion is left, will follow somewhat the same rule in both cases. +The great discretionary power as to reserve requirements thus lodged +in the hands of the Board makes possible at times of emergency the +use of the reserves both of the reserve banks and of the member banks, +down to the last dollar, if need be, without violation of law. This +gives practically unlimited opportunity to expand credit both by +the issue of bank notes and by discount and deposit in periods of +financial crises. + +Sec. 7. #Reserves in member banks.# A fundamental change is made in the +rules as to the reserves against deposits that must be maintained by +the member banks. A new distinction is made between time and demand +deposits. Time deposits are defined as those payable after thirty days +or subject to not less than thirty days' notice; and demand deposits +as those payable within thirty days. In every case the reserve +requirement against time deposits is only 5 per cent. This gives +encouragement to banks to maintain savings departments. + +The requirements as to reserves against demand deposits are not +uniform, being the lowest for banks in smaller cities (the great +majority), larger for banks in the reserve cities, and largest for +banks in the three central reserve cities (New York, Chicago, St. +Louis). The act substitutes the new Federal reserve banks for the +banks in reserve and central reserve cities as the depositories of +funds that may[9] be counted as a part of the reserves of member +banks. The new rule requires that one-third must be in the bank's own +possession, a fraction slightly over a third must be in the Federal +reserve bank, and the remainder may be kept in either place. This may +be tabulated as follows: + + _Not in In reserve In central + reserve cities cities reserve cities_ + + Total reserves, per cent 12 15 18 + Must be in its own vaults 4/12 5/15 6/18 + May be either place 3/12 4/15 5/18 + Must be in a Federal reserve bank 5/12 6/15 7/18 + +These requirements as to total reserves are, as compared with +requirements of national banks under the old law, a reduction +respectively of 20 per cent, 40 per cent, and 28 per cent. The total +decrease in the amount of reserves required for all three classes of +national banks was about $400,000,000 on the amount of deposits held +in September, 1914. + +Sec. 8. #Rediscounts by Federal reserve banks.# More important than +any other single feature of the act is, however, that by which each +Federal reserve bank is to rediscount notes, drafts, and bills of +exchange arising out of actual commercial transactions, when indorsed +and presented by any of its member banks. This, quite apart from +the note issues, gives a power to the banks collectively, under +the general supervision and control of the board, to expand credits +indefinitely at any time for real business purposes. Any business man +able to offer any commercial paper of sound quality should now be able +to borrow on it at some rate of discount, even in the most stringent +times. And, in turn, every member bank will now be able at such times +to rediscount such paper and thus secure credit toward its reserve +requirement on the books of its Federal reserve bank. Suppose, for +example, that a member bank (in a central reserve city) saw its +reserve in the Federal bank fall below 7 per cent of its deposits. It +could by rediscounting $7000 worth of notes increase by $38,888 the +amount to which it might legally extend credit to its customers (i.e., +$7000 is 18 per cent of that sum). The deposits of the Federal reserve +bank would then be increased $7000, against which it must have a +reserve of 35 per cent, or $2450. If the reserves of any Federal +reserve bank fall too low, it can in turn rediscount its paper with +the other Federal reserve banks.[10] If the time comes when no one of +the twelve banks can longer maintain a 35 per cent reserve, the +board may reduce or suspend the requirement, levying a tax graduated +according to the deficiency. The provision here for elasticity of +credit combined with union and solidarity of all the central banking +reserves of the country to meet unusual demands in emergencies, +exceeds any needs which can be expected to arise. + +Sec. 9. #Changes in national banks.# There is here created a national +system of reserves, but it will be observed that membership in the new +system of the Federal reserve banks is not limited to national banks, +but is open on equal terms to banks organized under state laws. While +in most respects the general banking law remains as it was, certain +changes are of importance. The percentage of reserves henceforth +required of all member banks (as above indicated) is a substantial +reduction of the former requirement for national banks. In some other +respects the powers of national banks are enlarged. One with a capital +and surplus of $1,000,000 may with the approval of the Board establish +foreign branches, and one not situated in a central reserve city may +loan on farm lands for a term not longer than five years, but not to +exceed one third of its time deposits or 25 per cent of its capital +and surplus. National banks may now be granted permission by the board +to act as trustee, executor, administrator, or registrar of stocks and +bonds, thus having the rights that have proved in many cases to be of +advantage to trust companies organized under state laws. + +Sec. 10. #Operation of the Act#. It was fortunate that this act was +nearly ready to be put into operation when, August 1, 1914, the great +European war broke out. The able appointees to the Federal Reserve +Board commanded the confidence of the bankers and of the public. The +knowledge that the reserve banks would early begin operations was +reassuring during the grave financial stress of the next three months, +and the opening of the district banks in November, 1914, at once made +possible the release for commercial uses of cash reserves and +credits to meet the needs of reviving business.[11] Only an extended +experience can show how this enormous new banking organization will +operate as a whole and in its details. + +Because of the very wide discretionary powers given to the board +in the administration of the act much depends on the character and +ability of the members of the board as well as on a sound public +opinion that will keep this great power from use in partisan and +selfish ways. No doubt amendments of the act will appear necessary, +but there can be no question that the Federal Reserve Act has +inaugurated a new epoch in the banking and financial history of our +country.[12] + + +[Footnote 1: See ch. 8, sec. 1.] + +[Footnote 2: The law provided that an organization committee should +designate not less than eight nor more than twelve cities as Federal +reserve cities and should divide the continental United States, +excluding Alaska, into districts each containing one such city. Twelve +districts were designated. Wherever, therefore, the act speaks of "not +less than eight nor more than twelve," or of "as many as there are +Federal reserve districts," we may, for convenience, speak of twelve.] + +[Footnote 3: On agreeing to comply with reserve and capital +requirements of national banks and to submit to Federal examination.] + +[Footnote 4: Except that until the surplus of any reserve bank amounts +to 40 per cent of its paid-in capital stock, one half of its net +earnings shall be paid into a surplus fund.] + +[Footnote 5: These notes are all secured by the deposit of bonds of +the United States, a large share of them bearing interest at the very +low rate of 2 per cent. Two per cent is less than the market rate for +government loans, for 3 per cent bonds without this privilege +sell above par. Therefore these 2 per cent bonds were held almost +exclusively by banks, and would have lost a good share of their value +had the note-deposit privilege been withdrawn.] + +[Footnote 6: Through the Federal Reserve Board or they may do it +voluntarily, sec. 4.] + +[Footnote 7: The Act does not explicitly say by whom the notes are +issued: it says that they are "to be issued at the discretion of the +Federal Reserve Board"; that "the said notes shall be obligations of +the United States." Further on the notes are spoken of as "issued +to" a Federal reserve bank, and again as "issued through" a Federal +reserve bank, but not _by_ it. But the phrase occurs (sec. 16) "its +[i.e., the Federal reserve bank's] Federal reserve notes." The notes +thus are technically issued by the United States, but not as ordinary +political (fiat) money, for they are not given a forced circulation +by the Government in paying its indebtedness. But the banks "shall pay +such rate of interest on" the amounts of notes outstanding as may be +established by the Federal Reserve Board (i.e., to the Government of +the United States). Practically the notes (as respects choice of time +of issue, amounts, profits from them, commercial assets to secure them +and to redeem them) are asset currency issued by the several Federal +reserve banks.] + +[Footnote 8: This may be shown in the following table: + + When reserves against notes are the tax rate upon the total + are-- deficiency shall be-- + + Below 40.0 to 32.5 per cent 1.0 per cent + " 35.5 to 30.0 " " 2.5 " " + " 30.0 to 27.5 " " 4.0 " " + " 27.5 to 25.0 " " 5.5 " " + " 25.0 to 22.5 " " 7.0 " " + " 22.5 to 20.0 " " 8.5 " " + " 20.0 to 17.5 " " 10.0 " " + " 17.5 to 15.0 " " 11.5 " " + " 15.0 to 12.5 " " 13.0 " " + " 12.5 to 10.0 " " 14.5 " " + " 10.0 to 7.5 " " 16.0 " " + " 7.5 to 5.0 " " 17.5 " " + " 5.0 to 2.5 " " 19.0 " " + " 2.5 to 0.0 " " 20.5 " " +] + +[Footnote 9: The complete application of the new rule is deferred for +a period of three years from the passage of the act.] + +[Footnote 10: See on "piping" provision, sec. 2, above.] + +[Footnote 11: See sec. 7 above.] + +[Footnote 12: Several other features of the law well merit +description. Among these features are measures for developing bankers' +acceptances, open market operations, the gold clearing system of +the Federal Reserve Board, and the clearing of checks and parring of +exchange.] + + + + +CHAPTER 10 + +CRISES AND INDUSTRIAL DEPRESSIONS + + Sec. 1. Mischance, special and general, in business. Sec. 2. Definitions. + Sec. 3. A feature of a money economy. Sec. 4. European crises. Sec. 5. American + crises. Sec. 6. A business cycle. Sec. 7. General features of a crisis. + Sec. 8. "Glut" theories of crises. Sec. 9. Monetary theories of crises. Sec. 10. + Capitalization theory of crises. Sec. 11. The use of credit. Sec. 12. Interest + rates in a crisis. Sec. 13. Dynamic conditions and price readjustments. + Sec. 14. Tariff changes and business uncertainty. Sec. 15. Rhythmic changes + in weather and in crops. Sec. 16. Remedies for crises. + + +Sec. 1. #Mischance, special and general, in business.# Every separate +business enterprise is subject to chances which suddenly decrease +its profits and the prosperity of its owners; such are fire, flood, +illness of its owners, unfavorable changes in prices of materials +or of the products.[1] The interests of many other persons in the +neighborhood may be so bound up with an enterprise that its losses may +mean unemployment, lower wages to workingmen, and bankruptcy to local +merchants and to banks. Sometimes misfortune and disaster affect whole +communities. The lack of cotton while the Civil War was in progress +compelled the factories of Manchester to close in 1864, and the +earthquake and fire in San Francisco in 1906 left a quarter of a +million people homeless. + +But a change of business conditions is constantly occurring that is of +wider extent, that is of less accidental and of more rhythmic nature, +and that appears to be the effect of slowly working and more general +causes. The enterprise of a modern community, as a whole, "general +business," moves along, in a wavelike manner, going through a somewhat +regular series of changes that is called a business cycle. We are now +to study the nature of these cycles. + +Sec. 2. #Definitions.# Crisis means, generally, a decisive moment or +turning point. The word crisis suggests a brief period, a moment, +something that is sudden, severe, and soon over. In medical usage +it is the period when the disease must take a turn for better or +for worse. As used in economics, the term, however, implies a sudden +change of business conditions for the worse, a collapse of prosperity. +What precedes has not the appearance of disease, but rather that +of exuberant health. Crises in economics may be distinguished as +industrial, speculative, and financial, according as one or another +influence seems to be more potent, but all are essentially financial. +The change that occurs always is connected in some way with the use of +money and credit. + +A financial _crisis_ is the culmination of a period of rising prices, +and a sudden fall which shatters the credit of some banks, brokers, +merchants, and manufacturers. Every crisis is marked by much confusion +and loss and by hasty efforts of individuals and institutions to meet +their pressing obligations. Sometimes this process of liquidation goes +on quietly and in other cases it becomes a wild scramble, each one +trying to save himself, in which case it is a financial _panic_. +An _industrial depression_ is the period of hard times that usually +follows a financial crisis. + +Sec. 3. #A feature of a money economy.# Financial crises, by their +very nature, are confined to communities in which the money economy +prevails and where there is a developed state of industry. The periods +of industrial hardship in the Middle Ages were connected usually not +with the collapse of prices, but with political oppression, famine, +wars, pestilence, and scourges of nature. Throughout the lands money +was little used and there was no development of credit and of credit +prices. The money economy began, as has been noted, in the cities. +As the use of money spread, as larger commercial enterprises were +undertaken, as borrowing and the payment of interest became common, +there began to appear in city trading circles, on a small scale, the +phenomena of the modern crisis.[2] + +Sec. 4. #European crises.# In Europe financial crises date from 1763 +and have occurred at more or less regular intervals since. The common +statement that the cycle of a crisis is run in a period of ten +years, finds only partial support in history. The chief crises of the +eighteenth century occurred in 1763, 1783, 1793, these dates marking +the close of wars of some magnitude. The crises were not widespread +or general, but were more marked in England, which was at that time +farther developed industrially and in its money economy than other +countries. Likewise, in the nineteenth century, the crises were of +unequal force in various countries, usually being severer in England. +They may be dated 1803, 1825, 1838, 1847, 1857, 1864-66, 1875, 1890, +1900, 1907, and 1914. These were attributed to various causes; that of +1825 to over-trading abroad; that of 1847 to railroad-building; while +that of 1866 followed the severe disturbance of trade in 1864 caused +by the interruption of the cotton trade and commerce by the Civil +War in America. While in many parts of England the crisis of 1864 was +unusually severe, in other countries it was of little moment. Germany, +after several years of great speculative prosperity, had a most +severe crisis in 1875; while France, although prostrated by the war +of 1870-71, losing a large amount of wealth, and paying a thousand +millions of dollars to Germany as a war indemnity, escaped a +commercial crisis almost entirely at that time. + +Sec. 5. #American crises.# Since the beginning of the nineteenth century, +the financial connections of the United States with London, the +leading loan market of Europe, have been such that every crisis +in either England or America has extended its effects to the other +country. But the disturbances are so modified by the particular +conditions (of crops, politics, and speculation) that the phenomena +never correspond exactly in time of occurrence, in duration, or in +intensity. The first notable crisis in America occurred about 1817 +in the very violent readjustment of trade after the resumption of +commerce with Europe in 1816.[3] In 1837-39 came in quick succession +two crises, not quite distinct from each other, the second similar +to the relapse of a fever patient. The conditions were rapid westward +expansion, over-speculation in lands, reckless state internal +improvements, great issues of state bank notes, and the financial +measures of Andrew Jackson, which included the dissolution of the +Second Bank of the United States in 1836.[4] The crisis of 1857 +followed a period of great prosperity marked by rising gold production +and prices and a great increase in foreign trade. The crisis of 1873, +possibly the severest in our history, followed great speculation, +especially in the direction of railroad building on an unexampled +scale after the war. The blow, when it fell, was intensified by the +relative contraction of currency then in progress, leading to the +return to a specie basis and lower prices.[5] The crisis of 1884, +a comparatively slight one, occasioned (rather than caused) by the +discussion of the money question, was followed by some years of +noticeable depression. The years 1889 to 1892 witnessed prosperity, +only slightly interrupted in 1890, that culminated in a crisis in May, +1893 (likewise generally explained as due to the unsettled state of +our monetary system), followed by a period of great depression lasting +until 1897. A rapid growth of business was checked but little in 1900 +when a crisis occurred in Europe, especially severe in Germany. In +November, 1902, began in America what has been called "the rich +man's panic" of 1903 in which for a year many securities were sold +by holders because European creditors were recalling their loans. +American business, however, slackened but little, altho building +operations were somewhat checked. General prices, which had been +moving upward since 1897, remained almost unchanged in 1903 and +1904, and then continued going upward until 1907. In the period from +September to November of that year occurred a severe crisis both in +Europe and in America. The industrial depression following this was +marked in 1908, slowly growing less. The crisis at the outbreak of the +war in August, 1914, was quite exceptional, being due to the sudden +demand of Europe upon New York for funds. Within a couple of months +it was over and soon prices were again rising as the result of large +exports of merchandise followed by gold imports. + +Sec. 6. #A business cycle#. Let us now sketch in broad outline a business +cycle, bearing in mind that this series of changes does not repeat +itself with unvarying regularity, but that it is fairly typical in +the modern business world. The period leading up to a crisis is one +of relative prosperity; then occurs a crisis in which prices fall, +at first rapidly, and afterward for a while going slowly lower. When +prices are at the lowest point many factories are closed, and much +labor is unemployed. Let us start at that point. Conditions are worse +in some industries than in others. General economy and great caution +prevail; few new enterprises are undertaken. For those persons having +available funds this is a good time to buy, and property begins to +change hands. Then hoarded money begins to come out of its hiding +places. Money and credit flow in from other countries, particularly if +business conditions are better abroad than here, for when prices are +lower than they have been, relative to those of other countries, a +country is a good place in which to buy. At the same time that the +money in circulation thus increases, there is a general return of +confidence that increases credit. Not only are there more dollars, but +each does more work. Then old enterprises are resumed and new ones are +undertaken. The purchase of materials in larger quantities causes a +rapid rise in the prices of many raw materials and of all kinds of +industrial equipment. The less efficient laborers and others that have +been out of work, begin to find employment, and then, more tardily, +wages begin to rise. As a result, the costs of many products begin to +rise rapidly. The only classes not sharing in this improvement are the +receivers of fixed incomes. As prices rise, the purchasing power of +their incomes correspondingly falls. + +At length prices begin to go up less rapidly, and the question arises +in many minds whether the movement can continue, and if not, when it +will cease. Men wish to hold on for the last profits, and are willing +to risk something to gain them. When prices rise not only as compared +with former domestic prices, but as compared with current foreign +prices, foreign imports are stimulated and exports fall. This calls +for a new equilibrium of money and requires at length large and +continued exportation of specie. This checks prices, and, reducing the +specie reserves of the banks, compels them to be more cautious. At the +same time the increase of costs in many industries begins to reduce +profits. The fall in the value of many stocks and securities held +by the banks forces many brokers and speculators to convert their +resources into ready money. This is the moment of danger; weak +enterprises find their foundations crumbling, and there are many +failures.[6] The falling prices, the shattered credit, and the +financial losses force many factories to close, and many workmen +are thrown out of employment. This moment of widespread loss is the +crisis, It is followed by another period of low prices and of small +output, and therefore of profits small or negative in many industries. +Business must again enter upon a period of retrenchment, for it has +completed another cycle. + +Sec. 7. #General features of a crisis.# Altho irregular in time of +occurrence and unlike in their immediate occasions, financial crises +show certain general features. They are a part of the larger movement +here outlined as the business cycle. Some have thought this cycle to +be normally a period of ten years, divided into one year of crisis, +three years of depression, three years of recovery, and three years of +unusual prosperity. This succession of events occurs pretty regularly, +though not in the regular intervals of time. Crises are more severe in +countries with more extensive use of money and credit, but still more +severe where the credit system is more loosely administered and less +efficiently cooerdinated. They are harder in the United States and +England than in Germany, harder in Germany than in France, harder in +western Europe than in eastern Europe, harder in Christendom than in +heathendom. They are less severe in rural districts, where prosperity +depends more on crop conditions, and business has in it less of +financial speculation. Their effects are least felt in the staple +industries, for when hard times come people economize on the +less essential things. The glove-factory, the silk-factory, the +golf-club-factory are more likely to close than the flour-mill. In +a crisis wages and salaries are less affected than are profits, but +wageworkers suffer in the loss of employment. Those money lenders who +have eliminated chance as far as possible and have taken a low rate +of interest lose little; the risk-takers who draw their incomes from +dividends on stock or from bonds of a less stable kind, often lose +much. + +Sec. 8. #"Glut" theories of crises#. Many explanations of the causes of +financial crises have been offered.[7] Nearly all of these belong to +the general group of "glut" theories, of which genus there are two +species, under-consumption and over-production theories. These are, in +truth, but two aspects of the same idea.[8] The one view is that too +many goods are produced, the other that too few are consumed. The +over-production theorist seeing that in a crisis warehouses are filled +with goods that cannot be disposed of for what they cost (or at best, +not so as to give a profit), and that factories are shut down and men +are out of employment for lack of demand, declares that productive +power has grown too great. The under-consumption theorist, seeing +the same facts, says that the trouble is lack of purchasing power. He +observes that there are some people who would like to buy more of some +of these things, but that such people lack income with which to buy. +Usually he asserts that this is because production grows faster +than wages, wages being fixed, as he believes, by the minimum +of subsistence--a theory akin to the iron law of wages. In both +over-production and under-consumption theories, the inequality of +demand and supply is looked upon as a general one. There is supposed +to be not merely an unequal and mistaken distribution of production, +but a general excess of productive power. + +The wide vogue held by these views would justify a fuller discussion +and disproof of them here, did space permit. It must suffice to +indicate merely that they have the same taint of illogicalness as the +"fallacy of waste," and the "fallacy of luxury."[9] They overlook the +fact that an income, either of money or of other goods, coming even +to the wealthiest, will be used in some way. It may be used either +for immediate consumption or for further indirect use in durable +form. Through miscalculation there may be, at a given moment, too many +consumption goods of a particular kind, but the durable applications +can find no limit until the inconceivable day when the material world +is no longer capable of improvement. At the time of a crisis, there is +unquestionably a bad apportionment of productive agents, and a still +worse adjustment of their valuations, but these facts should not be +taken as proving that there is an excess of all kinds of economic +goods. + +Sec. 9. #Monetary theories of crises.# Another group of theories explains +the crises as being due to money, either too much or too little. The +unregulated issue of bank notes has been assigned as the cause of +crises, especially under the circumstances accompanying such crises +as those of 1837 and 1857 in America, when bank note issues greatly +contributed to the unsound expansion of credit. The issue of +government paper money years before, leading to inflation and +speculation, was by many believed to be the cause of the crisis +of 1873. The reverse view is taken by the advocates of a cheap and +plentiful money. They say that these crises were caused, not by the +expansion, but by the contraction of the money stock; for example, not +by the inflation of prices through the issue of greenbacks in 1862 to +1865, but by the contraction of the currency from 1866 to 1873. + +There is only a fragment of truth in these various views. It is always +lack of "money" at the moment of the crisis that causes any particular +failure, and in that sense it is always lack of "money" that causes +a crisis. The question is, whether in any reasonable sense it can be +said that it was lack of a circulating medium before the crisis that +brought it on. There is no support for this view, except in the rare +case when the money standard is undergoing a rapid change, as in the +United States from 1866 to 1873, and the statement then needs much +modification and explanation. The monetary theories of crises are a +bit nearer to the truth than are those of the over-production type, +for the crisis is always connected with prices and credit. But it +is clear that these rhythmic price changes occurring in the business +cycle are not due to the same causes as are the general movements of +the price level, due to an increasing or decreasing output of gold or +again to a paper money inflation. Statistics show that while a general +price level is slowly changing like a tidal movement, the effect +of the rhythmic business cycle appears now in hastening, now in +retarding, the changes in the price level. + +Sec. 10. #Capitalization theory of crises#. Here we verge upon a +different type of explanation of the financial crisis--one of a +psychological nature. The quantity of money, we have seen, affects +prices more or less according as credit is more or less used in +connection with it. Money plus confidence has a larger power of +sustaining prices, than money without, or with less, confidence. And +throughout the business cycle the amount of confidence, expressed in +such ways as the readiness to grant credits and in the easy extension +of the time of collection, is constantly changing. Over-confidence at +one time is suddenly followed by widespread lack of confidence. This +has led some to say that lack of confidence is the cause of crises. +This is a truism, but it does not explain what is the real cause of +this lack of confidence, which, when the crisis comes, is not mere +unreasoning fear that needs only to ignore the danger to banish it. +Might it not just as truly, if not more truly, be said that the cause +is _over-confidence_ in the period preceding the crisis? + +The essential characteristic of a crisis is the forcible and sudden +movement of readjustment in the mistaken capitalization of productive +agents. Capitalization runs through all industry. The value of +everything that lasts for more than a moment is built in part upon +incomes that are not actual, but expectative, whose amount, therefore, +is a matter of guesswork, or "speculation."[10] Many unknown factors +enter into the estimate of future incomes. The universal tendency +to rhythm in motion (material or psychic) manifests itself in an +overestimate or underestimate of incomes and of every other factor in +value. This is emphasized by a psychological factor called sometimes +the "hypnotism of the crowd," and sometimes, the "mob mind." Most +men follow a leader in investment as in other things. The spirit of +speculation grows till often it becomes almost a frenzy, and people +rush toward this or that investment, throwing capitalization in some +industries far out of equilibrium with that in others. + +The cause of crises immediately back of the maladjusted capitalization +thus is seen to be a psychological factor; it is the rhythmic +miscalculation of incomes and of capital value, occurring to some +degree throughout industry, but particularly in certain lines. This +subjective cause in men is given an opportunity for action only when +certain favoring objective conditions are present. + +Sec. 11. #The use of credit.# Most noteworthy of these objective +conditions is the general use of credit. The credit system greatly +enhances the rhythm of price. If the value of a thing that is fully +paid for falls, the owner alone loses; but if the value of a thing +only partly paid for falls so much that the owner is forced to default +in his payment, the loss may be transmitted along the line of credit +to every one in a long series of transactions. A credit system, highly +developed, is a house of cards at a time of financial stress. Demand +liabilities are at such a time the greatest danger, so that the banks, +ordinarily the pillars of financial strength, become at such a time +the points of greatest weakness in the financial situation. If many +of the customers were not restrained by their sense of personal +obligation to the banks, by the strong pressure which the banks can +bring to bear upon them, or by the force of public opinion among +business men, from withdrawing the balances to their credit in a time +of crisis, all commercial banks would become insolvent at once in a +crisis by the very nature of their business; for all their ordinary +deposits are nominally payable on demand. + +Sec. 12. #Interest rates in a crisis.# In normal times there is always +outstanding a great mass of short-time, commercial loans.[11] The +motive of the borrower, in most cases has been to hire more labor and +to buy more materials for use in his business. Ordinarily these loans +can and are renewed without difficulty or are replaced by others, +based on the security of new business transactions in unbroken +succession. Now at the time of a crisis a general contraction of +credit occurs, and all borrowers with maturing obligations are faced +with bankruptcy. The effort of the business man at such a time is not +to make a positive profit, but to save what he can from the threatened +wreck. The demand for short-time loans, therefore, in such times +of stress, fluctuates rapidly, and exceedingly high interest rates +prevail in these loan markets for a few days or a few weeks, rates +which have only a remote relationship with the usual capitalization of +most agents. + +The distress of the business man is magnified by the fact that it +is just at such times that both the equipment he has bought and the +products he has made become temporarily almost unsaleable at prices as +high as he paid for them when he bought them with the borrowed money. +He may know that prices will soon be higher, but he cannot wait. +Various courses are open to him in this emergency; he may borrow the +money at a very high rate of interest, holding the goods for better +prices; or he may sell the goods under the unfavorable conditions; or +he may sell other capital such as stocks and bonds. The end sought +is the same--to get ready money; and the methods are not essentially +unlike--the exchange of greater future values for smaller present +values. The sacrifice sale thus reveals the merchant's high estimate +of present goods in the form of money. The purchaser of some kinds +of property in times of depression is securing them at a lower +capitalization than they will later have. The rise in value may be +foreseen as well by seller as by buyer, but the low capitalization +reflects the high interest rate temporarily obtaining. A.T. Stewart, +once the most famous New York merchant, is said to have laid the +foundation of his fortune when, being out of debt himself, he bought +up the bankrupt stocks of his competitors in a great financial panic. +The high interest at such times is but the reflection of the high +premium on present purchasing power. + +The worst of the evils of crises are confined to the markets where the +greatest numbers of short-time loans are made. Most of the long-time +loans do not fall due in such seasons of stress, and the great mass of +slowly exchanging wealth alters little and slowly in price. Such loans +as fall due can generally be renewed for long periods at rates little +higher than usual, the market for long-time and short-time loans being +in large measure independent of each other. But they are not quite +independent, and some lenders take whatever sums they can collect on +maturing long-time obligations and loan them on short terms at high +rates of interest, or buy goods, whole enterprises, bonds, and stocks, +at the unusually low prices temporarily prevailing. The effect of this +is to raise somewhat the interest rate on long-time paper to accord +with the new conditions. + +Sec. 13. #Dynamic conditions and price readjustments.# Another condition +favorable to the rhythmic movement of capitalization is a dynamic +economic society. The past century has opened up new fields for +investment on an unexampled scale. Investment has advanced both +intensively and extensively in a series of great waves. New machinery +and processes have given undreamt of opportunities for enterprise in +the older countries, and the physical frontier of investment has moved +outward with the march of millions of immigrants to people the fertile +wilderness. Such factors disturb the equilibrium of prices both in +time and space, give a powerful impulse toward higher values in +the older lands, and stimulate the hopes of all investors. When the +balance between the capitalizations of various industries and between +the incomes of the various periods proves to be false, the inevitable +readjustment causes suffering and loss to many, but particularly in +the inflated industries. But, because of the mutual relations of men +in business, few even of those who have kept freest from speculation +can quite escape the evils. + +Among the dynamic conditions in industry are changes in the general +price level whether due to changes in the production of the standard +money commodity (relative to population) or to changing methods of +doing business. If the price level is falling (i.e., the standard unit +is appreciating), the burden of the great mass of outstanding debts +is growing heavier upon the debtors.[12] Sooner or later some of them +break down under its weight. At such times many attempt to shift their +capital from active investments such as stocks, to passive investments +such as bonds. When the price level is rising, the opposite conditions +prevail. But such adjustments proceed uncertainly and unevenly in +different industries, with much speculation in shifting from one type +of business to another, and with much accompanying miscalculation. + +Sec. 14. #Tariff changes and business uncertainty.# Another variable +influence in American business has been the tariff. Every tariff +revision, whether the rates go upward or downward, shifts somewhat +the relative opportunities and profitableness of different industries. +Some of these call for far-reaching readjustments of investments and +of productive forces. Some persons gain and some lose by every such +change. It is observed that a reduction of tariff rates seems to have +a more disturbing effect upon business than does an increase. This +probably is because the industries favored by protective tariffs in +America are those most fully within the circle affected by crises; +whereas most of the consumers adversely affected by a rise of tariff +rates are outside the commercial circles where short-time credit +is common and where the rapid readjustment of investment leads to a +financial crisis. It never has been convincingly shown, however, +that there is any large measure of correspondence in time (not to say +causal relation) between tariff revisions and crises.[13] + +Sec. 15. #Rhythmic changes in weather and in crops#. A psychological +movement, once started, accumulates force and momentum up to a certain +point where a reaction begins. This rhythmic movement as it appears +in the capitalization of enterprises is favored and magnified, we +have seen, by the wide use of credit and by the constantly changing +technical and physical conditions of industry. These call for constant +revaluations of the sources of incomes, thus destroying customary +and habitual valuations. But why should the cycle begin or end at one +point of time rather than at another; and what determines the length +of the cycle? Some of the new dynamic forces such as inventions and +growth of population are distributed pretty regularly along the line, +so that their influences are nearly equalized. But occasionally +some large impulse may serve to start a swing and if this impulse +is somewhat regularly repeated, it may serve to keep up the rhythmic +motion. True, the lack of coincidence in the impact of various +influences which occur accidentally, such as political changes, wars, +and the rapid opening of new routes of transportation, would serve +to hasten or to retard, perhaps for a time quite to alter, what would +otherwise be the rhythm of the cycle. That there is nevertheless, a +noticeable degree of regularity in the recurrence of crises may be due +to the presence of one dominating factor. + +Alternation of good and poor harvests has always seemed to be +favorable to business prosperity. In America since about 1865, farm +products have constituted the larger part of our exports, so that a +succession of large harvests has usually acted to stimulate exports +(one of the features of a period of prosperity), to give us a larger +credit balance in international trade, and to reduce the rate of +exchange. Large harvests of the staple agricultural crops in America +have been known to be closely related to the amount of rainfall in the +three most important growing months. Recently, it has been shown that +the rainfall of the Ohio Valley occurs in cycles of about eight years, +and in a larger cycle of thirty-three years. The cycle of yield per +acre of the nine principal crops is shown to correspond closely with +the cycle of pig iron production (one of the best single indices of +growing business) dated one to two years later.[14] As the cycles of +rainfall and of harvests are not coincident in different countries, it +will require further study to adjust to these observations the fact +of the world-wide extent of the great financial crises. But a better +understanding of objective conditions of this kind will give fuller +meaning to the psychological interpretation of crises. + +Sec. 16. #Remedies for crises#. The financial crisis must be looked upon +as an economic disease which brings many evils in its train. The need +is not merely to mitigate the severity of the brief period of crisis, +but also to smooth out the curve of the business cycle so as to reduce +periodic unemployment, the lottery element in profits, and the number +of unmerited failures in business. Several measures may aid toward +this end. In the past the crisis has been more severe in America than +in Europe because of certain well-recognized defects which now have +been largely remedied in the Federal Reserve Act.[15] The provisions +whereby any one may get credit on good commercial assets should +make it impossible for a crisis to degenerate into a panic. This +legislation has provided springs to reduce the jolt of the change from +a higher to a lower level of prices. + +Probably other improvements may be made in our banking laws. Competent +students of the subject have urged that the payment of interest +on deposits not subject to notice before withdrawal should be made +unlawful, because demand deposits constitute the greatest danger at +critical times. In principle this objection is sound, tho experience +may show that this evil has been practically remedied by other +features of the Federal Reserve Act. Moreover, bankers could, by +pursuing a more conservative policy, discourage speculative methods of +enterprise. The strong public disapproval of stock-market speculation +on margins may some day be able to express itself effectively in ways +that will not injure healthy business. Greater stability in our tariff +policy would remove a constantly disturbing factor in prices, as would +likewise the stabilizing of the standard of deferred payments. In +the attempt to remedy the great evil of unemployment, public works of +every kind might be planned and distributed in time so as to better +equalize the demand for labor and materials. Finally, much better +commercial statistics are needed, and for collecting them and +reporting the outlook, government organization is required comparable +in range and methods to the weather bureau. + +It cannot be expected, however, that financial crises, in the sense of +general readjustments of prices downward from time to time, ever +can be completely abolished. There will always be changes in general +industrial conditions calling for reevaluation of the existing sources +of income; and in this process there will always be a tendency to +rhythmic swing like that of a river, which carries the stream +of prices now on this side of the valley, now on that. But this +fluctuation of general prices surely can be so greatly moderated in +magnitude and in evil results as to make the word "crisis" almost a +misnomer. It is toward the attainment of this irreducible minimum of +uncertainty and disaster in business that efforts should be directed. + + +[Footnote 1: On the way these affect private profits see Vol. I, pp. +340, 341 (and references there given in note), 348 ff. and 361 ff. +There are thus good reasons for discussing crises in connection with +profits, as well as with money and banking.] + +[Footnote 2: See Vol. I, pp. 51, 154, 300-302.] + +[Footnote 3: See below, ch. 15, sec. 5, on the tariff legislation at +this time.] + +[Footnote 4: See ch. 8, sec. 1.] + +[Footnote 5: See ch. 6, sec 5.] + +[Footnote 6: See diagram of business failures 1890-1914, in Vol. I p. +364.] + +[Footnote 7: In the first annual report of the United States +Commissioner of Labor is given a long catalog of theories that have +been suggested, many of them quite fantastic.] + +[Footnote 8: See Vol. I, ch. 38, on Abstinence and Production. +Believers in the glut theory usually condemn efforts to encourage +frugality among the masses, calling it the "fallacy of saving."] + +[Footnote 9: See Vol. I, ch. 37, secs, 6 and 9.] + +[Footnote 10: See e.g., Vol. I, pp. 271. 335, 365 367.] + +[Footnote 11: See Vol. I, p. 304.] + +[Footnote 12: See above, ch. 6, on the standard of deferred payments.] + +[Footnote 13: See note on tariff legislation and business crises, end +of ch. 15.] + +[Footnote 14: In both cases there is what is called in statistics +a high degree of correlation (viz., .719 and .800), indicating that +there is that percentage of probability that there is some causal +relation between the two sets of figures.] + +[Footnote 15: See above, ch. 9, secs. 5, 6, 8.] + + + + +CHAPTER 11 + +INSTITUTIONS FOR SAVING AND INVESTMENT + + Sec. 1. The nature of saving. Sec. 2. Economic limit of saving. Sec. 3. Commercial + bank deposits of an investment nature. Sec. 4. Investment banking. + Sec. 5. Savings banks in the United States. Sec. 6. Typical mutual + savings banks. Sec. 7. Postal savings plan. Sec. 8. Advantages of the postal + savings plan. Sec. 9. Collection of savings and education in thrift. Sec. 10. + Building and loan associations. Sec. 11. The main features. Sec. 12. The + continuous plan. Sec. 13. The distribution of earnings. Sec. 14. Possible + developments of savings institutions. + + +Sec. 1. #The nature of saving.# The motives actuating the different +classes of lenders may, for our present purpose, be reduced to two: +to postpone the consumption of income, and to obtain a net income +from wealth (or investment). Saving always is relative to a particular +period and is for more or less distant ends. The child saves its +pennies to go to the circus next week, the working girl saves her +dimes for a new hat next spring, the earnest high school pupil saves +to go to college next year, and the provident man saves for his +family's future needs and for his own old age. But always, to +constitute saving, there must be for the time a net result: the +excess of income over consumptive outgo in that period. This is easily +distinguishable from various forms of pseudo-saving of which many +persons that are really spending all their incomes are very proud. +Such forms are: planning to buy a particular thing and then deciding +not to do so, but buying something else; finding the price less than +was expected, and thereupon using this so-called saving for another +purpose; spending less than some one else for a particular purpose, +such as food, but off-setting this by larger outlay for another +purpose, such as clothing; spending all one's own income but less +than some one else with a larger income. We may define saving as the +conversion, into expenditure for consumptive use, of less than one's +net income within a given income period. + +Saving goes on in a natural economy both by accumulation of indirect +agents and by elaboration so as to improve their quality.[1] It goes +on to-day by the replacement of perishable by durative agents, as in +replacing a wooden house by one of stone or concrete, and by producing +wealth without consuming it, as in increasing the number of cattle on +one's farm. But saving has come to be increasingly made in the form +of money (or of monetary funds), and in this chapter we shall consider +some of the ways in which this can now be done. + +Sec. 2. #Economic limit of saving#. There is an economic limit to saving, +as judged from the standpoint of each individual.[2] The ultimate +purpose of every act of saving is the provision of future incomes, +either as total sums to be used later or as new (net) incomes to be +received at successive periods. The economic limit of saving in each +case is dependent upon the person's present needs in relation to +present income and conditions, as compared with the prospect of his +future needs in relation to his future income and conditions. Each +free economic subject must form a judgment and make his choice as +best he can and in the light of experience. There is no absolute and +infallible standard of judgment that can be applied by outsiders to +each case. Yet there is occasion to deplore the improvidence that is +fostered and that prevails, especially among those receiving their +incomes in the form of wage or salary. Considered with reference to +the possible maximum of welfare of the individuals themselves, the +apportionment of their incomes in time is frequently woful. It is +uneconomic for families of small income to save through buying +less food than is needed to keep them in health; but it is likewise +uneconomic to spend the income, when work is plentiful and wages good, +for expensive foods having little nutriment and then, for lack of +savings, to go badly underfed when work is slack and wages are small. +There is for each class of circumstances a golden mean of saving. The +saving habit may develop to irrational excess and become miserliness, +but this happens rarely compared with the many cases where men in the +period of their largest earnings spend up to the limit on a gay life +and make no provision for any of the mischances of life--business +reverses, loss of employment, accidents, temporary sickness, permanent +invalidity, or unprovided old age. Despite the development of late of +new agencies and opportunities for saving there is need of doing more +toward popular education in thrift.[3] + +Sec. 3. #Commercial bank deposits of an investment nature.# If a +commercial bank pays no interest on demand deposits there is no motive +for the depositor to keep a balance larger than he needs as current +purchasing power. When his bank account increases beyond that point, +it becomes available for a more or less lasting investment to yield +financial income. If the sum is small or if the owner is at all +uncertain as to his plans or if he is not in a position to find +another attractive form of investment, the offer by the bank of a +small rate of interest on special time deposits (2 to 3 per cent is +not an unusual rate in such cases) will suffice to cause him to leave +such funds in the bank. Since about 1900 the practice has been greatly +extended of paying interest even on "current balances" of regular +checking accounts (demand deposits). If the new 5 per cent rule[4] as +to reserves against time deposits operates to cause commercial banks +generally to pay a rate ranging from 2-1/2 to 3-1/2 per cent on time +deposits, their amount will doubtless increase greatly. But still, in +the future as in the past, those depositors having funds that can be +invested for considerable periods will seek a higher rate of interest +than can be obtained from commercial banks. + +In their loaning function the "commercial" banks (as the adjective +indicates) serve mainly the special needs of the _commercial_ elements +of the community--business men borrowing for short terms to carry out +particular transactions. Loans made on short-time commercial paper +(quick assets) are very suitable to the needs of a bank that has its +liabilities largely in the form of demand deposits. Time deposits can +be more safely loaned on the security of real estate and for longer +periods. + +Despite their limitations in this respect, the commercial banks must +be recognized as of growing importance in the work of encouraging and +collecting small savings, which in many cases are better invested in +other ways. In 1916, the centenary of the beginning of savings banks +in this country, a nation-wide propaganda was undertaken by the +American Bankers' Association for the encouragement of savings. + +Sec. 4. #Investment banking#. Enormous amounts of securities issued by +governments or by corporations (railroad or industrial) are now on +the market and to be bought conveniently by private investors. Through +special bond houses some bonds are to be had in denominations as small +as $100 and $500. The regular brokers on the stock exchanges buy and +sell, for a small commission, the regular bonds and investment stocks. +Several large statistical and financial expert agencies[5] in return +for an annual subscription, offer advice to investors regarding +general market conditions and special securities. + +For a large number of investors the personal examination and selection +of sound securities is too difficult a task. To serve their needs many +bonds and trust companies have of late developed special departments +for investment banking. Through these agencies the banks are +constantly placing as relatively permanent investments securities +which they have bought or have aided "to float" or which they handle +only as commission agents. In any case the real investment banker +is bringing to his task special training and a high sense of +his professional obligations, and is employing the services of +statisticians, financial experts, and of practical engineers to +determine exactly the fundamental conditions of each investment. +Investment banking promises to increase steadily in amount and +importance. + +Sec. 5. #Savings banks in the United States.# For the increasing +number of wage-earners, salaried employees, and persons following +professions, investment as active capitalists is impossible.[6] Their +savings must take the form of passive investments. But there are few +good opportunities for lending money in small amounts, without great +risk, and the requirement of skill, time, and labor to look after the +loans and to collect the interest is prohibitive to a small lender. To +provide a place where small sums could be kept with safety and so as +to yield a moderate rate of income, the first modern savings bank +in the United States was instituted in New York in 1816 after a plan +already developed in England. + +In form these banks are mutual, having no capital stock on which +dividends are to be paid. The boards of trustees are self-perpetuating +and receive only fees for attending meetings. In their legal aspect +these banks have a philanthropic character. Their investments are +limited by law to specified, conservative classes of securities and +loans on real estate. The total increase from investments is, +after paying the expenses of operation and setting aside a surplus, +distributable to the depositors at regular periods. In the United +States the number of such institutions reported in 1914 was 2100.[7] +They have over 11,000,000 depositors, deposits to the amount of +$5,000,000,000, an average deposit of $444 per depositor, or of $50 +per capita of the whole population. These figures are very unequally +distributed geographically, the divisions ranking as to total deposits +in the following order: the Eastern Middle, New England, Middle +Western, Pacific, Southern, and Western divisions. The first two of +these groups of states have about 75 per cent of all the deposits, the +Southern states hardly 2 per cent, and the Western (North Dakota to +Oklahoma) only 1/4 of 1 per cent. + +Sec. 6. #Typical mutual savings banks#. About one third of these banks +are on the mutual plan, having no capital stock (most of them in the +East) and these contain about four fifths of all the deposits. +The stock savings banks have individual deposits of over a billion +dollars, and have outstanding capital stock to the amount of about +$90,000,000 (about 9 per cent of their deposits). These stock savings +banks to a much greater extent than do the mutual banks transact also +a commercial business. + +The banks on the mutual plan are therefore the most important, the +typical savings banks. The average rate of interest they paid +to depositors in 1914 was 3.86 per cent. About one half of their +resources are invested in loans, mostly to small borrowers on the +security of real estate, and most of the remainder consists of bonds +and other securities of the safer kinds. + +Savings banks are subject to the supervision and inspection of the +banking departments in the several states, a fact that exerts a +salutary effect though not insuring absolutely against either mistaken +judgment or dishonesty on the part of the bank officials.[8] + +Savings banks seek to keep invested as large a part as possible of +their assets, keeping only in ready cash enough to meet a possible +temporary excess of withdrawals over deposits. In contrast with the +policy of commercial banks with their demand deposits, the sound +policy for savings banks is to reserve the right to require notice of +intention to withdraw. The period of such notice varies from a +minimum of ten days to a maximum of about sixty days. In ordinary +circumstances it is not needful or usual for a bank to exercise this +right, but it is a needful safeguard in times of commercial crises. +This requirement of notice is greatly to the advantage of depositors +collectively and thus of the community as a whole. It is not an undue +limitation of the rights of the individual depositor. It is unfair +for the individual, in a period of financial stress, to seek his own +safety in a manner which is impossible for all, and thus to endanger +the interests of all.[9] + +The mutual savings banks in 1914 had (on the average) but six tenths +of a cent of actual cash (and "checks and cash items") in their tills +for every dollar of deposits, but in addition they had for every +dollar of deposits four cents due on demand from state and national +(commercial) banks. In the aggregate these demand deposits amounted to +the large sum of $172,000,000, a large part of which bore a low rate +of interest. + +The depositors in savings banks have a direct legal claim on the bank +as a corporation. The bank's only means of payment are its assets, +consisting of claims upon the owners of such wealth as houses, +factories, railroads, electric light plants, good roads, and school +buildings. Thus virtually the depositors have by their savings made +possible the building and equipping of these actual forms of wealth, +and have an equitable claim upon the usance of them, which claim is +met by the payment of interest and dividends to the savings banks. +Viewed in this way the great social importance of the savings function +appears, and the importance of developing the savings institutions. + +Sec. 7. #Postal savings plan.# In many countries of the world the +governments have not only authorized private, corporate, and trustee +savings banks, but have provided public agencies where it is possible +for the citizens to deposit small amounts. Thus municipal, and what +are called communal, savings banks are operated by many European +cities; but the most effective and widely used agencies for the +purpose are the national post-offices. Postal savings banks, or postal +savings systems as divisions of the postal service, are now found in +all the larger countries of the world, and in many smaller ones. The +United States of America was almost the last civilized country to +establish such a system, which was authorized by act of Congress in +1910, and went into operation in a few designated cities in January, +1911. The number of offices at which it was in operation was rapidly +increased, and the number in 1914 was about 10,000. + +Any one ten years of age may become a depositor. Deposit must be made +always in multiples of one dollar. Not more than $100 will be accepted +for deposit in any one calendar month, and nothing after the total +balance to the depositor's credit is as much as $1000, exclusive of +accumulated interest. However, amounts less than one dollar may be +saved for deposit by purchasing a ten-cent postal savings card and +affixing ten-cent postal savings stamps until the nine blank spaces +are filled. Such a filled card will be accepted as a deposit of +one dollar either in opening an account or in adding to an existing +account. + +Deposits are not entered in a depositor's book, as is the usual +practice of savings banks, but are evidenced by certificates issued in +fixed denominations of $1, $2, $5, $10, $20, $50, and $100. These bear +interest, from the first day of the month next following that in which +the deposit is made, at the rate of 2 per cent per annum for a whole +year (interest is not paid for any fraction of a year). Interest +is not compounded, unless the depositor withdraws the interest and +redeposits it, but simple interest continues to accrue annually on +a certificate so long as it is outstanding, without limitation as to +time. + +By the end of the first year (1911) of operation the savings system +held a balance to the credit of depositors of nearly $11,000,000; in +the next year (1912) there was added to this about $17,000,000; in +the next year (1913) about $12,000,000; and this average rate of one +million dollars a month net addition to deposits has continued to the +present (1916). These funds are deposited in banks belonging to the +federal reserve system, which must deposit with the Treasurer of +the United States designated kinds of bonds (national, state, and +municipal) as security and pay interest at the rate of 2-1/2 per +cent on the amount of the deposits. The one-half per cent difference +between this rate and that paid to individuals goes far toward paying +the expense of operating the system. + +Provision is made for the issue of postal savings bonds in exchange +for certificates issued in sums of $20 or multiples thereof up to +$500. These bonds bear interest at the rate of 2-1/2 per cent payable +in semi-annual instalments, January 1 and July 1. These bonds are +not counted as a part of the $500 maximum of deposits allowed to one +person, and there is no limit to the amount of bonds which may be +acquired by one depositor. Postal savings bonds are exempt from all +kinds of taxes, federal and local. These bonds are issued only on the +surrender of postal savings deposits, but may be sold by the owner +at any time. Three years after the law went into effect, there were +$4,635,820 of postal savings bonds outstanding. + +Sec. 8. #Advantages of the postal savings plan.# As compared with +corporate savings banks the postal savings system has certain +advantages. + +(a) It protects the small depositors from the danger of dishonest +private bankers who have preyed upon the immigrants in the larger +cities. To foreigners, accustomed to the postal savings plan in their +home countries, it is especially useful. + +(b) It gives to every depositor the greatest safety possible, as "the +faith of the United States is solemnly pledged" for the repayment of +depositors. + +(c) It brings a savings institution to many a small town and rural +place formerly entirely lacking in facilities for small depositors. +The benefit of this has not immediately appeared to be great, but may +in time prove to be. + +(d) It pays interest from the first of the month following the date of +deposit whereas the usual practice of savings and commercial banks is +to pay only from the beginning of the quarter year or half year. + +(e) It provides for the exchange of deposits for bonds bearing a +higher rate of interest--a unique feature greatly simplifying for the +small saver the process of buying bonds for more lasting investment. + +In some respects, however, the postal savings system falls short of +the advantages of the regular savings banks. These usually accept +for deposit as small an amount as ten cents; they pay interest either +quarterly or semi-annually; they pay on the average (at present) +almost double the rate of interest, and the interest is credited +to the depositor's account at stated intervals and automatically +compounded. The postal savings system, as the law now stands, may be +looked upon, therefore, as supplementing the regular savings banks +rather than competing with them. + +Sec. 9. #Collection of savings and education in thrift.# Small savings +have been encouraged in many places by penny provident funds, dime +savings banks, and school savings funds, which have been conducted at +public schools, social settlements, and factories, by school officers +and by charitable and educational societies acting through canvassers. +These plans all call for much personal effort and cost, which must be +provided by volunteer services and private gifts. These plans being +undertaken mainly as a means of education in thrift and in the +related moralities, their results are not to be measured merely by the +magnitude of the sums collected. They are not rivals of the ordinary +savings banks, but rather auxiliary methods of encouraging their use. +The funds collected by these agencies are usually deposited in local +savings banks, and depositors are encouraged to open individual +accounts there, whenever they have considerable sums saved. + +In Germany the public schools have been furnished with automatic stamp +vending machines, from which savings stamps in as small denominations +as ten pfennigs (2-1/2 cents) may be had by dropping a coin into a +slot.[10] This method could be used very effectively in connection +either with the postal savings system or with a local savings bank. It +ought to be made easy to deposit funds at every school house, at every +post-office, at every factory counter on pay day, and wherever people +pass in numbers. Allurements to foolish expenditures meet old and +young at every turn; to spend the dime is made all too easy, whereas +to save it and deposit it in a safe place too often calls for wasteful +and discouraging efforts from the person of small means. + +Sec. 10. #Building and loan associations.# Building and loan association +is the name applied to a cooeperative organization of persons with +the purpose of collecting regularly from members small sums which +are loaned to some members for the purpose of building or paying +for homes.[11] The first association of this type was organized in +Frankford, Pennsylvania, in 1831. It and others of its kind have +made Philadelphia notable among all the larger cities as "the city of +homes." The number of such associations has almost steadily increased +in the United States. Pennsylvania continues to rank first in respect +to amount of total assets, with Ohio a close second, and New Jersey +third (the ranking first in proportion to population). Associations +of this type have been hardly second in importance in America to the +savings banks as institutions for savings for persons of moderate +means. The number of their members (nearly 3,000,000) is about +one-fourth of that of savings bank depositors, and the amount of +their assets (1-1/4 billion dollars) is about one-fourth that of the +reported savings banks. But their relative influence in educating and +encouraging to thrift is doubtless much greater than these figures +indicate. There are more than three times as many of them as of +reported savings banks, their management is much more democratic than +is that of the banks, and many of their members attend and participate +in the meetings and understand how they are conducted. Moreover, the +savings made through these associations are constantly passing on into +the houses that are fully paid for, and which continue to yield their +incomes to their owners. Each year these associations collect from +their members as dues and in repayment of loans (made to build houses) +the sum of over half a billion dollars, which is twice as much as the +annual increase in the deposits of the reported savings banks.[12] + +Sec. 11. #The main features.# A building and loan association is +organized by a group of persons in a neighborhood, uniting to form a +corporation under the laws of the state, every member to subscribe +for one or more shares. The officers elected all serve without pay +excepting the secretary-treasurer, who receives a small fee for his +services. All official meetings are open to all members. The shares +vary in denomination from $25 to $200; the larger figure being common +under the serial plan and $100 being usual under the continuous (or +permanent) plan, described below. Whenever there is a sufficient +sum it is loaned to one of the members for the purpose of building a +house. The borrower must subscribe for shares to the par value of his +loan. + +The receipts of the association are of several kinds. + +(a) Interest is received from members, usually at the rate of 6 +per cent, and from banks at a lower rate on the small working cash +balances kept on deposit. Usually the loans made are large enough to +cover a large proportion of the cost of the house, but the land on +which the house stands must be free from all incumbrance, and its +value gives a margin of safety to the association. Then by the method +of payment of dues the debt is, from the first month, steadily reduced +and the security for the loan therefore grows constantly better. + +(b) Premiums are collected in addition, sometimes in the form of a +higher rate of interest, but the practice of charging premiums has +been mostly abandoned and the total amount of premiums now constitutes +less than 1 per cent of all payments from members. + +(c) Fines for delinquency also are less commonly imposed now and +constitute a small fraction of 1 per cent of total payments. + +(d) Deductions are made on account of withdrawal before the maturity +of the shares; under these circumstances it is usual to pay a portion +but not all of the accumulated profits, sometimes a proportion +increasing as the shares approach maturity. + +Different plans have been and still are followed in respect to the +method of issuing the shares. Under the _terminating plan_ all +the shares begin and mature at the same time (for all members that +continue to the end). Whereupon the association dissolves or starts +anew. The chief difficulty in this plan is that the association has +too few funds to loan at the beginning of its career, and a surplus +of unloanable funds as it nears the maturity of the series. It is +therefore necessary to encourage or to compel the withdrawal of +non-borrowing members on the payment of estimated profits to date. + +The better to remedy this difficulty the _serial plan_ was devised, +by which new series of stock are issued at intervals--yearly, +half-yearly, quarterly, and even oftener. + +Sec. 12. #The continuous plan.# A further development is the continuous +plan (usually called the _permanent_ or the Dayton plan), by which +much greater flexibility is attained in the organization. Shares +of stock may be subscribed for at any time, each man's separate +subscription of shares being treated as a separate series, and +maturing each at its own time. There is thus, after an association has +been for some time in operation, a continuous stream of new members +(or new subscriptions) flowing into the association, and a continuous +outflow of shareholders whose shares have matured. The maturing shares +of borrowing members discharge their indebtedness to the association; +the maturing shares of non-borrowing members are paid in money, or +may (if the association has use for the funds) be left as an +interest-bearing loan. + +Additional funds are obtained when needed by issuing paid-up stock to +non-borrowers. This is convenient at the beginning of an association +and when the movement in building is more active than usual. But if an +association has funds that cannot be loaned, outstanding paid-up stock +may be called in. In practice a large part of the paid-up stock as +well as of the running stock is subscribed for and held not by large +capitalists but by persons of small means, especially "the more frugal +element in the working classes." Non-borrowing members desiring +to withdraw may do so at any time under certain conditions; but to +safeguard the association, the laws usually require that thirty days' +notice of intention to withdraw shall be given, that not more than +one half of the funds received in any one month shall be paid on +withdrawals, and that withdrawing shareholders shall be paid in the +order of the notices of intention to withdraw. + +The most intelligent and prudent workers were formerly deterred from +subscribing by the fear that sickness, unemployment, or other mishap +might make it impossible to keep up regular payments. Now, however, +fines for late payment have been almost entirely done away with. On +the other hand, extra payments may be made at any time by borrowing +members, to hasten the date when their shares mature and their debt +be discharged. These privileges are possible because of the method of +distributing earnings which will now be described. + + +Sec. 13. #The distribution of earnings.# Every six months is ascertained +the amount of the gross earnings which, under this plan, consist +almost entirely of interest paid on loans. From this amount are +deducted expenses (and in some states 5 per cent of the total is +placed in a "loss fund" to meet possible losses) and the rest is +divided in proportion to the amount standing to the credit of each +member, being credited to the account of running stock and paid in +cash to holders of paid-up stock. + +The payment of dues is correspondingly simple. The dues at twenty-five +cents a week amount to $13 a year per share of $100. This is the whole +bill; there are no extras. The interest at 6 per cent (the usual rate) +is $6, and the rest, $7, is credited upon the stock. Thus at the end +of the first six months the member has $3.50 to his credit, and is +entitled to his share of the net earnings on that amount. Thus his +share of the earnings is steadily increased by compound interest, and +if he keeps up his regular payments the shares mature in about sixteen +years. This means in most cases that a prudent tenant can become the +owner of a house in sixteen years while paying no more than the rent +would be. As the active investor he becomes his own rent collector +and uses the house with less need of repairs, thus dispensing with +services and costs which are included in contractual rents.[13] + +These associations are properly made subject to supervision and +examination by state officials, in the manner of that exercised over +banks. They have been favored by exempting the shares of members and +the mortgages held by the associations from all state and municipal +taxation. As the houses built or paid for are taxed, this is of course +but just, but it is an exception to the rule of the illogical general +property tax.[14] + + +Sec. 14. #Possible developments of savings institutions.# The social +importance of increasing and improving the agencies of savings for the +masses is being more fully recognized, but much more might be done in +these directions. Some possible changes have been suggested above, and +a few words more may be added. + +Probably the greatest developments in the near future will be through +the savings departments of commercial banks (favored by the reserve +rules of the Federal Reserve Act) rather than by the increase in the +number of special banks for savings. The initial expense and risk of +starting a savings bank is considerable, and outside of cities of some +size this is prohibitive. Whereas a savings department, with its +funds and reserves separated, can be easily and cheaply operated in +connection with a general bank. It is much to be desired, however, +that a larger measure of popular cooeperation might be made possible to +the depositors, both for its educational value and to reduce the real +evil of the autocratic or the plutocratic centralization of the money +power in the small communities. + +Savings banks usually limit the amount of an account to $3000. It +is desirable that depositors should be able easily to convert their +savings-bank deposits over certain amounts into good bonds, bearing +a higher rate of interest (after the method of the issue of postal +savings bonds). There is need of a central market in each community +where such bonds can be bought and sold at any time; and the savings +banks might easily serve to buy and sell for their customers in this +way in the larger bond market. This would be of benefit also to the +states and municipalities which issue bonds for such purposes as +schools, roads, and public utilities, by creating a more open and +regular market to small investors than now is provided for such +securities. This might somewhat reduce the rate of interest and there +would be a gain divided between taxpayers and lenders. + +The general plan and principles of local building and loan +associations might well be extended to groups of rural cooeperators, +enabling them to make loans to their members; and to groups of small +investors, permitting them to hold real estate mortgages and bonds and +stocks of corporations, free from taxation other than that paid on the +wealth itself. Members of such organizations could get a higher income +on their investments than a savings bank could pay, and with greater +security than if each attempted to save and invest by himself.[15] + +Savings institutions are necessarily also lending institutions. In +this chapter they have been looked at mainly from the saver's (the +lender's) standpoint, though their service to the borrower is of +cooerdinate importance. In the case of building and loan associations +this feature is most apparent. Later, the problem of the agricultural +borrower will receive further consideration. + + +[Footnote 1: See Vol. I, chs. 9 and 10.] + +[Footnote 2: See Vol. I, pp. 285-290 for the analysis of saving from +the individual standpoint; and pp. 482-499 for its relation to general +economic conditions.] + +[Footnote 3: See Vol. I, p. 484.] + +[Footnote 4: See above, ch. 9, sec. 7.] + +[Footnote 5: E.g., Babson Statistical Organization, Brookmire Economic +Service, Moody Manual Co., Moody Corporation Service.] + +[Footnote 6: See Vol. I, p. 318.] + +[Footnote 7: Report of the Comptroller of the Currency. Not all of +these are mutual. Statistics, moreover, include in some cases (e.g., +California) the savings deposits of commercial banks but not the +number of such banks, and in other cases (Michigan) some banks that do +chiefly a commercial business. The line of demarcation between savings +banks and savings departments of commercial banks cannot be sharply +drawn. The Comptroller of the Currency reported in 1914 in a different +form the amount of savings deposits and of time certificates +of deposits in _all_ kinds of banks as the enormous sum of +$8,675,000,000.] + +[Footnote 8: In the last twenty-three years, on the average, seven +savings banks a year have failed, the annual excess of liabilities +over assets being about $200,000, or about $30,000 for each failing +bank. The total loss has been about 1/5 of 1 per cent of total +deposits.] + +[Footnote 9: The Federal Reserve Act, by making it possible for loans +to be had at any time (through member banks) on good security, should +reduce the danger of runs on savings banks.] + +[Footnote 10: The author saw in operation a new machine of this kind +which had been installed in a German public school as early as 1910.] + +[Footnote 11: See Vol. I, pp. 290, 297-298, 484, and 486.] + +[Footnote 12: The figures here given and the description of methods +apply to the "local" building and loan associations. The success of +this kind led to the organization of other associations which took the +name "National" building and loan associations, to carry on a business +in a larger field. The number of these has always been comparatively +small, and their operation is less simple, democratic, and economical +than the local associations. They have borne more of the nature of +ordinary profit-making enterprises. They should not be confused with +the local associations.] + +[Footnote 13: On these economies, see Vol. I, p. 298.] + +[Footnote 14: See ch. 17, sec. 4.] + +[Footnote 15: Since this was written the Federal Rural Credits Act has +been passed, embodying the main idea here described.] + + + + +CHAPTER 12 + +PRINCIPLES OF INSURANCE + + Sec. 1. Chance, unavoidable and average. Sec. 2. Uneconomic character of + gambling. Sec. 3. Borderland of gambling. Sec. 4. Insurance: definition and + kinds. Sec. 5. Insurance viewed as a wager. Sec. 6. Insurance as mutual + protection. Sec. 7. Conditions of sound insurance. Sec. 8. Purpose of life + insurance. Sec. 9. Assessment plan. Sec. 10. The reserve plan. Sec. 11. The + mortality table. Sec. 12. The single premium for any term. Sec. 13. Level + annual premiums and reserves. Sec. 14. Different features of policies. + Sec. 15. Insurance assets and investments as savings. Sec. 16. Excessive + costs of insurance operation. + + +Sec. 1. #Chance, unavoidable and average.# Every action and every +movement in life has in it some element of chance. There are what +may be called natural chances, arising from the uncertainties of the +seasons, or from rainfall, heat, hail, storm, flood, lightning, or +land-slides. Such chances must be taken both by the small enterpriser +and by the large. In earlier conditions of society natural chance +dominated industry, and it still remains and must always remain +important. There is the chance of unexpected political events, such +as war, riot, and legislation on money, tariffs, credit, and business +relations. These things are caused, it is true, by the action of men, +but it is a collective action out of the control of the individual. +There is the chance of human carelessness causing fire, explosions, +and wrecks on misplaced switches. There is the chance of physical or +mental collapse, as the sudden insanity or the sudden death of one +performing responsible duties. There is the chance of sickness that +often wrecks the plans and the fortunes of a whole family. There is +the chance of economic alterations in methods of production and of +transportation, in fashions and demand in this direction or for those +materials. + +Some of these chances are more connected with money-lending, others +with manufacturing, some with agriculture, others with commerce; but +all are present in some degree in every industry. Some events are +unique in nature and seem unlikely ever to occur again; others are of +a kind occurring so irregularly that no reasonable prediction can be +made as to the time and frequency of their occurrences. Still others +occur frequently and to many different persons; but no individual can +tell when and how they will occur to him. A general average of chances +in different lines of business causes some to be called safe, others +extra-hazardous. Chance has its favorable as well as its unfavorable +aspects. Chances are averaged and added algebraically to the profit or +loss in an industry, for an extra-hazardous enterprise must in general +afford a higher average of profit in order to induce men to engage in +it. It is folly to take a risk without ascertaining its degree so far +as general experience enables one to choose. But inasmuch and in so +far as the gains and losses fall unequally upon different individuals, +income depends upon chance. + +Sec. 2. #Uneconomic character of gambling.# This prevalence of chance +sometimes tempts men to say that business is "a gamble." But a +distinction in principle must be made between gambling and legitimate +risk-taking. The chances enumerated above are not sought, but avoided +as far as possible; yet they must be borne by some one if productive +enterprise is to continue, and the burden must somehow be distributed +throughout the community. Gambling is, however, a kind of risk-taking +which has a very different economic and moral quality. Gambling +creates the hazard, making the gain or loss of income depend on an +event that is not a necessary part of productive enterprise. Typical +gambling is the transfer of wealth on the outcome of events absolutely +unpredictable, so far as the two gamblers are concerned. Examples are +the shaking of unloaded dice or the honest dealing of a pack of cards, +and the betting on prices in so-called "bucket-shops" by persons +having no connection with the market of real things, and seeking to +get something for nothing as a result of mere chance. + +Cheating is not a necessary mark of gambling, altho the cruder +forms of dishonesty, such as the loading of dice or the collusion of +horse-owners or of horse-jockeys to deceive the betting public, are +so common that they seem often to be an essential feature. Gamblers +recognize fair as opposed to unfair methods. Fair gambling is a kind +of minor morality within the immoral field of gambling, like the +honor found among thieves. The chance-taking in gambling has no useful +purpose or result outside itself. Betting and gambling do not produce +wealth, but merely shift the ownership of existing wealth. The +gamblers constitute themselves a little fictitious economic circle, +and they transfer gains and losses on the turn of events that have no +practical objective result within their circle except to determine the +direction of the transfer. Even when fairest, gambling must, in its +average results, be uneconomic. In any economic trade each trader +gains by getting goods that are, on the marginal principle, to him +more valuable than the other kinds of goods he gives up.[1] But in +gambling the winner gets all, the loser gets nothing. If two men of +like incomes gamble the additional desires that the winner is able +to gratify are (by the principle of decreasing gratification) less in +amount than the desires which the loser must forego. As a result the +loser is often depressed and seriously injured by the loss of his +income, the winner makes reckless and extravagant use of his winnings. +Easy come, easy go, is the rule of gamblers. + +Moreover, gambling reduces the amount of wealth by relaxing the +motives of economic activity, diverting energy from productive +enterprise, tempting men into dishonesty to offset their losses, and +leading them into speculation and embezzlement. + +Sec. 3. #Borderland of gambling.# Ranging between the extremes of +unavoidable risk-taking and of gambling are a number of cases of a +mixed nature. In nearly all wagers, judgment in some degree influences +the choice of sides. One man bets on a horse whose pedigree and +performances he knows thoroly; another judges by the horse's +appearance as it comes upon the track. The professional bookmakers +have the latest possible and most exact information on which to base +their bids. + +In the bets made on one's own prowess, as on speed in running, the +chance-taking is still on the uneconomic side of the borderland, +certainly if the running is for the sake of the wager, not for +pleasure or for a useful purpose. A premium won by a runner for speed +in delivering a message of economic importance presents an essential +contrast to the winnings in a wager. + +Finally, the very borderland of difficulty is reached in the purchase +and sale of goods in the market with a view of profiting by chance +changes in price. The purchasing and holding of land, lumber, grain, +cattle, and other tangible and useful things, that need to be stored, +held for buyers, or taken to market, must be judged liberally. The +quality of gambling depends somewhat on the motive as well as on the +ability of the trader. The enterpriser dealing with real wealth, and +fitted to take the risks both because of his resources and of his +exceptional knowledge, needs the motive of gain in such cases, and in +a sense can be said to earn socially what he gets. The motive of the +uninformed must be a blind trust in luck, and a hope to gain from a +rise in prices which they are quite unable to foresee or to explain. + +Sec. 4. #Insurance: definition and kinds.# The large element of luck in +industry due to unavoidable chances has something of the same evil +character as gambling. It brings unearned prizes to some and to others +unmerited losses. It must therefore be a benefit to the community, if +this element of unavoidable chance cannot be reduced as a whole, +at least to regularize it and make it exactly calculable for any +individual. In this way each may be encouraged by the more certain +prospect of receiving a reward proportionate to his efforts and +abilities. This desirable condition has in many respects been +accomplished by means of insurance. + +_Insurance_ is the act of providing a guarantee of indemnity against +a financial loss that will result if an event of a specified kind +occurs. The person seeking some surety against the possible loss is +the _insured_; the person contracting to indemnify against the loss is +the _insurer_; the written contract of insurance is the _policy_; +and the price paid by the insured in fulfillment of his part of +the contract is the _premium_; the amount paid when a loss has been +incurred is the _indemnity_; and the person to whom the indemnity is +paid is the _beneficiary_ (who may or may not be the insured). + +The insurance with which we are here concerned is that which gives +financial indemnity. This is given for loss of expected net income, +when by chance either receipts are less or costs are more than +average. The two main classes as regards kinds of loss are property +insurance and personal insurance. _Property insurance_ is that which +indemnifies for loss of one's possession in specified ways, such as by +fire, by the elements at sea (marine), by hail, lightning, or cyclone, +by death (of valuable animals), by robbery, and by breakage (of window +glass). _Personal insurance_ is that which indemnifies the beneficiary +for loss of income as the result of various happenings to persons, +the chief being death, accident, sickness, invalidity, old age, and +unemployment. The principle of insurance is being constantly extended +to new subjects[2] and it is capable of further development in a +variety of directions. + +Sec. 5. #Insurance viewed as a wager.# Insurance, without question a +highly useful thing, appears, paradoxically, to be in its outer form +a bet. The large merchant with many vessels used in many kinds of +business had in the days before marine insurance an advantage in +distributing his losses over a number of voyages. Antonio, the wealthy +merchant, is made thus to express his security: + + "My ventures are not in one bottom trusted + Nor to one place; nor is my whole estate + Upon the fortune of the present year. + Therefore my merchandise makes me not sad." + +In its early form marine insurance was the attempt of smaller +ship-owners to distribute their losses (as could the wealthy merchant) +over a number of undertakings, lucky and unlucky. It became customary +for a ship-owner to bet with a wealthy man that the ship would not +return. If it did come back, the owner could afford to pay the bet; +if it did not, he won his bet and thus recovered a part of his loss. +Gradually there came about a specialization of risk-taking by the men +most able to bear it. They could tell by experience about what was the +degree of uncertainty, and could lay their wagers accordingly. When +several insurers were in the same business, competition forced them to +insure the vessel and cargo of the ordinary trader for something near +the percentage of risk involved. The insurance thus tended to become a +mutual protection to the ship-owners; what had to be paid in premiums +to cover risk came to be counted as part of the cost of carrying on +that business. + +Every legitimate form of insurance exhibits substantially the same +characteristics; it reduces loss at the margin where it is felt most +keenly. The difference between insurance and gambling, thus, lies +primarily in the purpose of insurance, which is not to increase +artificially the risk that any individual runs, but to neutralize or +offset an already existing chance. The insurance bet is what is called +a "hedge." The difference lies further in the collective method of +insurance, which combines the chances scattered among a number of +persons. Insurance does not increase the total of risks and of losses, +but merely combines, averages, and distributes them equally among all +the insured. This eliminates the chance element to the individual by +converting it into a regular cost. + +Sec. 6. #Insurance as mutual protection.# Modern insurance is conducted +either by enterprisers for profit, or by mutual companies; but in any +case in large measure the losses in insurance are mutually shared, +as the premiums (plus interest earned) equal the total losses plus +operating expenses and profit, if any is made. Each insured gets a +contract of indemnity for the payment of a sum that will help cover +the losses of others. Such an exchange is mutually beneficial. The +premium comes from marginal income; the loss if it occurs would fall +upon the parts of income having higher value to the insured. The less +urgent needs of the present are sacrificed in order to protect +the income that gratifies the more urgent needs of the future. In +insurance each party gives a smaller value for a greater; each makes a +gain. The greater security in business stimulates effort. This effect +is quite the opposite of that of gambling. + +Sec. 7. #Conditions of sound insurance.# To be economically sound, +insurance must have to do with real productive agents, and with +a group of occurrences which, as a whole, are approximately +ascertainable in advance--however irregularly they may fall upon +individuals. The beneficiary must have an _incurable interest_ in the +property or person insured; that is, the beneficiary must actually +suffer a loss by the occurrence insured against. Finally, the amount +of the indemnity must not be greater than the loss incurred. Some of +the greatest difficulties in insurance arise from the absence of these +essential conditions. When there is no insurable interest or when +the indemnity is greater than the loss that may be incurred, the +beneficiary may and sometimes does find it to his interest to bring +about the socially injurious event insured against. He artificially +increases the loss against which insurance was taken. When the insured +sets fire to his own buildings, he makes an illegitimate use of +insurance. Constant efforts are made by insurance companies to guard +against these "moral risks," the least calculable of any. Merchants +whose stocks have been mysteriously burned two or three times find +difficulty in getting further insurance. Formerly insurance was not +paid in case of death by suicide; but now usually no such limitation +is contained in a policy after a period of one or more years. As men +rarely plan suicide years in advance, death by one's own hand some +years after taking life insurance is regarded as coming under the +ordinary rules of chance. Yet it is to be feared that this +liberal policy serves as a temptation at times to crime and to +self-destruction. + +Sec. 8. #Purpose of life insurance.# Property insurance is mainly an +aspect of enterpriser's cost, whereas personal insurance is more +closely connected with the object of saving.[3] We shall in the rest +of this chapter limit the discussion to the one most important form +of personal insurance, that called life insurance (sometimes called +survivors' insurance). + +Life insurance is that form of insurance in which partial indemnity +is provided for survivors against the financial loss incurred by the +death of the insured. Usually the insured is the breadwinner of +the family and the beneficiary is a member of his family, but in an +increasing number of cases the beneficiary is the surviving business +partner, a creditor, or a business corporation with an insurable +interest in the life of one of its employees. + +Life insurance has been much used by persons mainly dependent on labor +incomes[4] rather than on incomes from capital, by those receiving +salaries, professional fees, and by active business men. It has of +late been extended rapidly, as "industrial insurance" to wage earners, +in policies never exceeding $1000, but averaging very much less, +and often being for no more than enough to pay funeral expenses. The +premiums on such policies are usually collected weekly and by agents +making personal visits. The cost to the insured is, therefore, +necessarily very high in proportion to the amount of insurance. + + +Sec. 9. #Assessment plan.# Life insurance plans may be distinguished, +with reference to the time and method of collecting the premiums, as +assessment and reserve insurance. + +In the simple form of assessment insurance originally the losses were +paid by contributions taken after the losses occurred, each member +paying an equal share without regard to age. In a slightly improved +plan the assessments are made at the beginning of the year, based upon +the expected mortality for the year. The sum just sufficient for this +purpose (omitting expenses) is called the _natural premium_. The +cost of such insurance is closely related to the average age of +the members. The rates are very low in a new organization with a +membership of young men; but each year the average age, and therefore +the mortality of the membership, rises and the annual assessments must +be increased. By constant additions of young members, this rise of +cost may be retarded. But when these members grow older, a still +larger addition of young members is required to keep down the average, +and the mathematically inevitable result is an increasing rate of +assessment. This keeps young men from entering, and finally results in +failure or in some form of "reorganization" that drives out the older +members. The assessment plan carries with it the seeds of its own +decay. + +To meet these difficulties in part, various modifications of the +flat-rate assessment plan are employed, such as classification by age +at entry, so that each member pays a flat-rate according to age +at entry; or large initiation fees at entry which form a temporary +"reserve" to offset increasing mortality in late years. Finally, +the policies may be issued on the natural premium plan, by which the +members of each age class pay exactly what the insurance costs for the +year. Under this plan the company will remain solvent, but with this +and all the other expedients the surviving members are forced to drop +the insurance in later years. + +Assessment insurance is sold by business companies organized +for profit, by fraternal orders, and by various types of mutual +organizations. The business companies have had a dismal history +of hardship to surviving members and of eventual failure. They are +disappearing under the influence of hostile legislation resulting +from a better popular knowledge of insurance principles. The fraternal +orders combine insurance with other objects of a benevolent and social +character. With good management, a favorable death rate, and very low +expenses, some of them have provided protection at very low rates for +many years. Others have failed with disappointment and disaster to +the older members. Still others are struggling with difficulties that +presage dissolution. Many now have some form of reserve accumulations, +and some have so improved their methods that they closely resemble +reserve companies. The assets of all the assessment companies are +now $1.37 per $100 of insurance in force, while the legal reserve +companies have $22.66. The assessment companies now get 10 per cent of +their total incomes from their funded investments, as against 24 per +cent for the old-line companies. Even with the favorable conditions +under which the fraternal orders conduct their insurance business they +are doomed to failure unless they adopt rates and policies based upon +adequate reserve accumulations. Many thousands of present members +are paying for insurance at rates which will not suffice to meet the +future losses. The assessment plan fails to eliminate the one great +risk, that of leaving the survivors without insurance in advancing +years. + + +Sec. 10. # The reserve plan.# The reserve plan, if honestly administered, +gives complete protection against the difficulties just indicated. The +essential purpose of the reserve plan is to collect during the earlier +years of the insurance policy when the mortality is less, a sum larger +than is needed to meet the current losses. This sum, the reserve, is +kept invested and accumulating an income, sufficient to offset the +increase in losses as years advance. In reserve insurance, therefore, +the premium never increases from year to year, altho it may be so +arranged as to diminish or to cease entirely sometime within the term +for which the insurance continues. + +The premium must always be fixed in advance. The calculations for +determining the premiums on different kinds of insurance policies are +many and complex, but all conform to a few general principles. The +three factors assumed are an average mortality table, a rate of +interest (or yield on investments), and an expense rate in proportion +to the premiums or outstanding insurance. Insurance on the reserve +plan is often called "scientific insurance" because, upon the basis +of these assumptions resulting from experience, it makes exact +mathematical calculations of the premiums and reserves needed for +insurance of any particular kind in respect to age of insured, +number of payments, method of paying the beneficiary, and any other +conditions. The premium thus fixed is, however, only a maximum, and +usually is reduced as the result of conditions more favorable than +those assumed. + +Sec. 11. #The mortality table.# When large numbers of men are taken as +a group, a certain proportion of those at each age may be expected to +die. A mortality table starts with a group of persons, as 100,000, at +a given age, as 10 years, and shows the number who die and the number +who survive at each year of age until all are dead. The table most +widely used in the United States is the American Experience Table of +Mortality, constructed by Sheppard Homans in 1868. The figures of this +table, at different years, are given below: + + Age Number Living Deaths each year Death rate + per 1,000 + + 10 100,000 749 7.49 + 20 92,637 723 7.80 + 30 84,441 720 8.43 + 35 81,822 732 8.95 + 40 78,106 765 9.79 + 50 69,804 962 13.78 + 60 57,917 1,546 26.69 + 70 38,569 2,391 61.99 + 80 14,474 2,091 144.47 + 90 847 385 454.54 + 95 3 3 1,000.00 + +The actual number of deaths of any group of insured will not +correspond exactly with the figures of any mortality table. But this +is not an essential defect of a table so long as the figures of the +table are approximately correct and are at least as great in the +earlier years as the actual mortality. For any excess of premium thus +collected but increases the safety of the insurance and reduces later +payments. In fact the mortality in nearly all companies in the United +States is much below the figures of the American Experience Table, +partly because of the influence of medical selection on the recently +insured and partly because of the decided improvement in longevity +since the table was constructed. + +Sec. 12. #The single premium for any term.# It is evident that the +natural assessment premium payable at the beginning of the year for +$1000 of insurance for that year is expressed by the death rate, e.g., +at age 35, the payment of $8.95 by each of the 81,822 living at the +beginning of the year will provide the $732,000 needed to pay the +losses.[5] + +In the same manner would be determined the natural assessment premium +for each year of insurance. Now, when it is possible to invest the +premiums so as to yield a minimum rate of income it is a simple matter +to determine the amount of a single premium, at any age, that is +adequate to pay for insurance covering any selected number of years +(term insurance) up to the entire period of each insured person's +life (full life). It is necessary only to apply the formula of present +worth and that of compound interest on investments.[6] Thus the +expected losses of any year according to the table of mortality, +divided by 1 + rate of yield on investments raised to the power of +years distant, equals the present worth of insuring the entire group +for that year. The sum of the discounted cost of insurance for all the +years of the term divided by the number living at the beginning of the +period, gives the single premium for each of the insured. Let P be the +present worth of all the policies for a group of the same age, p the +present worth of one policy, X the total insured at the beginning of +the period, f the natural assessment premium this year, or the natural +premium required for any year. Then + + f f1 f2 fn + P = __________ + _________ + ________ + _________ + (l + r) (l + r)^2 (l + r)^3 (l + r)^n + + P + p = _________ + X + +The payment in advance of the single premium for any selected period +provides a reserve fund sufficient, on the assumptions made, to carry +all the insurance without further payments. Each year there is added +to the fund the income earned on investments, and there is subtracted +the amount of the losses for the year, until the death of the last +member of the insured group. If the deaths in the earlier years are +fewer than were expected in the mortality table, this will be offset +eventually by more deaths at the advanced years; but in the meantime a +reserve larger than was expected is yielding income, thus providing +a larger sum than is needed to pay all the policies at maturity. This +surplus might be distributed as so-called "dividends" from time to +time to those surviving, or be added pro-rata, at intervals, to the +amount of the policies as accumulated dividends. + +Sec. 13. #Level annual premiums and reserves.# It is a matter of no very +abstruse mathematics (in principle) to find the equivalent of this +single premium in any one of many other forms of premium payment. +The processes are mainly but variations of present worth and compound +interest calculations. Such calculations, however, lead into many +complexities of practical detail difficult to explain in brief +compass, and are the special task of the actuary (the mathematical +expert dealing with such problems in the insurance business). The most +useful actuarial equivalent of the single premium is the level annual +premium for any period (term or life). Almost all policies now written +have the level annual premium as a feature. The amount of the level +annual premiums at first is greater than the losses; this causes for +a time the steady accumulation of a reserve which yields income. Then, +as the losses grow, they overtake and finally surpass the amount of +the annual premiums. Therefore, the total reserve for any group of +insured increases year by year to a maximum and then declines until +it reaches zero with the payment of the last claim. The individual +reserve for each policy not yet matured increases steadily the longer +it is in force. The total reserve is essential to the solvency of +the company and the payment of all the policies as they fall due. The +companies which issue policies on the level premium plan or reserve +plan are known as "old line" companies, or as "legal reserve" +companies, because the state laws require every company of this type +to maintain the reserves calculated on the basis of a certain rate +of yield. The growth of the legal reserve companies in recent times +constitutes one of the financial marvels of the age. + +Sec. 14. #Different features of policies.# The premiums thus far +discussed are "net premiums" estimated as just sufficient to meet the +actual payments required by the contracts in the policies. To provide +for the expenses of management an addition is made to the net +premium called the "loading." The entire premium is called the "gross +premium." + +Reserve insurance is still carried on by a few stock companies, but of +late some stock companies have been transformed into mutual companies, +which are the prevailing type. The mutual company legally belongs to +the policyholders. The gross premiums in reserve insurance are, for +the purpose of safety, fixed at a figure larger than the expected cost +of the insurance, and normally the earnings from interest are higher, +the mortality is lower, and expenses are less than those on which the +calculation of rates is based. From the excess of income resulting, +the company sets aside a surplus and then divides the rest among +the policyholders. These returns, virtually but the refund of excess +premiums, are called "dividends" (a somewhat misleading term, not +to be confused with dividends on corporate stock). The policies +that receive dividends are called "participating" and are said to +participate in the earnings. Formerly the majority of policies paid +"deferred" dividends after 5, 10, or 20 years, according to various +tontine and semi-tontine plans, the survivors to these periods +receiving their dividends plus those of the other policyholders who +had died or had withdrawn from the company. This form of payment +having been found objectionable, it was made illegal in New York and +other states, and in most cases dividends are now paid annually. The +stock company, organized for profit, frequently charges lower premiums +for "non-participating" policies, and then retains such profits as may +result from keeping expenses below receipts. + +The most popular policies are term policies (usually for 5, 10, 15, +or 20 years); ordinary life policies with annual premiums; limited +payment life policies (the policy payable at death, with premiums +fully paid up after 10, 15, or 20 years); and endowment policies (the +face of the policy payable after 10, 15, or 20 years if the insured is +still living). An endowment policy must be understood to be a regular +term policy of insurance for the specified number of years, plus a +plan of regular annual savings, which at compound interest, accumulate +to the face of the policy. Many persons are attracted to endowment +insurance by the oft expressed thought that "you don't have to die to +beat it." But this is a mistaken thought. For the premium in endowment +insurance is much higher than that for life insurance alone during the +same period, so that the endowment is merely a pretty convenient but +somewhat costly plan of saving, hitched on to an insurance policy, +with which "actuarially," it has no essential connection. In "scientific" +insurance the insured pays its full actuarial cost for each additional +feature of the policy that he buys. The various policies issued by a +company are approximately equivalent actuarially, on the basis of the +assumptions made, but they are of very different degrees of desirability, +in view of the circumstances of the insuring individual. The choice of +policies deserves a more careful investigation than it usually received. +Moreover, carelessness and ignorance in the choice of a company is +responsible for widespread loss and suffering. + +Policies differ in respect to the mode of payment. The payment usually +takes the form of a lump sum payment at death or at the maturity +of the endowment. In recent times there has been a growing use of +optional forms of payment which give to the beneficiary annual or +monthly installments for a definite number of years or for life. + +Sec. 14. #Insurance assets and investments as savings.# The discussion of +savings institutions in the last chapter left unmentioned insurance, +which probably is destined to be the most important of all. The assets +of life insurance companies in the United States have already attained +the enormous sum of $5,000,000,000, a sum equal to the reported +savings bank deposits. In the last twenty years life insurance assets +have more than doubled in each decade, and are now increasing by about +a quarter of a billion dollars every year.[7] These great funds, +which in equity nearly all belong to the policyholders, form already +approximately one thirtieth of all the private capital of the country. +They are invested in many ways, in real estate, in loans secured +by mortgages on real estate, in bonds--municipal, railroad, and +industrial. The problem of wise legislation for these organizations, +of their competent and honest management, and of their relation to the +social, business, and political life of the nation, is certain to be +of ever-increasing importance. We are hardly more than emerging from +the experimental stage of life insurance, hardly more than at the +beginning of its development. + +The premium in personal insurance (life, accident, sickness, +invalidity, old age pensions) is in almost all cases paid out of some +current income. The premium paid is just so much subtracted from the +amount available for present direct use and applied to the purchase of +future incomes for one's self or family. The insurance method differs +from the method of depositing savings by its contingent nature, the +resulting income of any individual being possibly much greater than +the amounts actually saved (e.g., when the insured dies or is injured +soon after taking insurance), and possibly less or nothing at all. A +very desirable kind of insurance which is yet little developed is +that for a term ending with the usual retirement age (say 65 years) +combined with an old-age pension for life thereafter. + +It is probable that abstinence will more and more express itself not +in accumulating large capital sums to provide for one's old age or for +survivors, but in providing insurance for survivors, and invalidity +and old-age pensions for the insured and others, payable as terminable +annuities. In any case the results to be expected in the changing +forms and magnitude of private fortunes are certain to be great. + +Sec. 15. #Excessive costs of insurance operation.# So beneficent is +insurance that the enormous cost of transacting the business under +present methods is much to be regretted. A very large part of the +premiums paid by the insured is retained by the companies.[8] In the +case of reserve life insurance a considerable part of what is not +returned is, however, set aside as reserve virtually held in trust for +the policyholders. In the case of the other kinds of insurance, nearly +all of the amount not returned is either cost of operation or profits, +tho it must be recognized that a part of the cost of some kinds +of insurance is for real services, such as inspection and fire +prevention. It is remarkable that the percentage returned by the life +insurance companies, accumulating, as they do, large reserves in trust +for the policyholders, is greater than it is for the other kinds of +companies (fire, marine, casualty, surety, liability, accident, and +health insurance). + +It is a striking evidence of the importance of the marginal +principle[9] that insurance at such a cost should still be desired by +men. The use of insurance would be much wider and its benefits greater +if this "tare and tret" of doing the business could be reduced. It +seems a reasonable hope, now that the experimental stages are passed, +that this may be done. In the case of all kinds of insurance as yet a +large expense for agents has been necessary to educate men to see +the value of insurance and to purchase it, as well as for many other +competitive expenses. It has been found that much of this expense +can be saved by insurance in groups (for all employees in an +establishment), by compulsory insurance (as of all working men), and +by central state administration serving to regularize and unify the +organizations. This important question will be further considered in +connection with "social insurance" as a measure to benefit the working +classes. + + +[Footnote 1: See Vol. 1, ch. 5, sec. 7.] + +[Footnote 2: The Jeffries-Johnson prize-fight was insured, against +rain, for $30,000. Frequently, race-horses, the fingers of pianists, +the lives of ball-players, and the throats of singers, are now +insured. Summer hotels in England regularly insure for large sums +against more than so many days of rain per season.] + +[Footnote 3: On the former, see Vol. I, pp. 365 and 374; and on the +latter, below, sec. 14.] + +[Footnote 4: See Vol. I, labor-incomes, in Index.] + +[Footnote 5: There is an appearance of a slight discrepancy due to +the omission of fractions of cents. If premiums are collected at the +beginning of the year and losses are paid at the end of the year, and +if interest can be earned meantime at the rate of 3-1/2 per cent, the +natural premium for a one year term policy is about $8.64, that being +the present worth of $8.95 due a year hence, interest being 3-1/2 per +cent. In these calculations there is no allowance for expenses, the +necessary "loading," on which see below, sec. 14.] + +[Footnote 6: See Vol. I, p. 279.] + +[Footnote 7: The following are the chief statistical facts regarding +the life insurance business in the United States, Jan. 1, 1914, +showing separately legal reserve and assessment companies, and the total. + ------------------------------------------------------------------ + | Number of | Policies | Insurance + | Companies | in force | in force + | | | + Legal reserve ..| 260 | 38,206,000 | $20,256,000,000 + Assessment .....| 605 | 8,789,000 | 10,023,000,000 + Total ..........| 865 | 46,995,000 | 30,587,000,000 + ----------------------------------------------------------------- + | Premium | Total | Per cent income + | income | income | from premiums + | | | + Legal reserve ..| $715,000,000 | $946,000,000 | 75.6 + Assessment .....| 138,000,000 | 153,000,000 | 90.2 + Total ..........| 853,000,000 |1,099,000,000 | 77.6 + ---------------------------------------------------------------- + | Payments to| Assets | Assets for each + | policyholders| | 100 insurance + | | | in force + | | | + Legal reserve | $470,000,000 |$4,659,000,000 | $22.66 + Assessment .... | 106,000,000 | 195,000,000 | 1.37 + Total ....... | 576,000,000 | 4,854,000,000 | 15.87 +] + +[Footnote 8: In 1913 the total premiums collected by all kinds of +insurance companies reported (Statistical Abstract of the U.S., 1914, +pp. 549-557) were about $1,512,000,000, and the amount returned to +policy holders the same year was $918,000,000, or about 61 per cent +of all premiums, the amount not returned ($584,000,000) being 39 per +cent. + + Premiums received Returned to policyholders + Amount Percent + + Life insurance + reserve companies ..$715,000,000 $470,000,000 67 + assessment companies 138,000,000 106,000,000 76 + Other kinds ......... 659,000,000 342,000,000 52 + ------------- ----------- -- + Total ........... $1,512,000,000 $918,000,000 61 +] + +[Footnote 9: See above, secs. 2 and 5.] + + + + +PART IV + + +TARIFF AND TAXATION + + + + +CHAPTER 13 + +INTERNATIONAL TRADE + + Sec. 1. Political and trade boundaries. Sec. 2. Benefits of international + trade. Sec. 3. Choice of the more advantageous occupations. Sec. 4. Persistence + of differences between nations. Sec. 5. Doctrine of comparative + advantages. Sec. 6. Equation of international exchange. Sec.7. Balance of + merchandise movements. Sec. 8. Cancellation of foreign indebtedness. Sec. 9. + Par of exchange. Sec. 10. International monetary balance and price-levels. + + +Sec. 1. #Political and trade boundaries.# By international trade is +meant, in general, trade between persons resident in different +countries; comparatively rare is the case in which one of the two +parties to a trade is a whole nation acting through its government +as a unit (e.g., in the purchase of munitions of war in neutral +countries). Outside of a communistic group such as the family, trade +is a necessary accompaniment of division of labor. As territorial +division of labor began between neighboring tribes,[1] international +trade was the earliest kind of regular interchange of goods. Indeed +the very word "market" meant originally the boundary between tribes. +Thus, from primitive times when wandering savages gave bits of flint +or copper in return for salt or fish, individuals have sought to +adjust their goods to their desires through trade with men of other +political groups. With the progress of the world in the means of +communication and transportation, international trade has widened in +extent and grown in volume. + +Economic relations never have been coextensive with political +relations. The economic groupings of men connected by a network of +trades never have and never will correspond very nearly with political +groupings of men bound together by common citizenship in particular +states. Indeed it is not uncommon for many of the residents in two +adjoining states to trade far more with each other than they do with +their own fellow citizens. Lawmakers and rulers from the beginnings of +formal governments have constantly tried to hinder this kind of trade. +They have done this chiefly because of their belief that they could +strengthen their states in political and economic ways, and could +favor some of their citizens, by confining economic relations within +political boundaries--if not exclusively, more closely than when trade +was left to take its natural course, guided by individual motives. The +regulation of international trade, therefore, has always constituted +an economic problem of great importance in the field of political +action. + +Sec. 2. #Benefits of international trade#. Now, bearing in mind that +international trade is carried on by individual traders in any two +countries, we may ask what motive impels men to trade across the +political boundaries of a state. The simple answer is that each trader +has something to give and desires to get something in return. Each +is seeking to get something that has to him a greater value than the +thing he gives, and believes he can do this in trade with a foreigner +better than by trading at home. In any trade, both parties gain, or +think they are gaining.[2] In international trade there is the same +chance for mistake as in domestic trade, but no more. In a single +transaction in either domestic or foreign trade one party may be +cheated, but the continuance of trade relations is dependent upon +continued benefits. The once generally accepted maxim that the gain +of one in trade is the loss of another is now generally rejected, +but often still it is assumed to be true of international trade. +The starting point for the consideration of this subject is in +this proposition: Foreign trade is carried on by individuals, for +individual gain, with the same motives and for the same benefits as +are found in other trade. + +The advantages of international trade are indeed but those of division +of labor in general, in the particular case where it happens to cross +political boundaries. The great territorial divisions of industry are +determined first and mainly by natural differences of climate, soil, +and material resources. Thus trade arises easily between North and +South, between warm and frigid climates, between new countries and +old, between regions sparsely and regions densely populated.[3] + +Territorial divisions of industry are determined secondly by social +and economic differences such as those with respect to accumulation +of wealth, amount of loanable capital, invention, organization and +intelligence of the workers, and the grade of civilization. + +Foreign trade normally imparts increased efficiency to the productive +forces of each country. In most cases it is apparent that labor is +more effective and gets a larger product when it is applied in those +ways for which the country is best fitted and for which it offers the +best and most bountiful materials; and that, further, when special +branches of industry have developed at one place, they make possible +the advantages of large production and of high specialization. + +Certain erroneous explanations of the advantages of foreign trade may +be dismissed with brief mention. It is said to give vent for surplus +production and to give a wider market to what would otherwise go to +waste. This involves the same fallacy as the "lump of labor notion," +the destruction of machinery, and the praise of waste and luxury.[4] +If it were true that sale to backward nations were now necessary +to give an outlet for products which would otherwise rot in the +warehouses, a time would come at length when the world would have +an enormous surplus unless neighboring planets could be successively +annexed. Again it is said that the great purpose of foreign trade is +to keep exports in excess of imports so that the money of the country +may constantly increase in amount. The ideal of such theorists is an +impossible condition where the country would constantly sell and never +buy.[5] In the narrow commercial view of the subject the sole object +of foreign trade is to afford a profit to the merchants, regardless of +the welfare of the mass of the citizens. + +Sec. 3. #Choice of the more advantageous occupations#. Let us consider +the cases of two countries somewhat differently situated, such as an +old country like England and a newer country such as was the United +States in the nineteenth century. Now the relative advantages of +various industries in two such countries are very unlike. The newer +country excels in its broad area, its abundant rich lands, its +bountiful natural resources of forests and mines. These are the +superior opportunities which give the economic motives for settlement +and for continued immigration from the other lands. Most of the +newcomers find it to their advantage to develop the peculiar +opportunities of the new land, rather than to go on producing the same +things in the same way as they did in the old country.[6] Thus they +get a larger quantity of products per day's labor, and are able to +gain by trading a part of these for the products of the older country. +Thus the characteristic industries of the two countries must differ. +Without any government supervision, therefore, but simply through the +choice of enterprises, each seeking the best investment of capital for +himself, industries are developed in which each country is either +most markedly superior, or least inferior, to its neighbors. If +either laborers or capitalists in the new country were to turn to +the less-favored industries they would be forced to accept a smaller +reward than they can earn in the more favored. + +Sec. 4. #Persistence of difference between nations#. If both men and +wealth interchanged between industries and between countries with +perfect readiness and without any outlay whatever for transportation, +these differences would soon disappear, and perfect equilibrium +of advantage would everywhere result. In every country, in every +occupation, labor and wealth of given quality and amount would receive +the same reward. But the interchange of labor and of products between +countries is never without friction. + +The laborers, enterprisers, and investors in a naturally rich country +are thus in a position of more or less enduring advantage relative to +those of older and poorer countries. Differences of the same nature +appear as between different parts of the same country, as between the +Northern and the Southern states of the American union, between the +Eastern and the Western states, and even between neighboring countries +of the same state. The differences between two countries, however, are +likely to be more marked, the circulation of factors being so active +within a country that it is allowable to speak broadly of prevailing +national rates of wages and of interest. Altho, as Adam Smith said, "a +man is of all sorts of luggage the most difficult to be transported," +the higher wages in a new country attract constantly from the older +lands a portion of their laborers. The higher rate of interest in new +countries constantly attracts investments from abroad; yet, despite +these forces working toward equalization, the inequality may remain +and, through the working of other influences, may even increase in the +course of years. + +Sec. 5. #Doctrine of comparative advantages.# It may be that two +countries both possess the necessary technical conditions for making +both articles that are to be traded for each other. It may even be +that the people in one country would be able to make not only one of +the two objects of trade, but both of them, more easily and with less +sacrifice and effort than the people in the other. If, for example, +American labor can produce two bushels of wheat in a day and English +labor but one bushel a day; and American labor can produce just as +much iron in a day as English labor--or more--the question always +arises: Is it not foolish and wasteful not to produce both the wheat +and the iron? + +Now, exactly the same case is presented in almost every simple +neighborhood trade. The proprietor may be able to keep his books +better than does the bookkeeper whom he employs. The merchant may be +able to sweep out the store better than the cheap boy does it. The +carpenter may be able to raise better vegetables than can the gardener +from whom he purchases. Yet the merchant does not turn to sweeping and +the carpenter to raising vegetables, because if they did they would +have to quit or limit by so much their present better-paying work, and +would lose far more than they would gain. + +So whenever the people in one country have a greater advantage in one +article than in another, relative to another country, the foreigners, +like the low-paid man, will be willing to exchange at a ratio that +will make it profitable to specialize in the product wherein the +greater superiority lies.[7] + +But this is always hard doctrine for the popular mind, and +particularly for the commercial mind endeavoring to carry on a +business that can not be made "to pay" in the face of foreign +competition. It is easy to believe that a country ought not to import +goods unless it is at an _absolute_ disadvantage in their production. +It is often declared that as our country can produce any kind of goods +"as well" as foreign countries (meaning with as few days' labor), +there is a loss on every unit imported. The fundamental principle of +trade as applied to such cases shows that not the advantage which +one country enjoys over the other as to a single product determines +whether it will gain by producing at home, but the comparative +advantages enjoyed in the production of the two articles in question. + +As a simple example, suppose that a day's labor in country A will +secure two bushels of wheat (2x) and two hundred pounds of iron (2y), +whereas in B a day's labor will secure 1x or 2y. Then A's comparative +advantage in producing x becomes a reason for A's not trying to +produce y. Trade can take place (aside from transportation outlay) +at any ratio between 2x = 2x (A's minimum) and 2x = 4y (B's maximum). +Evidently at any rate between these two ratios each party would gain +something by the trade, e.g., at 2x = 3y A would get 3 instead of 2y +by a day's labor, and B would get 1-1/3x instead of 1x for a day's +labor (2x for 1-1/2 day's labor instead of for two days'). If, +however, A could produce exactly twice as much of everything as B +could, then there could be no motive on either side for trade. But +this never happens. + +Sec. 6. #Equation of international exchange.# Foreign trade of course +can take place as barter, and in earlier times, particularly, very +commonly did so. But in the existing monetary economy nearly all +trades are expressed in terms of monetary prices. Both the prices +of all the particular objects of international trade and the general +levels of prices in any two trading countries come to be pretty +definitely interrelated. Changes in the one country at once compel +readjustments in the other. To understand in the most general way +how this occurs, a knowledge at least of the elementary principles of +foreign exchange is required, and to this we may now turn. + +Let us begin with the proposition known as the equation of +international exchange, which is sometimes given thus: the value of +the imports of a country must in the long run equal the value of +the exports. But this proposition (especially the words imports and +exports) must be understood in a much broader sense than that of +the movements of merchandise merely. The proposition might better be +expressed: the total credits of a nation (including money actually +sent abroad) must just equal its total debits (including money +imported). Into the balance of accounts between any two nations enter +many items: the cash values of the imports and exports of merchandise; +freights, insurance premiums, and commissions; the expenses of +citizens while traveling abroad; money brought in or taken out by +immigrants; the cost of the governmental foreign services (such as the +salaries of consuls and of diplomatic representatives); subsidies +and war indemnities received from or paid to foreign nations; the +investments of foreign capital; and credit items of many kinds, on +both sides of the account. + +The effect of loans upon the equation differs at different periods +according as they are just being made, are continuing, or are being +repaid. When foreign capital is first invested in a country, whether +it is loaned to the government or to individuals or to corporations, +either gold must be remitted to the borrowing country or goods be +sent. But later the interest payments and the eventual repayment of +the principal of the loan act in the opposite direction. Accruing +interest must be offset annually by exports from the debtor country +and the repayment of the principal requires that either money or goods +be exported equal in value to the original obligations. In popular +opinion an excess of exports of merchandise is an index, if not the +real cause, of national prosperity; but evidently it is no true index +whatever on this point. An excess of exports may at any given moment +indicate that the country is rich and is lending abroad, or that it is +in debt and is paying interest, or that it is repaying the principal. +On the other hand, an excess of imports may indicate either that a +country is poor, and is borrowing from abroad, or that it is rich, +with many foreign investments, and is receiving the income from them +in the form of a regular shipment of goods from the debtors. + +The following statistics of the foreign commerce (merchandise imports +and exports) of the principal countries of the world are given in +significant groupings which call for various explanations. + +Figures are in million dollars ($1,000,000) and are mostly for the +year 1908, (Stat. Abst. 1908, p. 769). At the present writing the war +has altered all the lines of commerce. + + COUNTRIES HAVING EXCESS OF IMPORTS OF MERCHANDISE + + |Excess %|Imports.|Exports.| + United Kingdom ..| 57 | 2886 | 1835 | + Germany ..........| 20 | 1824 | 1523 | + Netherlands ......| 30 | 1130 | 873 | + France ...... | 12 | 1089 | 975 | + Belgium ..........| 33 | 642 | 484 | + + Italy ............| 68 | 562 | 334 | + Aust.-Hung .......| 7 | 487 | 457 | + Switzerland ......| 44 | 287 | 200 | + Spain ............| 10 | 168 | 153 | + Sweden ...........| 26 | 163 | 129 | + Denmark ..........| 16 | 191 | 165 | + Norway ...........| 58 | 101 | 64 | + + Canada ...........| 34 | 298 | 222 | + China ............| 43 | 254 | 178 | + Turkey ...........| 59 | 135 | 85 | + + COUNTRIES HAVING EXCESS OF EXPORTS OF MERCHANDISE + + |Imports.|Exports.|Excess %| + United States ....| 1312 | 1638 | 25 | + Russia ...........| 436 | 542 | 24 | + + British Colonies .| 558 | 615 | 5 | + British India ....| 418 | 486 | 16 | + Australasia ......| 242 | 302 | 25 | + Japan ............| 196 | 206 | 5 | + Cuba .............| 84 | 116 | 40 | + Mexico ...........| 78 | 115 | 42 | + San Domingo ......| 5 | 10 | 100 | + + Argentina ........| 263 | 353 | 34 | + Brazil ...........| 172 | 214 | 24 | + Chile ............| 98 | 116 | 18 | + Uruguay ..........| 35 | 37 | 6 | + Bolivia ..........| 21 | 24 | 14 | + Venezuela .... | 10 | 15 | 50 | + +#Sec. 7. Balance of merchandise movements.# The first group evidently +consists of the older, creditor countries which are drawing some of +the income of their investments from abroad each year in the form of +food and of raw materials of many kinds. The second group includes +countries of very diverse conditions, possibly all having some +investments abroad; Italy receives large imports in return for the +services of many Italians working in foreign countries, and the three +Scandinavian countries (especially Norway) carry on a large commerce +for other nations which is paid for in these ways. The excess of +imports in the third group probably is the result of new investments +that were being made in Canada by English and American capitalists, in +Turkey especially by Germans, and in China by Americans and Europeans. + +The countries in the second column are doubtless on the whole debtors, +but in varying degrees. The excess exports of some are insufficient +even to pay all the current interest, and they are borrowing still +more (possibly the British colonies, Japan and several South American +countries); others have ceased to borrow and are simply paying +interest; whereas the United States at least with its excess of +exports was at this time both paying interest and getting out of debt. +With the outbreak of the war in 1914 the United States began rapidly +buying up its foreign-held securities, and events are fast making it +a creditor nation. Its imports must therefore in future more nearly +equal if not exceed its exports, the actual outcome being dependent +as well on various other items in the balance as on those here +considered. + +Sec. 8. #Cancelation of foreign indebtedness.# In the international +business of any two important countries to-day, such as England and +America, the number of credit and debit transactions is enormous. If +each trader had to attend to the forwarding of the means of payment +for his purchases he would, of course, deduct from the amount of his +indebtedness the amount due him from his foreign correspondent, and +might from time to time "remit" the balance in the form of a shipment +of gold. This simple offsetting and cancelation of debits and credits +would greatly limit the amount of gold that would have to be shipped. +But still, under such conditions, there must be a very large number of +shipments of gold by different individuals, and a large proportion +of these shipments would be going in opposite directions at the same +time. Now a merchant in New York called M may have a balance to pay in +London to X and at the same time a merchant in London called Y have a +balance to pay in New York to a man called N. If M can buy from N his +claim in the form of an order, draft, or bill of exchange, and send it +to X, the latter may through his bank collect the sum from Y. In this +way a further cancelation of indebtedness would occur. + +When all persons having either debits or credits to be paid in New +York and in London, respectively, are dealing with the banks in these +cities, and the banks and special exchange brokers are constantly +buying and selling these bills, a market is created for London +exchange in New York (and conversely in London), and a much easier and +more nearly complete cancelation of indebtedness results. In effect, +all the debits and credits between the two countries are merged into +one big ledger balance, and the international shipment of gold bullion +finally made is just the amount needed to balance the accounts payable +at the time. Industrial indebtedness is represented in various forms: +bills of lading for goods shipped, drafts made by the creditor on his +debtor for goods shipped or property sold, checks or letters of credit +for travelers, bonds and notes public and private. These are the +objects dealt in by the bankers who are the agents to carry on the +work of exchange. + +The balance of foreign exchanges is of essentially the same nature as +the domestic cancelation of indebtedness. It is going on constantly +between the two merchants in the same town, between two banks in +the same town who represent groups of merchants, between men in +neighboring towns, and between distant states like New York and +California.[8] The price of exchange to the individual is reduced +by the specializing of the business in the hands of a few dealers, +permitting the cancelation of indebtedness or offsetting of exchange, +and greatly reducing the amount of bullion to be transported in making +the payments. The cost to the bank of providing this exchange for its +customers varies as conditions change, but in any case is not great, +so that in domestic business when any charge is made it is usually at +a fixed rate, and is mainly for the service. + +Sec. 9. #Par of exchange.# Foreign exchange from America to Europe is, +however, in two features different from domestic exchange: (a) the +cost of shipment of gold is greater; (b) the monetary units of the two +countries usually differ in name, weight, and fineness, and sometimes +in materials. We may define foreign exchange as the purchase and +sale of the right to receive a given kind and weight of metal or its +monetary equivalent in current funds at a specified time and place. +_Par of exchange_ between two countries using the same metal as +a standard is the number of units of the standard coin of the one +country that contains the same amount of fine metal as the standard +coin of the other country. There is no fixed par of exchange between +gold-using and silver-using countries: par of exchange between them +fluctuates with changes in the comparative values of the two metals. +The _gold shipping points_ for importing or exporting gold are +respectively par of exchange plus or minus the cost of moving the +actual metal. These points vary with means of transportation and +communication. The par of exchange between New York and London being +nearly $4.866 and the cost of expressing and insuring a gold pound +between New York and London being approximately $.02,[9] the shipping +point for the export of gold from New York is $4.886 and for the +import of gold to New York is $4.846. At these upper and lower limits, +there is a motive for shipping gold as a commodity. + +When large sales have been made to Europe and credits are accumulating +in New York and the importation of gold is imminent or already begun, +the claims are bought by bankers in New York at less than par. At such +a time one needing to remit a sum to London can buy exchange for less +than par, for every such draft remitted reduces London's indebtedness +and, by so much, the need of shipping gold to this country. As a +rule then, accumulating credits here mean a low rate of exchange, +accumulating debits a high rate of exchange from this to the foreign +country. + +These are the merest rudiments of the subject. The many problems +arising, such as the adjustment of foreign credits to changing needs, +and such as arbitrage (the readjustment of the rates of exchange +prevailing among different financial centers) make foreign exchange +both a complex science and a difficult art. + +Sec. 10. #International monetary balance and price-levels.# The balance +of all accounts for or against a country (including new loans, current +interest, and repayments) must thus eventually be settled in money. +This cannot fail to affect the general level of prices in both +countries, tho this is brought about often only in indirect and +gradual ways. The flow of money out of a country causes the loan +market of a country to tighten (interest and discount rates to rise) +in proportion as the reserves of the banks are reduced. Then "general +prices" begin to fall.[10] When prices fall, imports decline, as the +country is not so good a place in which to sell: when prices rise, +imports increase, as it is a better place in which to sell. The +opposite effect is produced on exports, and thus in a short time the +national credits and debits are again brought into equilibrium. A +slight movement of money in either direction is enough to influence +prices and set in motion forces to counteract a further flow of +money. Decade after decade the circulating medium of leading countries +changes very slightly in amount, and the fluctuations in its amounts +during periods of so-called "favorable balance of trade" and of +"unfavorable balance of trade" are only the smallest fraction of the +value of goods passing through the ports of the country. + +It is therefore absurd to imagine, as is sometimes done, that a +country could, by continually importing goods, be drained of all its +money, or that by any possible set of devices it could forever have an +excess of exports to be paid for by a continual inflow of gold. +Long before either of such movements could go far, the automatic +readjustment of prices would inevitably check it, and secure and +retain for each country its due portion of the money. + + +[Footnote 1: See Vol. I, ch. 17, sec. 10.] + +[Footnote 2: See Vol. I, ch. 5, secs. 1 and 7.] + +[Footnote 3: See Vol. I, ch. 6, sec. 11, on the origin of markets.] + +[Footnote 4: See Vol. I, chs. 36 and 37.] + +[Footnote 5: Recall ch. 4, in general, on the nature of monetary +demand.] + +[Footnote 6: See Vol. 1 for numerous statements of the effects of +varying quantities of agents upon the economy of utilization; e.g., +pp. 138, 163, 164, 213, 228, and chs. 34 and 35 entire.] + +[Footnote 7: This theory has usually been presented under the name +of "the doctrine of comparative costs." The word "costs" is very +misleading in this connection because it is now always applied to +enterpriser's outlay. It seems best, therefore, to replace it in this +phrase by the word "advantages." Of course, it _never_ can be true +that an article can be "profitably" imported when its monetary costs +(all things considered) are higher in the exporting than in the +importing country. Indeed, the importation of any article is proof +conclusive that the importer thinks that the monetary costs of +an article would be higher in the importing than in the exporting +country. See further, ch. 15, secs. 11 and 13 (note).] + +[Footnote 8: See ch. 7, sec. 7.] + +[Footnote 9: This varies also with conditions; after the outbreak of +the war in 1914 it was for a time as high as $.05 because of high war +rates of insurance.] + +[Footnote 10: The connection between a high rate of interest and +falling price is a dynamic phenomenon of a very temporary nature. +In long-time static conditions the general level of prices and the +prevailing rate of interest are dependent on entirely different sets +of forces. See on the theory of interest, Vol. I, p. 308. In long-time +movements of prices, in contrast with brief changes due to foreign +trade such as are referred to above, high rates of interest are +connected with rising prices, and _vice versa._ See above, ch. 6, sec. +8, on fluctuating price-levels and the interest rate.] + + + + +CHAPTER 14 + +THE POLICY OF A PROTECTIVE TARIFF + + Sec. 1. Military and political motives for interference with trade. Sec. 2. + Revenue and protective tariffs. Sec. 3. Growth of a protective system. + Sec. 4. The infant-industry argument. Sec. 5. The home-market argument. + Sec. 6. The "two-profits" argument. Sec. 7. The balance-of-trade argument. + Sec. 8. The claim that protection raises wages. Sec. 9. Tariffs and + unemployment. Sec. 10. Exports and exhaustion of the soil. Sec. 11. Protection + as a monopoly measure. Sec. 12. Harm of sudden tariff reductions. + + +Sec. 1. #Military and political motives for interference with trade.# +The considerations set forth in the last chapter raise a strong +presumption in favor of the sovereign state permitting its citizens to +trade freely across its boundaries, as the best way to further their +own prosperity and, on the whole and in the long run, that of the +nation. Indeed, this presumption and belief has been held by +nearly all serious students of the question, with more or less of +modifications and qualifications, ever since Adam Smith published his +work on the "Wealth of Nations" in 1776.[1] But in conflict with this +belief has been the all but unanimous policy of nations from +early times, throughout the Middle Ages, and down to this day, of +interposing some special hindrances (of varying degrees and kinds) to +this kind of trade. Sometimes this has been done by prohibitions, but +more often by taxes imposed upon either imports or exports. Sometimes +the attempt is made to justify the policy of governmental interference +with foreign trade by arguments which crumble before the slightest +examination, and again it is admitted that free trade is true in +theory, but it is declared to be false in practice. The latter view +is not to be entertained for a moment. If free trade in theory (as an +explanation) is complete and true, it will in practice (as a plan of +action) be sound and workable. In truth, however, the practical policy +of governmental interference with foreign trade has always in part +rested on other than the simple economic grounds. + +Interference with free trade with the foreigner has always been in +large measure due to political motives. In every petty medieval state +or self-governing city, the aim was to make the economic boundaries +coincide as nearly as possible with the political boundaries. Except +for the trade in a few articles of comparative luxury this aim was +at that time nearly attainable. The peasantry surrounding a fortified +town and enjoying its protection were compelled to trade there. Down +to our own time it has seemed to statesmen expedient to forbid or +discourage trade that might nourish the economic power of future +enemies. Sometimes governments have used embargoes, bounties, or +tariffs as weapons to injure the trade of other nations and to secure +diplomatic or commercial concessions. Often they have sought by +tariffs to encourage the building of ships and the manufacture of +armaments and of all kinds of munitions by private enterprise within +their own borders, even when the immediate cost of these products was +greater than if they were purchased abroad. In such cases it is +always a question whether an outright expenditure would not be better, +whether the government could not build its own arsenals and shipyards +more economically than it can foster private enterprise by means of a +protective tariff. However, the political (or military) argument for +protection recognizes that it is in itself a costly (not a profitable) +policy, and that the cost is only justified on the grounds that +military necessity warrants the outlay. + +The military argument as applied to the preparation of ships and +munitions has no application to a tariff on those articles which have +no bearing upon military power. But the most recent application of +science and the mechanical arts to the uses of war has given new +significance to a larger policy of industrial preparedness for +military purposes. The year 1914 doubtless ushered in for the world +a new epoch of protective and discriminatory tariff legislation +determined by political rather than by direct economic considerations. + +Sec. 2. #Revenue and protective tariffs.# An important distinction in +principle is to be made between a tariff for revenue and a tariff +for protection. A _revenue tariff_ is a schedule of duties on goods +entering or leaving a country, so arranged that the collection of +taxes causes the least possible disturbance to domestic industry. +Speaking generally, the duties may be on either imports or exports; +but, as export duties are unconstitutional in the United States, our +tariff discussions are concerned only with import duties. The most +completely revenue-yielding tariff is one touching only articles +which, even at the higher prices are not in the least to be produced +profitably in the home country. A _protective tariff_ is a schedule of +import duties so arranged as to give appreciably higher prices to some +domestic enterprises than they could obtain with free trade. It shuts +out some foreign goods which would otherwise enter, an in so far it +"protects" the domestic producer from the foreign competitors who +would sell at lower prices than those at which he can or will sell. +In other words, "protection" means governmental interference with the +freedom of trade. + +The distinction between revenue and protective tariffs, thus clear in +principle, is not always easy to make in practice. It does not lie in +the intention of the taxing power, but in the actual effects produced. +Most tariffs combine the characteristics both of revenue and of +protective measures. A tariff that reduces imports but does not +cut them off entirely may be called either a revenue tariff with +incidental protection or a protective tariff with incidental revenue. +The difference is one of degree. But notice particularly that the two +features of protection and of revenue are mutually exclusive. To the +extent that one is present the other is impossible. A tariff rate +that in whole or in part excludes the foreign article to that +extent affords "protection" but does not yield revenue. Whenever the +government collects a cent of tariff taxes, the domestic producer in +so far and as respects that unit of goods is unprotected. Likewise, +whenever any domestic producer enjoys "protection" in respect to any +unit of goods, importation is in so far prohibited and the government +is deprived of any revenue whatever derived from the production and +sale of that unit of goods. + +Sec. 3. #Growth of a protective system.# The protective policy developed +at first accidentally, as it were, out of the practice of levying +taxes for revenue only. Tolls, dues (or duties), customs (that is, in +former times the customary dues paid by merchants, now the dues fixed +by law), tariffs (that is, schedules or lists of rates of duties) were +at first intended to raise revenues for the sovereign, the city, or +the state. The unintended, and to some degree inevitable, result of +the taxation of goods in commerce, whether imports or exports, is +to prevent and discourage trade and to raise the prices of the goods +imported. Any change in tariff duties, therefore, at once alters +the previously existing adjustment of profits and of industries in a +country. + +The first effect of the tariff is the same as that of any new factor +in enterpriser's cost; the same, for example, as that of a new +domestic tax on an article or as that of a rise of freight rates--the +domestic price of the taxed article tends to rise. Other results then +follow. If the article cannot, even at the higher price, be produced +within the country (as in the cases of oranges, spices, and coffee +in England, Norway, and Sweden), its consumption is reduced. The +lessening of demand may, however, depress somewhat the price in +the producing country. But as such a tariff does not increase home +production of the taxed article, it is therefore for revenue, not for +protection. + +But if the article can be profitably produced in the importing +country at the new price, "home industries" will start. Where the +transportation charges are low, as on the coasts and on the main lines +of railways, some imported goods may be bought, while farther inland +where transportation charges are higher home production of some or all +grades of such goods may take place. If the whole demand at home is +supplied and all imports stop, therewith cease all revenues to +the government from that source. A completely protective tariff is +completely prohibitive. + +Experience abundantly shows that, with a few exceptions, due to +climate and natural resources, it is impossible to put into effect the +most moderate schedule of duties without the increase in price at once +causing some men to shift their occupations, and to begin producing +articles of the kinds that have risen in price. At once appears a +group of "protected industries," the owners of which are dependent for +the safety and profits of their investments, and the workmen in which +are dependent for the security of their present jobs (possibly for +the chance to continue the pursuit of highly skilled trades) on the +continuance, if not the increase, of the existing tariff rates. A +tariff may be adopted mainly from stress of financial need (as in our +own history in 1789 or in 1861), but its modification or repeal cannot +be decided by fiscal considerations. The "incidental protection" it +affords has created a wealthy and influential group of employers and a +large body of employees who are irresistibly tempted to exercise their +influence in politics almost solely in favor of continuing and of +increasing the rates to the sacrifice of the higher civic life of +their communities. Of course the beneficiaries of the tariff usually +believe sincerely that it is indispensable for the prosperity of the +country as a whole, and they can do much to persuade others to +the same opinion. This commercial motive for maintaining existing +protective tariffs explains in large part their wide prevalence, +whatever other reasons may be adduced in their justification. + +Sec. 4. #The infant-industry argument.# Most free-trade writers concede a +limited validity to the claim that protection may be used to encourage +infant industries and thus diversify the industries of the country. If +the natural resources of a land are adapted to an industry, it may be +called into being earlier by a fostering protective tariff. This is +merely anticipating and hastening the natural order of progress. In +the American colonies the manufactures of such goods as iron, cloth, +hats, ships, and furniture sprang up and continued not only without +"protection," but despite numerous harassing trade restrictions made +in the interest of English merchants. Can it be doubted that many +of these industries would have developed and flourished after the +adoption of the Constitution with no other favoring influences than +those of rich resources and of economy in freights? In the Mississippi +Valley since 1880 natural gas, abundant coal, ore, and timber have +made possible a great growth of industries without protection against +the Eastern states. Industries capable of eventual self-support must +in most cases naturally appear in due time. Economic forces will bring +them out. The protective system has often been likened to a hothouse, +anticipating the season by a few weeks and at great cost. The question +is whether the mere possession of the hothouse is a luxury worth the +price, if meantime the products can be got more cheaply by trade. +English manufactures flourished in the nineteenth century because they +were well established, had excellent coal supplies, great stores of +iron ore, and low-paid labor which did not have the opportunity of +better alternatives, as did the American workman. If America had +imported more (it would not have been all) of her iron and coal, the +English mines would have begun to shown signs of exhaustion earlier, +and America's advantage surely would have asserted itself in time. Her +iron manufactures undoubtedly were hastened--they cannot truly be said +to have been created--by the protective tariff. + +The peculiar advantages of a new country attract labor and +enterprise into a few lines. Industries are forced into an earlier +diversification by tariffs. Which is the better economic situation? +Contrast Iowa, Dakota, and Minnesota, or Kansas, if you please, with +New York and Pennsylvania. Is it so certain that a dense population +congested in cities and crowded in factories and mines is a more ideal +social aggregation than is a community of prosperous farmers? The +smoky industrialism fostered by protection often puts a premium on a +low grade of immigrants, crowds then into city slums and into forlorn +mill towns, and keeps them aliens to the American spirit. It would be +surprising if Americanism on the Western plains were not as sound +as in the crowded cities. But the infant-industry argument appeals +strongly to the enterprise and the speculative spirit of Americans, +who like to do all things rapidly and on a large scale. Every village +aspires to be a great industrial center. Americans are impatient of +the suggestion that things "will come in time"; they like things to +come at once. + +It must, however, be recognized that in a new country there is often +a certain monotony and poverty of life because of the lack of +diversified industries. There are not sufficiently varied avenues for +the expression and use of the manifold talents of the nation. There +are unused materials and opportunities, but the initial expense of +experimentation, the initial difficulties of gathering and training a +working force, are discouraging to individual enterprise, prices being +as they are. A protective tariff is not necessarily and always the +best way, but it is one way of helping private enterprise to establish +and conduct such industries through their initial period. But as has +been pointed out by many writers, the infant-industry argument is +self-limiting, and involves always the assumption that the industries +selected as fit for protection are such as ultimately, and within a +moderately short period, can grow into self-dependence. The infant +must sometime grow to be a man and stand on his own legs, or he is +either a chronic invalid or a degenerate. + +#Sec. 5. The home-market argument.# The home-market argument seeks to +show a more permanent need for a tariff. At the same time it appeals +to the farmers, whom it has been hard to reconcile to a policy which +in America[2] has been peculiarly favorable to manufacturers. The +home-market argument extols the advantages of having near to the +farms customers for agricultural products, and dwells on the greater +steadiness of domestic trade. War or political changes, it is said, +may change the demand for products. This is true, but no other changes +have affected American agriculture so radically as the peaceful +development of domestic transportation and the opening of the West. + +The main economic claim made in the home-market argument is that the +shipping of food to Europe and the importing of manufactures involve +a great cost for double freights which could be saved by manufacturing +at home. The farmer is supposed to pay this cost. The obvious defects +in this view are: first, there is nothing to show that the freight is +not partly or entirely paid by the European, either the manufacturer +or the food consumer; secondly, home trade "saves the freights" for +the farmer only in case he can buy goods under a tariff with less +of his own labor and products than under free trade. The payment of +freight charges is true economy when the goods can be bought at a +distance on more favorable terms than near home. The freight argument +attempts to prove too much for it condemns every trade within the +country, of goods produced a stone's throw away from the consumer. + +The home-market appeal is strongest when addressed not to all farmers, +but to one class of farmers, those whose lands are situated nearer the +manufacturing cities. As city population grows, some land is converted +from the extensive cultivation of corn and wheat to dairying, fruit- +and market-gardening in the neighborhood of cities, and perhaps at +length is used for factory sites or as city lots. There is, thus, a +partial validity in the argument as applied to a comparatively small +number of farmers, who gain as landlords, not as tillers of the soil. +Even greater gains have sometimes been reaped by the owners of timber +lands, ore mines, coal lands, and other natural resources, the values +of which have been raised by tariff legislation. But unless these +gains come from truly productive additions due to the tariff, there is +no benefit to the community as a whole. + +#Sec. 6. The "two-profits" argument.# Somewhat related to this idea of +the saving of two freights is the "two-profits" argument. It is said +that the tariff keeps "two profits" at home, foreign trade gives but +one. The word "profits" is here used in the popular sense of gain from +a single transaction. Both parties are said to profit and both profits +are thought to be secured at home when two citizens are forced to +trade with each other. The view that there are "two profits" in a +trade is an advance upon the notion that "one man's gain is another's +loss,"[3] but there is an error in elementary arithmetic here, both as +to the number and as to the aggregate amount of profits. The purpose +of a protective tariff is to compel two of the citizens of a country +to trade with each other instead of trading with two citizens of a +foreign state; the number of profits made by each country is therefore +not increased by substituting domestic for foreign trade. + +What, then, as to individual size and aggregate amount of the profits? +The gain is not the same in all trades; the trade is made if there +is a gain to each party, no matter how small it is; but the generous +"profit" on one transaction where the conditions of the two parties +are very different may be greater than the total of petty gains on a +dozen trades between two traders of evenly matched powers. Indeed, +the greater the difference in the conditions and the capacities of two +groups of traders, the greater is the sum of the profits which they +may secure through the members of each group trading with those of +the other, rather than by the members of each group trading only among +themselves. Can it safely be assumed that every trade with a foreigner +is less advantageous than one with a fellow-citizen? Diamond cuts +diamond, but two Yankees left to themselves surely should not be +worsted in bargains with the universe. If they could exchange to +better advantage with each other they probably would discover it as +soon as the interested manufacturers and political orators who can +prove so eloquently that they know the other man's business better +than he knows it himself. Forcing the home trade by making our +citizens trade with each other whether both wish to or not may be +to the advantage of one citizen, but it is not likely to be to the +advantage of both citizens. + +Sec. 7. #The balance-of-trade argument.# At the foundation of nearly +all belief in the virtues of a protective tariff will be found the +"favorable balance-of-trade" notion. The ideal of the more thorogoing +upholders of a protective policy is to keep merchandise consistently +flowing out of the country, and to have nothing come in--in any case, +nothing that by any fair amount of effort (whatever that be) could be +produced at home. This is called maintaining a "favorable balance of +trade." Sometimes the emphasis is more on the advantages of an excess +of exports of goods, sometimes more on the importance of the need "to +keep money at home." The simple error in these opinions is clearly +apparent in the explanation of foreign exchanges and of the principles +regulating the international flow of money.[4] + +An interesting commentary on the opinion before us is the fact already +noted[5] that an excess of exports is the usual situation in poor +debtor countries having constant interest payments to meet; while, on +the contrary, rich creditor countries have an excess of merchandise +imports. + +The "favorable balance-of-trade" argument, with the emphasis on money +rather than on goods, is that the protective tariff keeps money at +home which, if trade is free, will be sent abroad to buy foreign +goods, thus impoverishing the country. This doctrine as presented +in the seventeenth and eighteenth centuries in Europe, was known as +_mercantilism_. It had great influence upon the commercial policies +of all the great European nations. A superficial glance at the trade +relations of an old, rich country with a new province seems to give +evidence for such a belief. A richer country that is lending capital +(sent to the debtor country in the form of goods) has at the same time +a larger supply of money. The lack of money and the poverty of the +newer country are looked upon by the protectionist as due to the +importation of goods. The common cause of the imports to newly settled +districts and of their scanty stocks of money, it need hardly be +repeated here, is the comparative poverty of settlers and pioneers.[6] +Often these are paying for imports by means of loans, and in any case +their monetary stocks are not decreased either by their foreign trade +or by their domestic trade with the older and richer parts of the same +country. Europe and the United States, in their trade with China and +South America, usually do not get gold in exchange, but merchandise +of various sorts. It is true that in the trade of England and New York +with great gold-producing districts, such as California, South Africa, +and Alaska, gold is received in return for merchandise, for much of +the gold in gold-producing districts is merely merchandise, and its +export does not drain them of their due portion of money. There was +a time when the states of Kansas, Nebraska, Iowa, and their neighbors +were filled with resentment against the money-lenders of the Eastern +states. There was a widespread belief that hard times were due to an +insufficient currency.[7] + +Attempted action took the form of the greenback and free silver +movements, which were defeated by the opposition of the East, but +there can be little doubt that if the Federal Constitution had +not forbidden it, the discontented states would have established a +protective tariff "to keep their money at home." Few advocates of +protective tariffs are ready to admit that the money stock of the +country is dependent on the general wealth of the country and on the +methods of doing business, rather than on a protective tariff. + +Sec. 8. #The claim that protection raises wages.# The most effective +popular claim made for protection is that it raises, or maintains, the +general scale of wages in the country. This argument takes two forms: +first, when wages are low in a country it is claimed that a tariff is +needed to raise them; and, secondly, when wages are high it is argued +that a tariff alone can preserve them. In Germany the fear is of the +higher paid and more efficient labor of England. In America, where +general wages at all times have been higher than in England, it was +first argued (in the time of Henry Clay) that because of the greater +cost of production, due to high wages, the tariff was needed to start +certain industries; but after the tariff had long been established +and the old argument had been forgotten (ever since 1865), it has +been urged that the tariff, being the cause of high wages, must +be maintained to protect against the "pauper" labor of the older +countries. The higher wages in new countries where a tariff exists are +always claimed to be the fruits of a protective policy. The true +cause of the high general scale of wages in America is the greater +efficiency of industry under existing conditions.[8] Labor is +surrounded here with advantages in the forms of rich natural resources +and of mechanical appliances such as never before were combined. +Because of the scarcity of workers in particular protected industries, +wages may be temporarily higher in them than in some other industries; +but such workers form a small fraction of the population, and it is +impossible to show that the general scale of wages in all occupations +is raised by the tariff protecting this fraction. + +There is, of course, no question that every tariff change affects +certain enterprises and classes of workmen. Enterprisers already +acquainted with and engaged in a business always may hope to gain by +the higher prices immediately following a rise in the tariff rates +on their particular products. Though they are granted no enduring +monopoly by the protection, they for a time enjoy the advantage of +being on the ground, and may reap the first fruits of the favoring +conditions. The enterpriser usually profits when the price of his +product suddenly rises. Usually skilled workmen are affected slowly by +competition when there is any considerable increase of prices in their +special industries. The important question is, Who bears the burden of +the higher prices that result from a tariff? The burden is very soon +distributed. A part of it may be for a short time borne by the retail +merchants, but ultimately nearly the whole of it must be borne by +their customers, the unfortunate, less favored citizens. The weight +falling on each is usually small, often unsuspected, always hard to +measure. The increased benefit is concentrated in a few industries and +accrues to a comparatively few producers. Here is a recipe for riches: +get everybody to give you a penny; it's so little that no one will +miss it, and it will mean a great deal to you. Something like this +happens in the case of many protected industries; every consumer +of the article pays a few cents more, a small group of wage-earners +temporarily gains, and a few enterprises wax wealthy. + +Sec. 9. #Tariffs and unemployment#. The claim that a low tariff is bad +for the workers is made with peculiar success in any period when +unemployment is greater than usual. It is vain in reply to show that +again and again equally bad periods of unemployment have occurred when +a high tariff was in force, and that often the most highly protected +industries are most affected. It is vain to suggest that fluctuations +of unemployment are related rather to the rhythm of industrial cycles +and panics, than to any particular level of the tariff, whatever it +be.[9] The fact that at the moment is seen is that here are some men +for the time out of work, and here are some foreign goods coming in. +Of course, what is not seen is that if we stop importing goods we +thereby eventually will stop the exportation of goods of equal value +now being sent in payment and this must throw as many men out of jobs +as we helped into jobs by raising the tariff. But the view easy to +take is the short view, and the ulterior consequences seem to the +popular mind to be vain imaginings. + +Sec. 10. #Exports and exhaustion of the soil#. It has been ingeniously +argued that a tariff may keep some of the natural agricultural +resources of a new country from becoming quickly exhausted. The export +of food takes out of the soil and out of the country fertile qualities +never to be returned. The shipment of several hundred million dollars +of food products year after year represented a tremendous drain from +the soil of the United States, but this has now largely ceased. +The assumption, however, that the use of the food in this country +preserves the fertility of our own fields is in the main mistaken. The +fertile material in the food for human consumption hauled to a town +five miles away from the field is almost as entirely lost as if it +were shipped to Europe. Engineering skill has as yet succeeded in +returning economically to the fields from which it comes hardly a +fraction as much fertile organic matter as that which flows into the +sewers, that is dumped into river and ocean, and that is buried in +heaps at the borders of our own cities. Artificial fertilizers are +increasingly used, to be sure, but they are obtained in other ways. +On the other hand, the increased use of iron, coal, and timber, as a +result of encouraging manufacturers, has very effectually hastened the +exhaustion of the natural resources of the country. + +Sec. 11. #Protection as a monopoly measure#. It has rightly been observed +that a new country has a limited potential monopoly in certain kinds +of products and that a tariff may make it effective. The rapid opening +up of America with its rich natural resources greatly benefited +the average consumer in Western Europe, altho it caused a loss to a +special class of landowners.[10] Whether the citizens of the older +or of the newer country shall reap the greater benefit in the trade +depends on the reciprocal demand for the two classes of goods, as was +seen in discussing the equation of international demand. A wide margin +of advantage may go to one party and a narrow margin to the citizen +of the more favored land. To put it concretely: America, having great +natural resources for agriculture, might continue to trade food for +manufactured goods even tho England reaped most of the benefits of the +trade. An American tariff on manufactures from England would, under +such conditions, check the demand for English products and compel some +Americans to leave farming. This reduction of the American supply +of wheat or corn and of the American demand for English manufactures +compels a new ratio of trade (expressed in prices). It is conceivable +that trading fewer goods with a larger gain on each trade would give +a larger total of gain to the favored nation. Thus, foreigners may +conceivably be compelled to pay a part of the tariff duties to +enjoy the favored market. This is but a special case of the monopoly +principle; the government by law artificially limits the supply of +goods offered by its citizens. + +This argument is somewhat subtle, but probably is the soundest one in +the theory of protection. The supposed conditions seldom occur in +a marked measure, but they may exist, and probably have existed +in America. When the great system of internal transportation was +developed in the United States before that of the other new countries +(say from 1840 to 1894), this country had such peculiar advantages for +the production of food that the quantity was enormously increased +and agricultural prices fell.[11] At such a time the tariff may have +worked toward checking the fall and earlier reestablishing a more +favorable ratio. It did this by making prices of manufactured goods in +this country artificially higher and thus tempting men from rural to +urban callings. But the limited application of the principle must be +recognized. The potential competition of undeveloped countries on all +sides, seeking to develop their resources, and profiting by the higher +prices of food in the world-market caused by our tariff, threatens +the peculiar advantages of the favored land. Russia, Argentina, and +Australia have rapidly taken the place of America in supplying food to +Western Europe, in part, no doubt, because we refused to take Europe's +goods in trade. A great nation with its manifold interests is not +eminently fitted to practise the gentle art of monopoly. + +The period in America from about 1840 to 1890 shows certain absurd +contradictions in economic policy. By governmental action, national, +state, and municipal, enormous grants of money and lands were made in +aid of transportation. Canals, roads, and railways were built into +new agricultural territory far faster than was healthy and normal. A +prodigal land policy put a premium upon a wastefully rapid extension +of the farming area. These things were done to favor the agricultural +states, but agricultural prices fell so greatly that our farmers for +a long period were nowhere prosperous, and great numbers of them, +both in the East and in the West, were ruined. At the same time a +high tariff on nearly everything the farmers needed to buy was the +political spoil obtained by the Eastern and Middle states. This +further depressed the condition of the farmers and forced them or +their sons into urban industries. A slower development would have +occurred without the waste of national resources in such conflicting +policies of artificial stimulation. + +Sec. 12. #Harm of sudden tariff reductions.# It is rarely appreciated how +great is the tactical advantage which the advocates of a high tariff +enjoy in popular political discussion. They can so easily impress the +popular judgment with the evident fruits of their own policy and +with the immediate dangers of the policy of their opponents. When +a protective rate is first applied or is increased, it calls into +existence something visible and tangible, which can be measured in +terms of factories built, men employed, and products turned out. The +increased cost of these results is diffused among many consumers and +reaches them in such indirect ways and in such small increments of +price that they are quite unaware of the way they are affected.[12] + +On the other hand, reduction of the tariff works in a direction the +reverse of the enactment. It may cause local crises and may even bring +on general crises. The benefits of the lower prices are diffused and +lost to view; the immediate injury is concentrated and strikingly +evident. Factories are closed, investments depreciate, laborers are +thrown out of employment. The organic nature of local industry causes +these evils to be felt by many classes. Merchants, professional men, +servants, and skilled laborers, that are tributary to the depressed +industry, suffer. The effects are transmitted to commercial and +financial centres and often credit is much shaken. Then follows a slow +and painful process of readjustment. + +The low-tariff advocates in America undoubtedly have underestimated +these immediate effects. They have been too abstractly doctrinaire, +have argued too absolutely for the merits of free trade to be applied +instantly regardless of the existing distribution of investments and +of occupations. They have opposed one extreme system by another, with +no thought of the inexpediency and injustice of sweeping changes. +There is a strong feeling among business men that any tariff, be +it high or low, is better than a shifting policy. Despite the great +preponderance of domestic production over foreign trade, it is +perhaps too much to say that the tariff is unimportant in our present +conditions. It can, however, be truly said that business can adjust +itself in large measure to any settled conditions and that radical +changes, especially sudden and large reductions, are fraught with +evils. Long before a new tariff law goes into effect, even months in +advance of its passage, while it is merely in prospect, the course +of trade is abnormally affected. If the rate is likely to be raised, +large importations take place under the lower rate, and for a +considerable time after the law goes into effect imports are small, +while prices rise and domestic production gradually increases. But if +the rate is likely to fall, importations are for months meager, stocks +of goods are reduced to the lowest point, and when the lower rate +goes into effect, large importations follow to the injury of domestic +producers. In many cases a year or two of notice, time given to +enterprisers to adjust their business, would probably do away with a +large part both of the serious losses and of the lottery-like gains +that otherwise occur. + +The obvious measure of precaution and of justice would be to put +any new rate into effect gradually.[13] The difficulties are of a +political nature and in the desire of the party in power to "make a +showing" at once of the results of its campaign pledges, in the one +case by starting and stimulating industries through a higher tariff +and in the other by reducing prices to consumers through a lower +tariff. Under the new permanent tariff board, constituted to suggest +tariff changes and to administer the tariff laws, it would be possible +to apply some such feature. + + +[Footnote 1: See above, ch. 2, secs. 12, 13.] + +[Footnote 2: In European countries, on the contrary, the rates that +have been mainly effective have been those levied upon food products, +and the agricultural landholders have been the "protected interests," +such as the England "landed aristocracy," the German agrarian +"Junkertum," and the French peasant landowners.] + +[Footnote 3: See above, ch. 13, sec. 2.] + +[Footnote 4: See ch. 4, sec. 6 and ch. 13, secs. 6-10.] + +[Footnote 5: In ch. 13, sec. 7.] + +[Footnote 6: See ch. 4, secs. 4 and 9.] + +[Footnote 7: That there is a certain measure of truth in this opinion +is recognized in our discussion of the standard of deferred payments, +ch. 6, sec. 9. But the relation of a world-wide appreciation of the +standard money commodity with the burden that this change puts upon +debtors has nothing to do with the question now before us, viz.: +Does a protective tariff enable a country to keep and increase its +proportion of the world's stock of gold; and if it could, would it be +a general benefit?] + +[Footnote 8: See Vol. I, especially p. 228, and chs. 34 and 36.] + +[Footnote 9: See on wages in times of crises, ch. 10, secs. 6 and 7; +and on tariff changes, ch. 10, sec. 14, and ch. 15, sec. 13.] + +[Footnote 10: See Vol. 1, pp. 361 and 443.] + +[Footnote 11: See Vol. 1, p. 436, for average wheat prices in England, +practically in the world-market.] + +[Footnote 12: See above, sec, 8. On the next paragraph, see ch. 10, +sec. 14.] + +[Footnote 13: For example, the maximum alteration in any year might be +limited to 3.65 per cent of the value of the goods and in any case not +to exceed one tenth of the old duty, this change to be applied day by +day. Thus, if, on a valuation of $1000, the duty collected under the +old rate has been $400, and under the new law is to be $290.50, three +years would be required for the full change to become effective, the +reduction each day being $.10 per $1000 valuation. The administration +of such a rule would be simple, and it has been favored by men of +practical commercial experience.] + + + + +CHAPTER 15 + +AMERICAN TARIFF HISTORY + + Sec. 1. Prevalence of protective tariffs. Sec. 2. Specific and _ad valorem_ + rates. Sec. 3. Some technical features of the tariff. Sec. 4. The tariff, + 1789-1815. Sec.5. The tariff, 1816-1845. Sec.6. The tariff, 1846-1860. Sec.7. The + tariff, 1861-1871. Sec. 8. The tariff, 1872-1889. Sec. 9. The tariff, + 1890-1896. Sec. 10. The Dingley tariff, 1897-1909. Sec. 11. Sentiment favoring + lower rates. Sec. 12. The Payne-Aldrich tariff, 1909-1913. Sec. 13. The + Underwood tariff, 1913. Sec. 14. Some lessons from our tariff history. + Note on Tariff legislation and business depressions. + + +Sec. 1. #Prevalence of protective tariffs.# For a century and a half +most serious students of economics have favored a larger measure of +freedom, if not absolute freedom, in foreign trade. But the actual +practice of most nations has never been in accord with the principles +laid down by the philosophers. Great Britain alone among the larger +countries has, since 1846, steadily pursued a low tariff policy for +revenue only, and her example has been most nearly followed by Holland +and Denmark. Germany, which had always had restrictive duties, adopted +still more protective measures under Bismarck in 1879. France, +Italy, and most of the other nations of Europe have strong protective +tariffs. The United States has followed a restrictive policy since +near the beginning of the last century. The explanation of this +contradiction between precept and practice is not entirely simple. +Great interests are affected by foreign trade and certain of these +interests are able to influence opinion and to dominate legislation. +Free trade is not the most desirable thing for every one. The general +policy of free trade between nations, as advocated by most English +economists since Adam Smith, has usually been rejected by the people +and the legislators of other countries. + +In its details American policy in tariff legislation under the +Constitution has been varied and vacillating. The changes have been +determined in most cases by motives of temporary partisan advantage or +by the political activity of the immediate beneficiaries rather than +by clear knowledge and consistent purpose of the electorate as a +whole. Thus its lessons for the student are largely of a negative +nature, but they well repay serious study. + +Sec. 2. #Specific and _ad valorem_ rates.# Before entering upon the +history of the American policy let us make clear the meaning of +certain technical terms and explain certain methods which are +frequently referred to. + +Rates (and duties) may be by either specific or _ad valorem. Specific +duties_ are those that are calculated and levied according to some +physical test, as so much per pound, per yard, per hundred-weight, or +per ton. _Ad valorem_ duties are those that are calculated and levied +according to the value of the goods (usually as it was at the place of +shipment) determined by an assessor, by invoice of sale, by statement +of the importer under oath, etc. The actual duty collected on any +article may result from various combinations of the two rates (as, to +take an actual example, $4.50 a pound and 25 per cent _ad valorem_ +on cigars and cigarettes) or _ad valorem_ with a minimum valuation so +that on the cheaper goods the rate is specific. + +Specific rates are more easily applied in administration, not offering +the temptation to undervaluation and misrepresentation that _ad +valorem_ rates do; on the other hand, specific rates do not adjust +themselves to price changes as _ad valorem_ rates do. If the prices of +goods go up the specific rate is relatively less and affords less of +"protection" to the domestic producer; whereas if prices go down (as, +in general trend, the prices of manufactured goods have done most +of the time) the specific duties are relatively greater. To take a +historical example, the specific rate of 6-1/4 cents a yard on cotton +goods in 1816 which was at first in fact only about 25 per +cent, within a few years became about 75 per cent and absolutely +prohibitive. For this reason specific rates have most often been used +in acts intended to increase the "protective" duties and often as a +device for immediately raising rates; while _ad valorem_ rates have +been more often used in acts prompted by the desire for less drastic +exclusion and for a more adequate revenue; but there is no essential +connection between the protective policy and specific rates. Indeed, +in the period from 1897 to 1909, when most prices were rising, many +of the specific rates under the Dingley Act, intended to be strongly +protective, afforded less and less "protection."[1] + +Sec. 3. Some technical features of the tariff. All goods not subject to +duties are said to be on the _free list_. It is customary to group +articles in _schedules_, of which there are fourteen in the law of +1913, designated from A to N (for chemicals, pottery, metals, wood, +etc.), but the rates are not uniform for all the articles in each +schedule. _Drawbacks_ are a certain amount, the whole or a part, of +the duties that have been paid on imported commodities, which is +paid back by the government on the reexportation of the goods. +_Compensatory duties_ (or compensatory rates) are those levied on +certain manufactured articles with the purpose of raising their price +as much as domestic producers' costs are raised by a tariff on their +raw materials. Examples are a duty on woolen goods to offset a duty on +wool, or a duty on shoes to offset one on hides. They may be intended +to be partial or complete or more than sufficient, and are likely in +any case to work either more or less to the advantage of the domestic +producer than was intended. It may be that the conditions of supply +are such that the home price of the raw materials is raised little +or none by the tariff while the price of the finished product is +considerably raised, or _vice versa._ + +Sec. 4. #The tariff, 1789-1815.# The main difficulty of government in +1781-1789 under the Articles of Confederation was lack of the power +to obtain revenues by taxation. The separate states alone could levy +duties, and a good many tariff restrictions on freedom of trade +among them developed in this period. The Constitution established the +principle of entire freedom of trade among the states. The first act +of Congress under the Constitution levied a tariff, primarily for +revenue purposes, but clearly having a protective purpose, in the view +of some of the representatives. However, most of the separate rates, +as well as the general average rate, were the lowest ever levied by +Congress, except that there was no free list and that 5 per cent was +imposed upon all goods not otherwise enumerated. _Ad valorem_ duties +up to a maximum of 15 per cent (that on carriages) were laid upon +certain articles of luxury, and low specific duties on a few articles +such as glass, nails, iron manufactures, hemp, and cordage. + +From 1789 until 1812, thirteen tariff laws, all told, were passed. One +after another many rates were raised to get larger revenues, but some +goods were put upon the free list. The foreign trade, in both imports +and exports, grew largely and with considerable regularity, rising +then rapidly to a maximum in 1807. Then followed troublous times, +with British Orders in Council and our embargo and nonintercourse +acts until 1812, and war until 1815, trade falling off at first to +one-half, and at last (in 1814) to less than one-twelfth of the +former maximum. Just as trade was, in the war period, sinking to the +vanishing point, the tariff rates were doubled in hopes of getting +increased revenues needed for the war, but in vain. + +[Illustration: FIG. 3. IMPORTS INTO THE UNITED STATES. 1821-18565 + +Many statistics bearing upon tariff history are graphically brought +together here. This figure should be carefully studied in connection +with the following sections. Observe how invariably in the years +following a crisis, the amounts of dutiable imports and of duties +collected have diminished, whether the tariff meantime was changed or +not.] + +Sec. 5. #The tariff, 1816-1845.# Tho rates had been rising, manufacturers +had been making efforts to secure higher rates for protection, even +as early as 1803. Effectual exclusion of foreign goods and consequent +stimulus to the establishment of manufactures in the eastern states +resulted, in the period 1808 and 1815, from the embargoes and the war. +On the return of peace imports were resumed on a large scale and the +call for a higher tariff was loud. In the revision of 1816, rates in +a number of cases were fixed higher than those before the war. Average +rates are said to have been about 20 per cent. The rate on both cotton +and woolen goods was 25 per cent (and the minimum on cotton goods was +a specific rate of 6-1/4 cents a yard). High rates were imposed on pig +iron (50 cents a hundred), hammered bar (75 cents a hundred), and +rolled bar ($1.50 a hundred, equivalent to about 100 per cent _ad +valorem_). Rates were raised on many other articles. The average _ad +valorem_ rates collected in 1821 attained the remarkably high figures +of 36 per cent on dutiable goods, and almost 35 per cent on free and +dutiable together. + +In 1824 in response to the growing sentiment in favor of the so-called +"American policy of protection," many rates were still further +increased, as those on cotton goods and woolen goods (to 33-1/3 per +cent) and some kinds of iron. Cheap wool was now taxed 15 per cent and +that valued over 10 cents a pound at 20 per cent (to be 30 per cent +after 1826). In 1828, in the "tariff of abominations" which evoked +much bitter criticism, the rates on all these goods were again raised, +those on woolen goods being in some cases 100 per cent on the value, +and those on iron being from 40 to 100 per cent on the value, and +duties were levied on molasses, hemp, and flax. The results appear +in the statistics of 1830, showing the average _ad valorem_ rates on +dutiable imports to be nearly 49 per cent, and on free and dutiable +together to be over 45 per cent. This marks a temporary high point in +tariff rates. Revenues were then becoming excessive and that year the +rates on tea and coffee and some other goods were reduced. + +Violent protests, especially from the South, were made against the +protective system, and the tariff became a more important political +issue. Then in 1832 a number of changes were made, mostly downward; +the iron tariff, for example, being reduced to about the level of +1824. Average rates were thus brought down to about 33 per cent on +dutiable goods. The compromise tariff act of 1833 provided for a +process of reduction during a period terminating in 1842, the cut to +be small at first, then to be made more rapidly to bring the maximum +rate on any article down to about 20 per cent.[2] These changes, while +as yet incompleted had, in 1840, brought the average rates on dutiable +goods down to but 30 per cent and on free and dutiable together to 15 +per cent. The 20 per cent rate, however, remained in effect only two +months in 1842, when it was replaced by a tariff with higher rates +distinctly protective, passed by the Whig party and which remained in +force four years. + +Sec. 6. #The tariff, 1846-1860.# The Democratic party coming into power, +passed the Act of 1846, called the Walker tariff, after the Secretary +of the Treasury. As he was a believer in free trade, this act is often +mistakenly described as a free-trade measure. It was, in truth, far +from that. Most of the rates were indeed lower than those that had +been in force between 1816 and 1846 (with the exception of those +between 1840 and 1842), but still some of the rates were high (a few +as high as 100 per cent) and many of them were strongly protective in +nature. The fact that tea and coffee were on the free list is marked +evidence that considerations of revenue did not dominate. The rate +on cotton goods was 25 per cent and the rates on many of the most +important other protected articles (iron, woolen goods, manufactures +of iron, leather, paper, glass, and wood) were 30 per cent. The +average rates under the act for its last eight years (to 1857) were +on dutiable 26 per cent, on free and dutiable 23 per cent. The country +prospered for eleven years under this tariff. In 1857, rates were +again reduced, the more important protective rates from 30 per cent +to a level of 24 per cent. This time partizan considerations played +no part in the discussion. The revenues of the government had been +excessive and the need of a reduction was admitted by nearly every +one. The average _ad valorem_ rates under the nearly four years of the +act of 1857 were about 20 per cent on dutiable and 16 per cent on free +and dutiable (the lowest in the century between 1812 and 1913). + +Sec. 7. #The tariff, 1861-1871.# The reduction of rates in 1857 was +made just at the time when the country was at the height of a wave of +prosperity and of speculation which culminated in the financial crisis +of that year.[3] As always at such times, the government's revenues +fell greatly. The first purpose in the revision of the tariff in 1861 +was simply to restore the rates in the act of 1846. But the Morrill +act which became a law just before Fort Sumter was fired upon, +contained many higher rates and its purpose was avowedly protective. +This necessarily involved a sacrifice of possible revenues for the +government.[4] Then from the beginning of the Civil War till its close +some rates were raised almost every month with little scrutiny or +debate. The average _ad valorem_ rate jumped from 19 per cent on +dutiable in 1861 (under the law of 1857) to an average of 35 per cent +in the three years, 1862-1865. + +The most important tariff acts of the war were those of 1862 and 1864 +by which large increases were made on many articles. These tariff +acts were passed in connection with far-reaching and burdensome +applications of internal revenue taxes on many kinds of manufactures. +The tariff rates were primarily intended to offset these taxes, "to +impose an additional duty on imports equal to the tax which had been +put on the domestic articles," as was said by the sponsors of the +bill. These rates were similar in purpose to compensatory rates, and +in many cases they were more than sufficient to offset the internal +taxes. Under the last of these acts the duties collected in the six +years from 1865 to 1870 averaged nearly 48 per cent on dutiable and +nearly 44 per cent on free and dutiable. + +The remarkable fact was that soon after the war the internal revenue +taxes began to be repealed one after another, and by 1872 nearly +all those bearing upon general manufactures (apart from cigars and +alcoholic beverages) were gone. The tariff, however, remained almost +unaltered. This repeal of internal revenue taxation had the same +"protective" effect as raising the tariff rates by so much. As if +this were not enough for the protected interests, in 1867 the duty on +woolens was further raised and in 1870 numerous other increases were +made in the duties having a protective character. Some reductions were +made, but these were almost all on articles of a distinctly "revenue" +character such as tea, coffee, sugar, molasses, spices, wines. +Revenues were superabundant for current expenses of government, and +altho there was a large national debt, hardly any of it was redeemable +at the time. There was therefore need to reduce taxation, but the +attention of the consuming and tax-paying public was distracted by the +somewhat passionate political issues of the day. Besides, the public +had not the technical knowledge or the unified opinion on this subject +to protect itself against the greedy lobby in this process of tax +revision. And so, selfish commercial interests could get nearly what +they asked for in Congress, and the politicians at Washington, who had +come to have a well-nigh superstitious faith in the efficacy of very +high protective duties, could quietly use the opportunity to raise the +people's taxes for the people's good. + +These virtual increases in the protective power of the rates in force +are not evident in the statistics of average _ad valorem_ rates, +because the higher rates in many cases were sufficient to exclude +relatively more of the foreign products to which they applied.[5] The +imports came, by a process of selection, to consist more largely of +goods subject to lower rates. So the year 1868 showed the highest +average rate on dutiable goods (48.6 per cent) of any year after the +act of 1828 until that of 1890, and the rate fell somewhat each year +until in the fiscal year 1872 it was 41.3 per cent. + +Sec. 8. #The tariff, 1872-1889#. In 1872 the country was again, as in +1857, nearing the crest of a wave of prosperity and of speculation. +Imports and customs receipts attained new high points in our history, +and, despite the enormous reductions of internal revenue taxation, +the government's receipts continued to be excessive.[6] The important +revenue articles, tea and coffee, were then transferred to the free +list, as were also raw hides and paper stock and some other articles; +the rate on salt was reduced one-half and that on coal almost as much. +Many other specific rates were reduced and the _ad valorem_ rates on a +long list of articles were cut to "90 per cent of existing rates." +The effects of these reductions were mingled with those of the severe +financial panic occurring in 1873 and of the depression following, +which reduced especially the importation of luxuries bearing the +higher rates. The average rate of the three (fiscal) years 1873 to +1875 was 39 per cent on dutiable (a fall of 9) and 28 on free and +dutiable (a fall of 16). The ratio of imports entering free, which in +1872 was still only about 1 in 14, became the next year 1 in 4. But +government revenues falling short in 1874, advantage was soon taken +of the circumstance to repeal in 1875 with little discussion the +horizontal cut of tariff rates made in 1872. The specific rates that +had been reduced in 1872 were little changed, however. From 1876 to +1883 (8 fiscal years) nearly a third of the imports consisted of goods +on the free list. The average rate on dutiable was over 43 per cent, +and on free and dutiable was 30 per cent. + +The tariff was a leading issue in the campaigns of 1876 and 1880. In +1876, the Democratic party's platform contained a plank for "a tariff +for revenue only." It was a time of great industrial depression, and +as is usual in such cases a large number of the electors held the +party in power responsible for business adversity (as in turn they +credit it with any more or less fortuitous prosperity). The Republican +candidate Hayes, after a long contest in Congress, was declared +elected by a margin of one electoral vote. His opponent, Tilden had +received a quarter of a million more votes in the country as a whole. +In 1880, when business prosperity was rapidly returning, the party +in power was successful by a goodly margin of votes in the electoral +college, tho having a bare plurality of the popular vote. Garfield, +the Republican candidate, was known as one of the more moderate +protectionists and his opponent, General Hancock, who was without any +political record, declared the tariff to be a "local issue," to be +determined in the Congressional districts. The tariff issue was thus +not very sharply drawn. The tragic death of President Garfield left +no clear leadership. The tariff question from 1876 to 1884 was +politically in the doldrums. + +Yet there was undoubtedly a somewhat growing popular demand for some +moderation of the very high duties. To this demand the friends of +protection who were in power felt compelled to concede something--or +to appear to do so. Congress appointed a Tariff Commission of which +the Chairman was secretary of the wool manufacturers' association, and +after a report the tariff act of 1883 was passed. The net results were +almost nil. Some rates were lowered, while others were raised with a +definite protectionist purpose. The average rates for the next seven +years, 1884-1890, were 45 on dutiable (an increase of nearly 2 per +cent) and 30 on free and dutiable (unchanged as compared with the +period ending 1883). In 1884, the Democratic party elected its +presidential candidate (Cleveland) and a majority of the House, but +as it did not control the Senate it could not pass any of the various +proposed measures for a "reform" of the tariff. In 1888 the protective +principle was a leading issue in the campaign. Altho Cleveland +received a few ten thousands larger popular plurality than he had +obtained four years before, and held the electoral votes of 18 of the +states, he lost New York and Indiana by very narrow margins, a result +in which other issues played a large part. Harrison was elected and +the party favoring a high protective tariff came into power. + +Sec. 9. #The tariff, 1890-1896#. The tariff act (known as the McKinley +act) of October, 1890, followed. This was a general extension of the +principle of protection. The rates on woolen goods were on the whole +increased and made in more cases prohibitive. The rates on wool were +increased. The rates on iron, which was already highly protected, were +little changed except by the increase of the duty on tin-plates. The +duty on sugar (in the main a revenue duty, yielding $55,000,000 +a year) was removed and a bounty was granted to domestic sugar +producers. In the next three (fiscal) years, 1892-1894, the average +rate proved to be over 49 per cent on dutiable (4 per cent increase) +and 22 per cent on free and dutiable (the remission of sugar duties +accounting for the most of this fall of 8 per cent from the average +under the preceding law--4 per cent fall from the last year of its +operation). Particularly noticeable, however, was the increase in the +proportion of goods entering free, which was nearly 55 per cent of +all merchandise as contrasted with about 33 per cent between 1884 and +1890. + +Again the political weather vane shifted. The month after the McKinley +bill became law, the Congressional elections (November, 1890) returned +an overwhelming Democratic majority in the House, altho this was a +period of business prosperity, a fact usually favoring the party in +power. In 1892, Cleveland, being again a candidate, was successful +over Harrison by a largely increased plurality of the popular vote, +and received almost double the electoral vote of his opponent. +The House was Democratic, and the Senate soon became so. Business +prosperity was rising again to a high level, but there were many +features of financial and speculative weakness in the situation, +intensified by growing fear of a cheap money (silver dollar) inflation +under the act of 1878 providing for the annual purchase of silver. +A financial panic occurred in September, 1893, six months after +Cleveland's inauguration. + +Nevertheless Congress enacted the next year, Aug. 28, 1894, the Wilson +tariff act. The changes made by this legislation were not on the whole +very great, but were nearly all in the direction of the lowering of +the tariff. Most notable was the putting of raw wool upon the free +list. Some rates on woolen goods were reduced, but hardly more than +enough to offset the effects, upon manufacturers' costs, of the +reduction of the tariff on raw wool. Likewise small reductions were +made on cotton and silk goods, on pig iron, steel and tin plate +and many other articles; and larger reductions on coal, iron ore, +chinaware, and glassware. To make up for the expected reduction of +receipts from other sources, a duty was laid again upon raw sugar, +and an income tax law was passed (this soon, however, to be declared +unconstitutional). + +Under this law, for three fiscal years (1894-1897) the average +rates were 41 per cent on dutiable and 21 per cent on free and +dutiable,--pretty high rates. The proportion entering free under this +act was actually less than under the McKinley act, partly because +of the sugar item, and partly, probably, because of general business +conditions. + +Sec. 10. #The Dingley tariff, 1897-1909.# The campaign of 1896 was waged +almost solely on the issue of free silver. Undoubtedly great numbers +of voters supported William McKinley rather despite of, than because +of, his high protectionist beliefs. But his inauguration was promptly +followed by the passage of the Dingley act of July 24, 1897, which +embodied a marked increase of protective rates. A duty was again +levied on wool, and also on hides which had been untaxed since 1872. +High rates were made for woolens, linens, silks, chinaware, and the +rate on sugar was doubled. Provision was made for some reduction of +rates by reciprocity agreements, but the conditions were so complex +that the effect could not be great. This high protective tariff, thus +enacted without popular discussion, remained almost unchanged for +twelve years, the longest life, by one year, of any tariff act in our +history,[7] The rate under the first full fiscal year of the law's +operation, 1899, was the highest on dutiable in our history, 52 per +cent, and was nearly 30 per cent on free and dutiable. In practical +operation, however, the average rate steadily became more moderate +because of the rapid rise of the general price level that was in +progress throughout this period, amounting to 35 per cent from 1898 +to 1909.[8] The average rate of duties collected for the period of +12 years was 47 per cent on dutiable and 26 per cent on free and +dutiable. It was steadily falling and the last year, 1909, was 43 per +cent on dutiable and 23 per cent on free and dutiable. + +Sec. 11. #Sentiment favoring lower rates.# While the Dingley act was thus +in operation showing declining average rates, sentiment was developing +in every part of the country in favor of a further moderation of the +tariff. This was due partly to the discontent resulting from steadily +rising general prices, in which change the rise in the prices of food +and of many other necessities was not fully compensated by the rise +of the wages and incomes of the masses. Partly the growth of this +sentiment accompanied the agitation against trusts and the belief +that protective duties in some cases were an aid to the formation of +domestic monopolies. But more fundamentally, this changing sentiment +was the result of the changing industrial conditions in America. The +character of our foreign trade had altered greatly since the early +nineties. We were importing relatively less and less of manufactured +and finished products, and more of raw materials; and we were +exporting less and less of raw materials and more of finished +products. A growing number of manufacturers were feeling the need of +cheaper raw materials and were looking hopefully toward an enlargement +of their foreign trade. + +The Republican platform in 1908, in view of the changing public +sentiment, formulated a new rule for maintaining "the true principle +of protection," namely, that it "is best maintained by the imposition +of such duties as will equal the difference between the cost of +production at home and abroad, together with a reasonable profit to +American industries." This rule is very attractive in its suggestion +at the same time of the idea of a moderation of the tariff and of an +exact practical (not to say scientific) standard for the determination +of the proper rate in every case. + +The rule is, however, fallacious. "Costs of production" mean here +the monetary costs of the enterpriser. Now a first difficulty is that +costs are not uniform for all establishments in any one industry, and +a tariff high enough to protect some is entirely too low to protect +others. As long as a tariff rate is too low to exclude every unit of +the foreign product its importation is conclusive proof that for some +home producers the tariff rates fall short of the "true principle" +(better proof, indeed, than the most elaborate investigation by any +tariff board could be). The indubitable truth is that no trade ever +can take place (in a monetary regime) unless the monetary price is +lower in the exporting than it is in the importing country. This +virtually means that the product cannot be profitably exported unless +the monetary costs of production ("together with a fair profit") of +the article exported are for each party less than those of the other +party in the other country.[9] The so-called "true principle" would +lead thus to absolute prohibition of every article to which it was +applied. + +Sec. 12. #The Payne-Aldrich tariff, 1909-1913#. In the campaign of 1908 +the Republicans admitted that the protective tariff needed to be +revised, but they declared that it should be revised by its friends. +It was doubtless the general understanding that "revision" in this +promise meant revision downward, tho this was left somewhat unclear in +a campaign wherein the tariff played a somewhat minor part. The tariff +act of 1909 (the Payne-Aldrich act) was the attempt of the successful +party to redeem its promise in this regard. Many changes of rates were +made, both downwards and upwards. It was estimated that rates were +reduced in 584 instances, affecting 20 per cent of imports. These +changes included placing hides upon the free list (before taxed 15 per +cent), and cutting down the rate on leather, shoes, coal, lumber, +iron ore, pig iron, and steel-rails. But on the other hand rates +were increased in 300 instances (including many items in the cotton +schedule). The general belief that little reduction was effected, on +the whole, was confirmed by the experience under the act. As compared +with the last two years (1908-1909) of the Dingley tariff the first +two years of the Payne-Aldrich tariff showed a decline of 1.5 per +cent, and on free and dutiable a decline of less than 3 per cent. +These reductions in the statistical results are no greater than +occurred within like periods while the Dingley act continued in +operation without change.[10] + +No other tariff since "the act of abominations" in 1828 has called +forth such widespread criticism as this one, and the tariff became +a leading issue in the campaign of 1912. After 1910, the House being +Democratic, many bills to reduce duties were presented, and some were +passed by both houses, but all were vetoed by President Taft mainly +on the ground that it would be best to await the report of the tariff +board which had been authorized and appointed for the purpose of +ascertaining the cost of production referred to in the "true principle +of protection." + +Sec. 13. #The Underwood tariff, 1913#. After President Wilson was +inaugurated, March 4, 1913, the tariff was at once taken up by +Congress. The general features of the act that was passed were as +follows: + +(a) Considerable additions to the free list of raw materials. + +(b) Abolition of compensatory duties corresponding with the old rates +on raw materials. + +(c) Replacement of specific by _ad valorem_ rates in many cases. + +(d) Taxation of plain kinds of goods less than fancy kinds--luxuries +higher than necessities. + +(e) Reduction of rates generally (most of the few increases being to +correct some evident error in the old law). + +(f) Application of the so-called competitive principle to rates +intended to be protective, viz., to leave the rate just barely high +enough to keep out foreign products.[11] + +Articles placed on the free list were raw wool (which had borne a rate +equivalent to about 44 per cent), metals, agricultural implements, raw +sugar (the lower rate to go into effect gradually), coal, lumber, many +agricultural products including live cattle, meats, wheat, corn, +flax, tea, and hemp, and numerous manufactures including boots, shoes, +gunpowder, wood pulp, and print paper. + +Moderate reductions were made in the schedules for chemicals, earths, +cotton goods, and sundries, while rates on various luxuries were +either unchanged or raised. Left almost unchanged were the schedules +for tobacco, for spirits and wines, and for silks (already very high). + +This act was signed October 3, 1913, and had been in operation about +nine months when the great war broke out in August, 1914. What its +effects would have been under normal conditions we can judge little +from the actual experience. The first eight months that the act was in +operation, the _ad valorem_ rate on dutiable goods proved to be 36 per +cent (about 4 per cent less than in the preceding year) and the rate +on free and dutiable together about 14 per cent (over 3 per cent less +than the preceding year). The first complete fiscal year (that of +1915) under the act, the average rate on dutiable goods was 33.5 per +cent and that on all imports was 12.5 per cent. Evidently this is far +from a "free trade tariff." The reduction in the average _ad valorem_ +rate is less than was expected. Many of the reductions had little +effect, the former rate having been much higher than was needed to +exclude the goods. In other cases the old rates were but nominal +and inoperative because they were upon goods regularly exported, +not imported (e.g., farm products, cotton goods, and some other +manufactures). But some of the reductions doubtless will force the +less efficient plants in some industries touched to increase their +efficiency or go out of business. Time, in any normal period, is +needed for adjustment, but an adjustment of a most abnormal kind is +in progress during the war. Imports from Europe have fallen greatly, +while exports are enormously increased. Old industrial establishments +have been converted to different and temporary uses. The conclusion of +the war must bring a new readjustment that must cause a severe shock +to some enterprises--and this must have been so under any possible +variety of tariff.[12] + +Sec. 14. #Some lessons from our tariff history.# Can we draw from the +checkered course of tariff history in America clear lessons of wisdom +for the future? At least certain negative conclusions may be safely +drawn. It is a history of a vacillating public opinion toward the +policy of protective duties. Always the policy has kept some hold +on public sentiment, but it has varied in strength, now waxing, now +waning. The time of revisions has been determined nearly always by +varying needs of revenue. When more income has had to be raised, this +has nearly always been made the occasion and pretext for increasing +the degree of protection for many industries. This is not at all a +necessary connection, for it would be possible to couple internal +revenue taxes and customs duties in such a way that the rates would go +up and down together and give the varying amounts of revenue +required for the government without appreciably altering the relative +profitableness of various private enterprises. + +Our tariff history is too largely a record of special favors granted +to classes of citizens, to the citizens of certain localities, and to +particular enterprises. This is apparent even in a general survey, but +almost every more detailed examination of particular protective rates +reveals evidence of suspicious and sometimes scandalous personal +influences at work. The protective policy has always professedly +been advocated for the general welfare to raise wages or to make the +country prosperous, but the initiative has always been taken, and +the valiant work in contributing funds for campaign purposes and +in lobbying bills through Congress has been done, by the interested +manufacturers. Even if it were beyond question sound in principle to +exclude goods that can be bought more cheaply by trade, it is very +doubtful whether any net good could have resulted from this policy +as it has been in fact applied and followed. The frequent and +unpredictable changes have been a great evil, and have again and again +brought unmerited losses to the many in business and still greater +and unearned gains to a favored few. It is incredible that such a +hit-or-miss, in large part selfishly determined, policy could have +been an important cause of our national prosperity. The fundamental +causes of the general high wages and popular welfare that we have +enjoyed is to be found rather in our rich natural resources, +our capacity for self-government with free institutions, and the +industrial energies of our people.[13] + +The revision of the tariff of 1913, viewed with non-partizan eyes, +appears to have been carried out, to say the least, as consistently +with regard to its professed doctrine, and as little influenced by the +malevolent arts of the old-time Congressional lobby, as any debated +tariff act in our history. It still contains on the whole a large +measure of protection. Under various pretexts such as the danger of a +flood of cheap goods after the close of the great war, attempts will +be made to make it still more prohibitive. But one lesson of our +tariff history is that such an act should be given a period of fair +trial before extensive changes are made in it. Even further reductions +should be cautiously undertaken and put into effect gradually. If the +attempt is made through temporary rates to reduce the shock of the +trade adjustments, of the "dumping" after the war, then the devising +and administration of such measures should be delegated to an +expert, disinterested, permanent tariff board. The task is to prevent +temporary "unfair competition" and sudden changes, rather than to +raise permanent barriers to fair trade.[14] + + +[Footnote 1: It is evident that it is only through _ad valorem_ rates +that it is possible to compare the average rate of duty for one tariff +act, with that for another. As, however, every tariff act is made up +of both specific and _ad valorem_ duties, it is only at the end of the +year that an average _ad valorem_ rate can be estimated by comparing +the total of duties collected with the total estimated value of the +goods imported. Average _ad valorem_ rates are estimated in this way +both on the dutiable goods alone, and on all goods, free and dutiable +combined. There may be an element of error, even of misrepresentation, +in such estimates. They do not give the simple test of the relative +height of duties, or of the degree of "protection" that we might at +first suppose. Just to the extent that a new and higher rate really +operates to exclude imports (and thus is protective in its effect) the +goods subject to that rate cease to form part of the total imports. +For example, if the average rate of duty were 25 per cent, and a +50 per cent rate on an article were increased to 75 per cent, it is +possible that this rate would prove to be absolutely prohibitive. +This raise of rate, therefore, would tend to reduce the average rates +collected on all dutiable articles. Changes in general conditions +of industry from causes quite apart from the tariff may result in +shifting the proportions of imports that are dutiable so that the +average rates go either up or down while the tariff law has remained +unchanged on the statute book. A failure to consider these and related +facts leads to much confusion in popular and political discussion of +the tariff.] + +[Footnote 2: Usually given as 20 per cent. However a good many rates +under the full operation of the act worked out as 21-1/2 or 23 per +cent, and a few at 26 and at 29 per cent. Besides there were +numerous specific rates, the _ad valorem_ force of which cannot be +determined.] + +[Footnote 3: The political argument that the small tariff reduction of +1857 caused the crisis of 1857 will not bear serious examination. See +below, sec. 13.] + +[Footnote 4: See ch. 14, sec. 2.] + +[Footnote 5: See above, sec. 2, note 1.] + +[Footnote 6: Internal revenue receipts in 1866 had been $309,000,000; +in 1872 they had fallen to $131,000,000, yet the government's surplus +for the three years 1870-1872 was little less than $100,000,000 a +year. This was almost half of the total receipts from customs, which +were $216,000,000.] + +[Footnote 7: Other issues absorbed public attention in this +period--the Spanish war, colonial policy, "imperialism," railway rate +regulation, corporation control, etc.] + +[Footnote 8: See above, sec. 2.] + +[Footnote 9: Compare with ch. 13, sec. 5.] + +[Footnote 10: Probably resulting from the rising prices, as explained +above, sec. 2. For example, in one year, from 1899 to 1900, the +average _ad valorem_ rate collected on dutiable goods fell 3 per cent, +and that on all goods fell 2 per cent; in the two years from 1904 to +1906 the average rates on dutiable fell 4 per cent, and on all goods +fell 2 per cent.] + +[Footnote 11: This "competitive principle" is essentially the same as +the so-called "true principle" of equalizing the cost of production +(see above, sec. 11). It is essentially a prohibitive, not a free +trade, principle. Strictly applied it would cause complete exclusion +of imports. But as applied to selected articles which it is desired +to exclude in order to "protect" the domestic producer, this principle +would simply prevent the rate being placed appreciably higher than +was needed to exclude them. Anything beyond that point but offers +temptation and opportunity for the formation of a monopoly by domestic +producers. Then, too, the rate may intentionally be fixed so as to +make just possible the survival of the most favorably located or most +efficiently operated establishments, while compelling the abandonment +of other establishments. See ch. 14, sec. 3.] + +[Footnote 12: Such changes are logically related to the subject of +financial crises rather than to that of the tariff. See note at end of +the next section.] + +[Footnote 13: See Vol. I, e.g., pp. 228, 431, 445ff, 466, 490, 506ff.] + +[Footnote 14: #Tariff legislation and business depressions.# The +relation between new tariff legislation and the business conditions +following it has been the subject of much debate in political +campaigns. In the few cases where a relationship has been most often +asserted to exist, it is more probable that the tariff change was the +_result_ of business conditions preceding it, than that it was the +cause of the conditions following it. For usually a tariff has been +revised downward because a few years of prosperity with large imports +had so increased customs duties that the government has had surplus +revenues. Just when the tariff was reduced, the conditions were ripe +for a crisis. This happened in 1857 (already in 1856 there had been a +preliminary halt of business), again in 1872, and on a small scale in +1883. But the main reduction resulting from the compromise act of 1833 +did not occur until after the crisis of 1837-39; the Walker act of +1846 was passed just as business was starting upward on a long wave +of prosperity; and the act of 1894 was passed a full year after the +severe crisis of 1893, when business had already entered upon a period +of depression. In none of these cases does it seem reasonable to +attribute business depression to the reduction of the tariff, as +is commonly done in protectionist arguments even to the point of +attributing the panic of 1893 to the reduction of the tariff a year +later! + +At several times the tariff has been raised soon after a crisis when a +good occasion was presented by the need of larger revenues as in 1842, +1860, 1875, and 1897. Business at such times is just at the point +of the cycle when prosperity is due. The higher tariff of 1842 was +succeeded by the low tariff of 1846 without any check to business. The +war obscured the ordinary industrial effects of the tariff acts of the +sixties. The increase in the year 1875 was followed by four years +of hard times and slow recovery. The increase of the tariff in 1890 +occurred as business was nearing the top of the cycle and was followed +by two years of prosperity culminating in the very severe crisis of +1893. The authors of the tariff of 1897 were peculiarly fortunate in +the time of their action, for the country was just fairly recovering +from the very severe crisis of 1893 and prosperity was to continue +(with brief hesitation in 1900 and 1903) until the severe crisis and +panic of 1907. + +The advocates of higher rates are, of course, correct in declaring +that the great business prosperity of the years 1915 and 1916 resulted +from the unexpected demands in foreign trade growing out of the war, +and is not to be credited in large measure to the act of 1913. But +reason requires that the same restraint be exercised in crediting +to higher protective acts the prosperity which has in some--not +all--cases, followed their enactment; and requires further that the +present act be not held accountable for the next reaction in trade, +whenever it may occur, inasmuch as a reaction would be sure to occur +no matter what kind of tariff act we might chance to have at the +time.] + + + + +CHAPTER 16 + +OBJECTS AND PRINCIPLES OF TAXATION + + Sec. 1. Public finance as a division of economics. Sec. 2. The police function. + Sec. 3. Social and industrial functions. Sec. 4. The enlarging sphere + of the state. Sec. 5. Industrial revenues of governments. Sec. 6. Governmental + receipts from loans. Sec. 7. Nonrevenue character of receipts from + loans. Sec. 8. Revenues from taxation. Sec. 9. Forms of taxation. Sec.10. + Defective tax "systems." Sec.11. Various standards of justice suggested. + Sec. 12. Social welfare as the aim. Sec. 13. Principles of administration. + Sec. 14. Shifting and incidence. Sec. 15. Taxes as costs. + + +Sec. 1. #Public finance as a division of economics.# Men live together +in politically organized societies which employ public officials as +agents to carry on the functions of government. Every governmental +unit, large or small, may be viewed not only as a political body, +but as an economic enterprise. Each has its economic aspects, such +as receipts and expenditures, employer and employee, borrowing and +lending, etc. Each political unit is in this sense "an economy." The +study of the public economy, of the economic aspects of government as +distinguished from its political aspects, constitutes the science of +public finance, an important division, tho not the whole, of political +economy. + +The primary fact determining the public finances is the extent of the +sphere of "the state," meaning by the state the totality of political +powers and functions in a community. There are two typical ideals of +a state, each with corresponding functions: the ideal of the police +state, and that of the social-industrial state. In fact every system +of government provides for the exercise of both functions in some +measure. The police function is primary. All governments alike +exercise it, but they differ most in respect to the degree in which +they exercise the social-industrial functions. + +Sec. 2. #The police function.# The police function is that of public +defense and the maintenance of domestic order. In family or +patriarchal communities all share a common income and combine in the +common defense, but self-preservation often has compelled such small +communities to form a larger, stronger state for the common defense. +Public defense requires sacrifice of some independence on the part of +the family and of the individual. Personal service in the field gives +place later in some measure to the payment of taxes, so that a regular +income may permit the government to attain a more regular, continuing, +and perfect organization of military forces. + +As political unity and power grow, the citizens need less often +protection against foreign foes, and they need more often, relatively, +defense against the aggressions of some of their own countrymen. The +preservation of domestic order requires police, courts of justice, and +other agencies. The ideal of the anarchist to do without government +is nowhere realized. Everywhere there must be government to preserve +peace and to protect property. Unfortunately, this need grows with the +growing density of population. Crime increases when men swarm in +great cities. The courts which settle disputes between men, and which +interpret their contracts, are agencies of peace, displacing physical +contests. To maintain and operate the various parts of the social +machinery requires ever increasing governmental revenues. From many +causes government has, in modern times, grown increasingly costly. + +Sec. 3. #Social and industrial functions.# The social and industrial +functions of government seem naturally to grow out of the primary +ones just mentioned. In a democratic society, popular education is +a necessity, as it appears that domestic order is not possible in a +democratic state without intelligent citizens. The system of public +education has, in many states, expanded to include a publicly +supported university as the dominant educational and scientific organ +of the community. Some industrial functions are performed by the +government in connection with the primary needs. Lighthouses are +necessary to guide the navy, but they also serve to guide the merchant +marine and to aid industry. The post was established as an agent +of political and military government to connect the ruler with the +outposts (a fact the name post indicates), but the postal service has +grown in every country to be a great industrial and social agency. +The consular service, originating in the political need of keeping +official representatives in foreign lands, has become a valuable +economic agency; consuls are commercial agents, advancing the business +interests of their countries in all quarters of the globe. + +Sec. 4. #The enlarging sphere of the state.# A mere police state would +leave to private initiative the provision of every kind of economic +agencies not needed for political government. The state might, for +example, even leave the provision of roads and bridges to private +individuals or to companies, permitting them to charge tolls to obtain +a return on their investment. Whenever a toll-road is made public and +a toll-bridge becomes free, and the state maintains the roads, it is +becoming less strictly a mere police state. Reacting from the ideal +of the police state which was most highly praised in the first half +of the nineteenth century, the functions of government have been +extending in many directions in the last half century. More and more +economic functions are performed through the agency of government. If +we think of an act as done by the government _for_ private citizens, +we call it paternalism; but if we think of an act as done _by_ +citizens collectively _for_ themselves as the best way to get these +things done, we may call it, in a broad sense, socialism.[1] + +Government is in one aspect a direct good to its citizens. In return +for its collective cost men collectively get the enjoyment of social +organization, markedly in contrast with the uncertain ties and hazards +of primitive communities. But government becomes also a mode of social +investment, an indirect agent, a productive enterprise. Wealth applied +through it secures in some cases a greater product than is possible by +individual action. + +But when the government undertakes these various tasks the expense +falls unequally on individuals and affects differently their incomes. +When free schools take the place of private schools, the law compels +every one to contribute to education. To many individuals it is a +matter of indifference whether they pay tuition or taxes, but the +wealthy bachelor sometimes grumbles when forced to help in educating +the day-laborer's family. The average result of a certain social +policy may be right, but individuals diverge from the average and +thus have constantly a motive to attempt to change the limits of +governmental action. Happily the subject is not always viewed with +selfish eyes. The ethical and patriotic thought is not, "How will this +affect my interests?" but. "How will it affect the general interests?" +But as the question of value is always involved men are usually found +favoring or opposing the industrial and social activity of the state +according as it affects their own incomes. Thus the determination of +the sphere of the state is in large part an economic question. + +Sec. 5. #Industrial revenues of governments#. The costs of government at +any stage are met in varying degrees in one of three ways: (1) from +industrial sources, (2) by borrowing and thus creating a public debt, +(3) from taxation. + +(1) Receipts from industrial sources in the broad sense include all +rents from wealth owned, interest on loans made, and proceeds of sales +from enterprises conducted, by the government. In feudal times, these +were mostly obtained in the form of rents from the private domains of +kings and nobles. In many early and medieval states these sources of +receipts were adequate to the need of government; then they decreased +in many countries, both relatively and absolutely, because of the +sale of publicly owned wealth (lands and mines) and with the recent +extension of the functions of government have again increased very +rapidly. Now industrial revenues come not only from the rents of +forests, mines, docks, lands, and buildings, but from profits in the +operation of industrial enterprises such as waterworks, railways, +mines, and factories, and from interest on funds deposited in banks +or otherwise invested. At present the industrial revenues of the +aggregate governments of the United States (national, state, and +municipal) amount to about a fifth of all revenue receipts. Since +the middle of the nineteenth century the number and variety of the +industrial enterprises undertaken by governments has been steadily +increasing, and this increase has been most marked in the cities. The +change in this respect in the United States, great as it has been, has +been proceeding more slowly than in the European countries. + +In 1913 the receipts of this nature (earnings of departments and of +public service enterprises) were nearly $500,000,000. The larger part +of this sum comes to the national government ($288,000,000), mostly +from the post-office department. Most of the remainder comes to the +minor divisions ($176,000,000), and but little to the states. The +total "earnings" (this means here receipts, not profits) of public +service enterprises in incorporated places were $120,000,000. + +Sec. 6. #Governmental receipts from loans.# The funds to invest in these +commercial undertakings are originally obtained in nearly all cases +from public loans. Almost every unit or division of government may +become a borrower to provide for its citizens at once certain needed +advantages and improvements when the funds are not at hand and +immediate taxation is deemed too heavy a burden.[2] + +The indebtedness (less funds available for payment of debt) of the +aggregate governments of the United States in 1913 was: + + Nation ................................. $1,028,000,000 + States ................................. 346,000,000 + Minor divisions ......................... 3,476,000,000 + ------------- + Total .................................. $4,850,000,000 + +The larger part of nearly every national debt has been incurred for +purposes of war and preparation for war, while nearly all public +debt other than national has been created for the purpose of peaceful +social and industrial development. The debts of the American states +have partly been made necessary to meet deficits in current expenses, +but largely of late to erect public buildings, purchase forest lands, +improve roads, and construct canals. The minor divisions are counties, +cities, villages, boroughs, towns, townships, school districts, +drainage, irrigation, and levee districts, fire districts, poor-relief +districts, road districts, and various other subdivisions of states +and of counties. Every one of them has more or less legal power to +incur debts and to levy taxes for the purpose of paying the interest +and of repaying the principal. The purposes for which the debts are +incurred by specially organized districts are sometimes indicated in +the names (e.g., drainage, irrigation), while the regular political +divisions of counties, cities, villages, towns, townships, incur debts +for a large variety of objects, such as streets, sewage disposal, +water supply, electric light or gas plants, school houses, libraries, +and other public buildings. Large expenditures for these purposes are +necessary because the local governments are undertaking new functions, +and either existing equipment (such as waterworks systems, and street +railways) must be bought from private companies or new ones must +be built. They are necessary further because the rapid growth of +population calls for an immediate "capital investment," the payment of +which may be, through borrowing, more easily spread over a series +of years (e.g., in the extension of streets and paving, and in the +provision of school houses for the children). + +Sec. 7. #Nonrevenue character of receipts from loans.# The proceeds +from loans (and certain other items of sales) are called nonrevenue +receipts, because they are but in anticipation of receipts from other +sources. The economic theory of such loans is essentially the same as +that of private loans, but it is the people of the political district +collectively that are the borrowers. To get the present uses of goods +they sell their promise to make future payments totaling a larger +amount. The loan is the present worth of those promises. In the case +of loans made for local purposes, provision is now usually made for +their complete repayment within a definite number of years, +usually 10, or 20, or 30. Meantime interest is payable annually or +semi-annually, and from some source an additional sum is collected +to repay a part of the loan, sometimes by redeeming a certain part +annually, sometimes by accumulating a sinking fund until that amounts +to the whole debt. + +The minor divisions in the United States are thus constantly creating +debts at the rate of about $2,000,000,000 each year and at the same +time paying former debts in instalments, in a total amount somewhat +less than this. In the case of some municipal investments which are +commercial enterprises (such as those supplying gas, electricity, and +water), these annual payments can be made out of the profits; in the +case of others, the payments come from special assessments upon +the owners; and in most other cases they are collected by the usual +methods of taxation. In America, a large part of these costs are, by +the law of special assessments, placed upon the owners of adjacent +lands, whose outlays are usually more than offset by the increased +value of their lands as a result of the improvements. In this case +also, the present investment is in anticipation of the future incomes +which the owners of the improved lands will get.[3] + +Sec. 8. #Revenues from taxation.# Much the largest part of the receipts +of most governments, apart from loans, and in many cases nearly all +such revenue receipts, come from taxation. Tax (as a verb) meant +originally to touch or handle, then to estimate or appraise, and then +to charge a burden upon some one, especially to impose a payment of +services, goods, or money upon persons or property for the support +of government.[4] _Taxation_ is the legal process of taking income, +services, or wealth from private persons for public uses. + +Taxes are of various kinds, but they always are incomes, or wealth +representing future incomes, transferred from private ownership of the +taxpayers to the government. In rare cases, more than the net current +income of a certain kind may be taken for public uses. As economic +income has many sources, it may be intercepted at many different +points, and taxation may take various forms. The differences are +so manifold that it is difficult to classify particular taxes +satisfactorily. + +Sec. 9. #Forms of taxation.# The following are the forms of taxation most +frequently referred to. + +(a) The simplest form of tax is a _poll tax_, a uniform amount payable +by every person of the taxable class. This form of tax is being +less and less used in America and now amounts to little more than +$17,000,000,[5] this being only .6 of 1 per cent of the aggregate +taxes in the United States. The national government gets about +one-fourth of this amount from a tax on immigrants and the rest is +collected by (some of) the states, counties, and minor divisions. +Usually, if not always, the poll tax is imposed only upon voters, as a +condition to the right to vote. + +(b) Taxes may be laid upon _incomes_, as they come into the possession +of the owner. Usually, only monetary incomes that arise in commercial +transactions are taxable, and no attempt is made to estimate the value +of psychic incomes. Commercial incomes are more easily measured, but +the omission of the other elements must cause many inequalities in the +burden of the tax as between two individuals controlling equal incomes +of real things. + +(c) Taxes may be on _property_, either general upon all property in +the taxing district, or special, upon certain forms of property. A +property tax may be specific or _ad valorem_, in proportion to value, +as to the method of its determination. Since the value of material +wealth is the capitalization of the rentals at the prevailing rate of +interest, a general, _ad valorem_, property tax, so far as it applies +to material wealth, and if it were accurately assessed, would take +an approximately equal proportion of wealth-incomes. It does not, of +course, touch directly incomes derived from wages and salaries, but it +reduces their purchasing power in many cases. It is in some respects +more searching than a tax on actual rents, for it reaches the +prospective, or speculative, rental. + +(d) Taxes may be on _expenditure_ (sometimes called taxes on +consumption). This is but another mode of attacking income, for in the +long run most income is spent, not always by the individual who earned +it, but by some one, and thus it is reached by a tax on expenditure. +Usually in the United States the tariff duties are accounted to be +taxes on expenditure, as also the internal revenues (also called +excises) of the national government. In time of war, internal revenues +are extended in the United States to a multitude of articles, but +usually they have been limited (with minor exceptions) to liquor and +tobacco. Most of these taxes are in fact levied not at the time of +purchase by the ultimate consumer, but upon the specific goods in +the hands of some merchant or business agency, and some of them are +essentially special property taxes and others are business taxes of +the kind next to be mentioned. + +(e) Taxes may be levied on selected agencies of industry or on the +process of _business_; such are business taxes, licenses, taxes on +investment in business, and corporation taxes. These burdens are +diffused and rest eventually on some income, rarely to be ascertained +exactly. + +Sec. 10. #Defective tax "systems."# The actual tax laws of each division +of government in a country combine the various forms in different +proportions. Most of the federal taxes are from tariff duties and from +internal revenues; the latter include a variety of special business +and property taxes and, since 1913, the federal income tax. The +largest receipts of states, of counties, and of minor divisions are +from property taxes, some special but most of them general in form. +Among the various states a wide diversity is found. Some use the +general property tax for all the divisions (state and local), while +others (several of the Northern states and California) have separated +the sources of state and local taxation, taxing corporations for state +purposes, and most other forms of wealth for local purposes. Some +states, particularly those of the South, make large use of licenses +and taxes on business both for state and local purposes. The tax +laws of many states have been much modified of late and are still in +process of change. It is only in a loose sense that one can speak of +the tax "system" of any state, made up as it is of so many diverse +elements, each used to tap in some independent way some source of +private income for public purposes. Every tax "system" has grown up +more or less accidentally, guided by no more of a general principle +than the advice of the cynical old statesman--so to pluck the +feathers of the goose that it will squawk as little as possible. Thus, +everywhere, the existing situation must be largely accounted for by +custom and ignorance, by the weakness of some classes and the undue +influence of other classes, rather than by clearly thought out +principles soundly administered. + +Sec. 11. #Various standards of justice suggested.# There have not been +lacking earnest attempts to arrive at some general principles. Many +standards have been suggested to measure the distribution of the +burden of taxation, such as benefit, equality, and ability. Each of +these terms is capable of various interpretations which have changed +from time to time. The benefit derived by any citizen from most of +the public services evidently cannot be measured with exactness. The +standard of equality cannot be applied in any literal sense to strong +and weak, to rich and poor. It is possible, however, to interpret +equality with reference not to objective goods, but to the psychic +sacrifice occasioned by taxation. Ability is of many kinds and may +be differently understood. Some think ability to bear taxation is +"in exact proportion to the money income"; others believe that it +increases at a greater rate than money income, and favor, therefore, +progressive taxation, that is, higher rates on the larger incomes. + +Sec. 12. #Social welfare as the aim.# The conflicting interests of +the various classes of taxpayers in each period are to some degree +softened by the prevailing public opinion, sometimes called the social +conscience, and taxes are adjusted according to a vaguely held +ideal of the social welfare. Social expediency, more or less broadly +interpreted, determines who shall be taxed and what social results are +to be sought. The exemptions from taxation in feudal times were great +and, viewed from our standpoint, were inequitable, for the upper +classes escaped while the peasants bore most of the burdens. The +landlords and nobility, who were assumed to be performing important +social functions, generally had outgrown their usefulness in the +period preceding the French Revolution, which swept away many of these +abuses. + +Exemptions from taxation are granted liberally in most states to-day +on some kinds of wealth and to some classes of citizens, because +of their supposed relations to the public interest. Real estate and +equipment devoted to educational, religious, and charitable purposes, +the homes of priests and ministers, homesteads purchased with pension +money, as well as all public lands, buildings, and equipment are +exempt. + +The social interest requires that taxes be both elastic and +productive, so that the needs of the government shall be amply +provided for. The harmonizing of these needs in the laws of taxation +requires a high degree of wisdom, of foresight, and of integrity +in the legislator and in the citizen. No hard-and-fast rule for the +apportioning of taxes can be laid down. The decision must be made in +each generation by the public opinion as to what is most expedient for +the general welfare. + +Sec. 13. #Principles of administration.# Whatever forms of taxes are +adopted, whether on property or income, whether at proportional or +at progressive rates, their justice and expediency depend largely +on their administration. Principle and practice in this, as in most +affairs, may go far apart. The administration of taxation should +be economical, certain, and uniform. Some laws are more easily and +economically executed than others. The time of collection should be as +convenient as possible for the citizen, and the mode of payment should +be the most simple. The utmost certainty is desirable as to the time, +method of payment, and amount. Taxation that, in its principle, is +variable, shifting, or dependent on personal whim and favoritism, +is despotism. But the greatest evils, in practice, result from the +failures in assessment. The assessment of taxes has to be intrusted +to men with fallible judgment, imperfect knowledge, and selfish +interests. The assessor is as near a despot as any agent of popular +government to-day. Not infrequently men of proved incapacity in every +private business they have attempted are, for partizan or corrupt +reasons, selected as assessors, and are given the power of passing +judgment on the value of millions of dollars' worth of property. Under +the circumstances, evils are to be expected, and they occur. The small +owner often is crushed under the unequal assessment while the large +owner comes lightly off. Political friends are favored, political foes +are made to suffer. Even the most honest and capable of assessors find +in the imperfections of the tax laws[6] an insuperable obstacle to +even-handed justice. + +Sec. 14. #Shifting and incidence.# The person paying a tax into the +public treasury is not always the one whose income is reduced in +the long run. This is most clearly seen in the case of taxes paid by +middlemen. In most cases the final and regular burden of the tax is +distributed over a number of incomes. The passing on of the burden is +called the _shifting_ of the tax; the final location of the burden is +called the _incidence_ of the tax. The lawmaker cannot tell exactly +where the weight will fall. The principles of value give some guidance +in the inquiry, but the workings of the principle are difficult to +follow. + +Consider a situation where certain taxes have been for some time +levied. They have become a part of the general adjustment of prices. +If paid by any one in business they may be looked upon as a deduction +from the gross proceeds or product of the business, prior to cost, or +as a part of cost.[7] In either case every one choosing that business +does so in the light of this fact. Unless the business promises to +yield as good incomes (wages, profits) as other lines, the number +engaging in it, and the output, must diminish and thus the price of +the product rise, or the cost of the factors fall, or both in some +proportion. The tax on any durative agent or on any established +business thus becomes incorporated after a time in its price and in +the prices of the products, and any purchaser pays a price based on +the net income remaining to the owner of the wealth after the tax is +paid. Viewed in this way, taxes are seen to be borne to some extent +by every one, by those who do not as well as by those who do actually +meet the tax-collector face to face. The citizen with no taxable +property is affected, far more than he realizes, by extravagance of +government and by inequities in taxation, for the effects of most +taxes are diffused so that every self-sustaining member of the +community has some share in them. + + +Sec. 15. #Taxes as costs.# Now if a new tax is levied, or an old tax +changed in amount or in its incidence, it becomes a new influence in +industry. Some occupations are made more attractive, others less so. +Some places are made more, others less, desirable to live in. +Property thus fluctuates in value, and investments become more or less +remunerative. If the new tax reduces the net income of any productive +agent, it reduces likewise its value, which is but the capitalization +of its net rental. If taxes are taken off of factories and put upon +farm rents, factories rise and farms fall in value in the hands of +their owners. The immediate change in value is much greater than the +annual tax, for if five dollars is to be taken permanently from the +annual rental of the farm, nearly one hundred dollars is taken at once +from its selling value when the prevailing yield on investment is +5 per cent. The rate of adjustment varies greatly under different +conditions, and the inflow and the outflow of labor and capital are +more or less rapid in the various industries. + +Taxes that enterprisers are unable to shift to others are reckoned by +them as a part of their costs of production whenever the conditions of +competition and of substitution make it possible to do so. Every new +tax that curtails the supply of any necessary agent must raise the +price of the products and cause more or less of the tax to fall upon +the consumers. In the Civil War an increase in the tax on whisky +increased its selling price, and distillers who owned stocks on which +a smaller tax had already been paid reaped profits of millions of +dollars. When the tax on tea was increased in England, all dealers +that had accumulated a stock before the law went into effect were +gainers. Every change in taxation inevitably affects, either favorably +or unfavorably, many interests. The chance to anticipate a change in +tax laws or to get, from those in power, information of a proposed +change, makes speculation possible and political corruption +profitable. + +The fact that a change in taxation is a disturbing element in price is +not to be deemed insignificant merely because "all comes out right +in the end." Every change in taxation is an element of uncertainty +in business and increases the fortunes of some men at the expense +of others. Hence no considerable change should be made without good +reasons in its favor. The older taxes have the virtue of stability, +but in many cases they have grown out of harmony with the industrial +conditions. While, therefore, from time to time there is a real need +of a reform in the tax system, it should not be undertaken without +recognizing the many and complex interests involved. + + +[Footnote 1: Meaning here not a certain political party, but a +principle of social action.] + +[Footnote 2: The total debts of the _national_ governments of the +world just before the outbreak of the great war in 1914 were estimated +at about $44,000,000,000. (These figures include the debts of the +separate states in the federal unions of Australia and the German +Empire, and the separate debts of European colonial governments, but +not those of the states of the United States, and in no case including +the debts of minor divisions, the total figures for which are not +to be had.) The new debts created by the war give already more than +double the foregoing total.] + +[Footnote 3: The special assessment is thus in its nature, in part a +private investment. The plan, of special assessments could easily be +applied in many more cases than is done at present.] + +[Footnote 4: There are border-line cases where it is difficult to +decide whether a particular payment to the government in the form of a +fee, price for service (as water rates, etc.), and special assessment +(as for street paving) is in the legal sense a tax or not. Some +courts have, for example, decided that for certain purposes a special +assessment is to be called a tax, and in certain other cases it is +not to be if this would defeat the evident and just intention of the +legislature.] + +[Footnote 5: The figures do not include returns from incorporated +places having a population of less than 2500 where the poll taxes may +be a considerable sum.] + +[Footnote 6: Particularly the difficulties noted in the next chapter, +sees. 2-5.] + +[Footnote 7: See Vol. I, p. 374.] + + +CHAPTER 17 + +PROPERTY AND CORPORATION TAXES + + Sec. 1. Importance of taxation as a public question. Sec. 2. The general + property tax; nature and difficulty. Sec. 3. Ambiguity of the term + "property." Sec. 4. Various temporizing policies. Sec. 5. A consistent policy + of wealth-taxation. Sec. 6. Needed reform of assessment. Sec. 7. Separation of + state and local taxation. Sec. 8. Federal taxation of merchandise in + commerce. Sec. 9. The proposal of the single tax on land values. Sec. 10. + Various reforms in land taxation. Sec. 11. Difficulties in taxing + corporations. Sec. 12. Special taxes on banks. Sec. 13. Special taxes on + insurance. Sec. 14. Special taxes on transportation. Sec. 15. Alternative + policies of corporate taxation. Sec. 16. General plan for corporate + taxation. + + +Sec. 1. #Importance of taxation as a public question.# The discussion of +taxation has accompanied the growth of free government in England and +America from the time of Magna Charta. The control of the public purse +has been found to give the key to political power, and therefore it +has frequently become the occasion of conflict between the monarch and +the people. But in our own national history since the adoption of the +Constitution, taxation has not had a leading place in politics except +in the one aspect of the tariff. The constitutional question of +states' rights long absorbed most of the interest of citizens and +of legislators. But with the quickened attention of the public to +economic questions, the problem of taxation became of increasing +importance. + +It has come to be recognized that taxation can be made to play, and +is bound to play, a leading part as an agency in the distribution of +wealth, and thus it is the center of much of the ardent controversy +regarding social reform. Ultimately, almost every proposal of social +change and betterment involves some cost. The question then must be +answered. Who is to receive the benefits and upon whom and how shall +new taxes be levied to pay the cost? Further, it is often urged that +this result of taxation in redistributing incomes is in itself (or can +be made) a virtue; and some even see in tax reform the answer to the +largest social questions of our time. We are now to take up a few of +the more important problems of taxation, to see the difficulties, and +to suggest the direction in which their solution is to be sought. The +tariff having been already separately considered, the chief kinds of +taxes we have here to treat are property taxes, general and special, +and inheritance and income taxes. + +Sec. 2. #The general property tax; nature and difficulty.# The rates both +of assessment and of levy of the general property tax are uniform and +equal in proportion to the value of all (or nearly all) property in +the taxing district.[1] There are always some exceptions of certain +kinds of property, or of the property of certain persons, or of +property and things put to certain uses--public, educational, +religious, and charitable in their nature. + +The federal government levies no general property tax, but the other +branches of government[2] receive about three-fifths of all their +revenues from it. + +At first view nothing would seem to be simpler and juster in principle +than such a plan of taxation, but those who have most carefully +studied its practical operation, almost with one accord, pronounce it +to be "a dismal failure." The chief reason assigned for this failure +has been that the assessment of the tax is imperfect and incomplete. +The usual thought is that if all property could be assessed the plan +would be excellent. Undoubtedly the difficulty of just assessment has +its part in the weakness of the tax, but back of, and more important +than this, is an inherent fallacy in the apparently simple principle +of the tax. + + +Sec. 3. #Ambiguity of the term "property."# Unfortunately, the word +property is applied, even by the most competent courts, both to the +intangible right of ownership (the fundamental meaning) and to +the concrete thing that is owned, the source of the income.[3] But +evidently the value of the right to the income yielded by a house, for +example, is merely the value of the house. The value of the _property +in the one sense_ (the abstract ownership, the intangible right) is +merely a reflection of the value of the _property in the other sense_ +(the concrete wealth). There are not here two independent bodies of +economic wealth. Whatever value belongs to the one is subtracted from +the other. Nor is it rational to take the paper document called a deed +(which is but the evidence of ownership) and call it tangible property +having a value in addition to the house itself. Yet, in fact, all +these confusions are constantly made in taxation. The term "intangible +personal property" is applied to such things as mercantile credits, +promissory notes, bonds--in general to the right to collect sums +from another person, whether these rights arise out of sales or of +loans--and all are treated as parts of taxable property. Sometimes +the evidences of indebtedness, the promissory notes or the mortgage +papers, are even called tangible property, the same term that +is applied to land, houses, and machinery. By universal practice +supported by a long line of court decisions, these rights (whether +evidenced by paper or not) are made subject to taxation, except as +by piecemeal legislation certain grudging exceptions have been made. +These views and this practice are supported by the popular desire to +tax money-lenders. The result is "double taxation" of many sources of +income. This involves a burden that is ruinous in some cases, both to +borrowers and to lenders, and that tempts in all cases to the evasion +of the tax. + +Take, for example, a house assessed at $10,000 which is owned free of +debt and which has a rental value of $600. At the rate of 1.5 per cent +the tax paid would be $150. Now if the owner borrows $8000 he is still +taxable $150 on the full value of the house, and the lender nearly +everywhere is taxable $120 on the amount of his mortgage. The total +tax payable out of the one source of income, the house, is then $270. +The same analysis will show that any credit is but a contractual +claim upon some other source of income which is, or should have been, +already taxed. + +If one person owns all the capital-value invested in a specific piece +of wealth, no attempt is made to tax both the capital and the wealth; +but if it happens that two or more persons share the capital-value +invested in the same wealth, the attempt is made to tax as a unit the +full value of the wealth and, in addition, some part of the capital +also. It is, however, easy in most cases to conceal this "intangible +property" from the assessor's eyes, and a comparatively small amount +of it is ever taxed. This means inequality and hardship in the +operation of the tax and, as a result, unceasing temptation to perjury +by the taxpayer and to favoritism and graft by public officials. + +Sec. 4. #Various temporizing policies.# The general property tax in +practice is unjust and demoralizing. What, then, shall be done about +it? Various policies have been followed. One has been to declare that +the law would be good if it could be enforced, but that as in practice +it cannot be, the best thing is to go on as before, catching a few +"tax dodgers," and letting the rest go. Another policy is to hire +"tax ferrets," paying them large commissions to discover cases +where intangible property of this sort has been concealed from the +assessors. This method, no matter how stringently applied, has never +reached more than a small proportion of the cases, and becomes a +potent agency of political favoritism and corruption. + +Another policy is to maintain the general principle, but to make +exceptions here and there. Usually the exceptions are made just at +those points where the law would with earnest effort be most easily +enforceable, and therefore where it has become most inconvenient. As +a result of these changes the state laws display a bewildering and +illogical variety. By constitutional interpretation, United States +notes and federal bonds are exempt from state and local taxation; +generally, by state law, building and loan association and +savings-bank loans are exempt as, in a majority of states, are state +and municipal bonds if held within the state. In at least eight +states, bonds of the state are exempt, but those of the municipalities +are taxable, while in a few states the reverse is the case. In several +states both kinds of bonds when issued after specified dates, are +exempt, but in Ohio state bonds are exempt only if issued prior to +1913. All but seven of the forty-eight states, however, attempt to tax +the resident holders of state and municipal bonds of other states; +but the exceptional states are those in which most of the investors +in this class of securities reside. In many cases private debts +receivable are allowed to be offset against debts payable. In some +states mortgages on real estate are exempted or (in Massachusetts) +treated as an interest in the real estate. Rarely mortgages are +exempted up to a certain amount (in Indiana, to $700, the purpose +being to tempt the borrower to reveal the name of the lender). +Sometimes a special mortgage registration tax, payable but once (in +New York 1/2 of 1 per cent) is levied, and otherwise mortgages +are free from taxation. Small as this rate is, the fiscal yield of +mortgage taxation under this plan exceeds that under the general +property tax. + +By the overlapping of these laws, so contradictory in principle, it +may happen that securities held by taxpayers residing in other states +than those of the issue are taxable two or three or more times; but +few if any loans of this kind are made except by those evading all +taxation. + +Sec. 5. #A consistent policy of wealth taxation.# These exceptions +still leave the law in its general principles as to the taxation of +intangible property illogical and unjust. A solution can be found only +by abandoning the ambiguous legal concept of property, and making use +of economic concepts. A consistent tax law might take either wealth +or capital as the basis of assessment, but not sometimes the one and +sometimes the other. Wealth is an impersonal basis of taxation; +each piece of wealth might be taxed once as a unit no matter how the +ownership were divided. Or the other alternative might be chosen. +Capital would be a personal basis of taxation; each person's capital +might be taxed no matter from what sources the incomes were derived +(the concrete wealth, of course, then being left untaxed). + +The wealth basis is much nearer to the present general property tax as +actually administered. The assessment of general tangible wealth +would undoubtedly be more easily done than would that of individual +capitals, and likewise be both easier and juster than the present +inconsistent policy. Tangible things are comparatively easy to find, +measure, and evaluate where they are, and if they are all taxed it is +evidently the same as if all the capital values based upon them were +taxed in the owners' hands. The various equitable claims of different +owners in one source of income could be left to adjust themselves +through shifting, mainly in the choice of investments, once the plan +had become generally applied. + +Sec. 6. #Needed reform of assessment.# The assessment of the present +general property tax is notoriously inefficient and unjust. The root +of most of the present evils (other than those above discussed) is the +method of local election of assessors, which usually is by townships, +but in some cases by counties. The local assessor's estimate of value +is used as a basis for taxation not only for his district but for the +larger units (county and state). Thus every local assessor is tempted +by the conflict of interests not only among the taxpayers in the +district which elects him, but by the conflict of interests between +his district as a whole and other districts. The lower the ratio of +assessment to true valuation in any township compared with that of the +other tax districts, the smaller the proportion of county and state +taxes that the people of the district have to pay. Willingness to +under-assess property often becomes thus the chief virtue of an +assessor in the eyes of his political constituents. This has led in +many cases to absurd underassessment, which boards of equalization +have proved powerless to remedy in any great measure. A sounder plan +would be general state assessment, with a permanent expert board of +commissioners employing a corps of state assessors under the merit +system of appointment. This plan has as yet been applied only to +assessment of railroads and some other public-service corporations. + +Sec. 7. #Separation of state and local taxation.# For the reason just +indicated the failure of the general property tax has been most +conspicuous where it is used as a basis for state taxation. This has +led some financial students to advocate the plan of separation of +state and local taxation. This means the assignment of certain sources +of revenue (such as corporations and the liquor business) primarily +or exclusively to the state, leaving all real estate and the general +property of non-corporate persons to be taxed by the counties and +minor divisions under the general property tax. The plan has been +increasingly applied in New York, until, in 1906, it became almost +complete. In 1910 the plan was adopted in California; and it is +largely used in New Jersey, Connecticut, Delaware, and Pennsylvania, +and to a small extent in some other states. An efficient state +assessment of general wealth would accomplish most of the advantages +claimed for this plan, while avoiding some of its dangers. + +Sec. 8. #Federal taxation of merchandise and acts in commerce.# Tariff +and internal revenue duties constitute the two chief revenues of the +federal government. Both of these are mainly taxes on wealth. Unlike +the general property taxes they are not levied upon the main body +of wealth held in possession, but almost entirely upon articles of +merchandise and upon acts in course of trade. Stamps on receipts, +checks, deeds, bills of sale, and licenses on the sale of liquor +and tobacco are taxes on business acts which are necessary to the +acquisition, use, or expenditure of wealth. Goods imported are taxed +at the time of entering the country; domestic products such as cigars, +spirituous or malt liquors, playing cards, and (at times) matches, pig +iron, and other products, are taxed usually at the time of exit from +the factory. It has already been shown that when the tariff duty +prevents the importation of foreign goods and by raising the price +encourages domestic manufacture of the article, there is virtually +taxation of the consumer to subsidize the private manufacturer. A +system of properly adjusted compensatory duties (tariffs and internal +duties combined) which would prevent tariff duties from having any +prohibitive effect whatever could, in a great country like ours, be +made to produce any revenues desired. Such a system, combined with the +federal income tax, seems destined to be the chief dependence for the +national government. + +Sec. 9. #Proposal of the single tax on land values.# Besides the general +property tax there are found in the country as a whole a large number +of special property taxes. Some of these have been introduced as +substitutes for the general property tax; such is the special taxation +(above referred to) of mortgages, and bonds. Other special property +taxes have been introduced because they were believed to be good in +themselves; such are special franchise taxes on corporations and some +kinds of taxes on land. + +The special taxation of land, or of land values, has been strongly +urged by Henry George and his followers since the publication of the +remarkable book "Progress and Poverty" in 1879. The doctrine there set +forth is that the state should "appropriate land rent by taxation," +should "tax land values, irrespective of improvements." It is +maintained that "a single tax" of this kind would be quite sufficient +for all the purposes of government. The main arguments adduced +for this plan may be reduced to three propositions: first, private +property in land is essentially unjust, because land is made by +nature, not by men; second, the plan would make assessment simple and +certain by limiting it to the unimproved land, and making unnecessary +the more difficult assessment both of tangible improvements and of +intangible personal property; and third, it would work a marvelous +reform in social conditions, abolishing poverty and greatly increasing +production. + +It is impossible within our limits of space to discuss this proposal +further than to indicate that: (1) It assumes an untenable theory of +property.[4] (2) It overlooks the difficulty of distinguishing the +value of the land "irrespective of improvements," from that of the +land as it actually is, a difficulty especially great in the case of +agricultural land.[5] The difficulty is present even in the case of +urban land when the improvements of filling, draining, and leveling +have become incorporated with the site.[6] (3) The plan ignores the +stimulus (motivating force) which private ownership has given and +still gives to the maintenance and fuller productive use of land. +Nowhere has production thriven where the state was the universal +landlord. + +Sec. 10. #Various reforms in land taxation.# While the single tax plan +is defective in principle, its wide discussion has served to direct +attention toward the need of reform in the taxation of land. Some +proposals looking toward this end are widely favored by opponents as +well as by advocates of the single tax. Such are the following: + +(a) The abandonment of the taxation of mortgages.[7] + +(b) A more correct assessment, in accordance with the present laws, +of lots and lands held for speculative purposes, which in practice are +now greatly under-assessed. + +(c) More adequate special franchise taxation upon corporations for +special privileges in the public highways. + +(d) Exemption, in value equal to the costs, of improvements on land, +such as buildings, drains, fences, and fertilizers, for a limited time +after they are made, perhaps five years. + +(e) The separate assessment of urban lands used as mere building sites +and of the buildings on them. + +(f) Taxation of the increase ("increment") of urban land values, +periodically or on the occasion of transfer of ownership. + +Sec. 11. #Difficulties in taxing corporations.#[8] Until near the second +quarter of the nineteenth century, business corporations (of which +there were few) were taxed just as was the general property of +individuals. This still continues to be the case in the main in most +of the states. The methods and machinery of assessment were (and still +are) essentially local and simple, and have proved to be inadequate +to reach or justly assess the larger and more complex corporate +enterprises when their equipment and business extend beyond town, then +county and, finally, state lines. Moreover, the corporate forms +of organization presented in complex and puzzling forms the dual +conception of property.[9] Here was the tangible wealth of the +corporation and there were the diffused rights of ownership, the +capital of individual stockholders and bondholders. Confused by this +ambiguity, the men of that time believed (as many still believe) that +there were here two separate and justly taxable funds of value. The +popular will declared (and still declares) that "all kinds of property +ought to bear their fair share of the burdens of taxation." Yet to +apply this principle would obviously be double taxation and result +in confiscation in many cases. Between this doubt and the practical +difficulty of assessment, it turned out that corporate wealth, far +from being doubly taxed, was largely escaping even its due single +burden. + +Sec. 12. #Special taxes on banks.# Attempts to deal with the difficulty +without clear perception of its cause took the form of legislative +tinkering and patching. Taxes were gathered from corporations by any +device that seemed workable. The banks, being the earlier important +corporations, were first experimented upon. Taxes on capital stock and +on circulation were tried first (in 1805, by Georgia), then a tax on +dividends (in 1814, in Pennsylvania, and in 1815 in Ohio), examples +which were followed or modified by a number of states. After the +national banking system was started in 1864, attempts to tax both the +capital of the banks and the stock in the hands of individuals led to +federal court decisions and then to state legislation by which now in +many of the states the banks are separately taxed on their real estate +and the shares are assessed to the individual holders (by various +rules), but the taxes deducted from dividends and paid by the bank. +There are, besides, special franchise taxes and fees paid by banks in +various states. + +Sec. 13. #Special taxes on insurance companies#. Insurance companies +present in a striking manner the complexities of the ambiguous +property concept. The assets of the insurance companies (we refer here +particularly to the reserve companies), which belong in equity to the +policy holders (less the claim of the stockholders in the case of +the stock companies), are nearly all invested in stocks and bonds of +corporations and in mortgages on real estate. Now under the general +property tax, strictly interpreted, the policies are assessable +at their surrender or reserve valuation in the hands of the policy +holders; secondly, the securities and credits which compose the assets +are assessable to the company; and, thirdly, the railroads, factories, +and houses, built with the outstanding loans made by the insurance +companies, are assessable as tangible wealth, to the owners. If such +an interpretation were practically enforced it would result in triple +taxation to be drawn from the same economic source, and would be +utterly prohibitive of the insurance business. The enforcement +has, however, been impossible in practice. Insurance companies +have comparatively little tangible wealth excepting real estate +for offices. This is taxed locally. Several methods have been tried +(beginning as early as 1824) to make insurance companies pay taxes +(usually for state purposes) on something besides tangible wealth. A +tax on receipts from premiums proved most workable, first as applied +to "foreign corporations" (that is, to those of other states) and +later, generally, to domestic companies also. Now, amid bewildering +variety and interstate rivalries in tax laws, the most usual rate is +two per cent on gross (in a few cases on net) premiums collected. The +taxes on premiums, with various licenses and fees, now amount to 2.15 +per cent of the total receipts from life insurance premiums in the +United States. This is taxation not on an existing body of accumulated +wealth, but upon the process of accumulation, a tax directly on the +act of saving. A consistent policy of wealth taxation combined with +income taxation would require the abandonment of the present forms of +special insurance taxes. + +Sec. 14. #Special taxes on transportation.# Another great group of +businesses whose taxation has been especially complex, because they +are distributed throughout different taxing districts, are agencies of +transportation and communication, especially railroad, sleeping car, +express, telegraph, and telephone companies. A state tax on railroad +tonnage (Pennsylvania, 1860) was declared unconstitutional by the +United States Supreme Court. But many other plans have been tried +to compel the railroads to contribute, the chief being by taxes on +dividends, gross earnings, equipment, and valuation of capital stock, +taxed either to the company or to the stock-holders, (Connecticut +since 1849). About a third of the states no longer make the physical +plant the basis of taxation, except that in most of them some part or +kinds of real estate are taxed locally.[10] + +Telegraph companies are still locally assessed in most states, but in +over a third of the states are taxed either on gross receipts, or +on mileage of wire. Telephone companies are similarly taxed, but +sometimes on the number of transmitters, or of subscribers, or on each +plant, or otherwise. In a similar manner, express and sleeping car +companies are taxed, in the same group of states, on mileage, or on +capital stock proportional to mileage, or by license and privilege +taxes. + +In the case of these corporations, and also of various other +miscellaneous kinds of companies, no clear-cut principles serve to +guide. The result is "a chaos in practice--a complete absence of +principle."[11] + +Sec. 15. #Alternative policies as to corporate taxation.# If the taxation +of corporations is not to continue to be treated in a mere hit-or-miss +manner, with every possible kind of inconsistency among the various +states, some general principles must be recognized and some clear +policy be formulated. But there is no general agreement to-day among +jurists and economists upon a definite and consistent plan in this +matter. + +Two alternative policies appear. The first is to make the scheme for +taxing corporations quite different in principle and plan from +that for taxing natural persons. The assumption in this is that the +"general property tax" is an irremediable failure, and is particularly +inapplicable to corporations. This plan goes along with the separation +of state and local taxation.[12] An unfortunate result of this is to +relieve the great mass of taxpayers of the state from, any apparent +and measurable part of the tax burden for state purposes and thus to +separate responsibility and power in state government. This policy +nevertheless is favored by some of the leading authorities on finance. + +The other policy is to tax the wealth and business of corporations +(excepting those enjoying special privileges) in essentially the +same way as other wealth and business. The improvement of corporate +taxation would thus be but a part of the transformation of the +"general property tax" into a general tax on tangible wealth.[13] +If first there is recognized the error of assessing the equitable +ownership interests in addition to the body of wealth, and secondly +there is created an efficient agency of assessment, the taxation of +corporations can be logically and easily brought into accord with a +harmonious system of state and local taxation.[14] + +Sec. 16. #General plan for corporate taxation.# The main features in such +a plan of reform would be as follows: + +(a) Assessment of all wealth by a state agency, with expert nonlocal +assessors, appointed and serving only under the merit system. + +(b) The assessment of the value of each enterprise and body of wealth +as a unit for the whole state, and apportioned to the minor divisions +as the basis for levying local taxes. + +(c) Apportionment of the total value in the state among the localities +by general rule, in the case of transportation and transmission +companies, by mileage with due regard to the presence of local real +estate and of special industrial equipment such as repair shops and +power plants. + +(d) Taxation of interstate enterprises only in due proportion to the +whole business, by mileage or other rules; inter-state comity to be +further developed in this matter. + +(e) Account to be taken, in assessment, of various factors determining +the earning power, such as good will, patents, and other monopolistic +elements, pertaining to and helping to determine the value of the +tangible plant of the enterprise. + +(f) Account to be taken of the market value of securities and notes +owned by a corporation, in determining the taxable value of the whole +business, but these not to be treated as a separately assessable +"property" (in addition to the tangible plant). + +(g) Exemption of the holders of securities and evidences of +indebtedness of corporations.{15} + +(h) Treatment of special privileges granted to public-service +corporations for the use of streets and public highways on the +principle of rent-payment to the community rather than by levying a +percentage on an assessment. + + +[Footnote 1: For example, the constitution of Alabama declares: "All +taxes levied on property in this state shall be assessed in exact +proportion to the value of such property," etc. And the constitution +of Indiana declares: "The general assembly shall provide, by law, for +a uniform and equal rate of assessment and taxation of all property, +both real and personal, excepting," etc. Similar statements occur in +most state constitutions.] + +[Footnote 2: The general property tax in the United States +constitutes: + + Of the revenue receipts of the states 38 per cent. + Of the revenue receipts of the counties 76 per cent. + Of the revenue receipts of the incorporated places. 60 per cent. + +The total amount collected in this way in 1913 was over +$1,083,000,000.] + +[Footnote 3: See above, ch. 2, secs. 2, 3, and reference there to Vol. +I.] + +[Footnote 4: See above, ch. 2.] + +[Footnote 5: See Vol. I, pp. 116, 117, 145, 445-455.] + +[Footnote 6: See Vol. I, pp. 117, 146, 453.] + +[Footnote 7: See above, sec. 4.] + +[Footnote 8: No reference is made in what follows to fees payable but +once for the incorporation of new companies or at times of increasing +the capital stock of an old one, variously called taxes on corporate +charters, license taxes, incorporation fees, organization fees, and +charter fees.] + +[Footnote 9: See above, sec. 3.] + +[Footnote 10: E.R.A. Seligman, "Essays on Taxation" (1895), p. 156.] + +[Footnote 11: Seligman, op. cit. p. 136.] + +[Footnote 12: See above, sec. 7.] + +[Footnote 13: See above, sec. 5.] + +[Footnote 14: The assessment feature of this proposal is exemplified +more nearly than anywhere else, tho still imperfectly, in the "Indiana +plan," in which, however, the true concept of property is recognized +only in so far as the shares of corporations of which all the wealth +is taxed are not assessed to the shareholders.] + +[Footnote 15. This need not prevent a supplementary system of +graduated taxation on incomes. See below, ch. 18, sec. 10.] + + + + +CHAPTER 18 + +PERSONAL TAXES + + Sec. 1. Inheritance tax laws. Sec. 2. Fiscal importance of inheritance taxes. + Sec. 3. Income taxes; general nature. Sec.4. Income taxation by the states. + Sec. 5. History of federal income taxation. Sec. 6. Events leading up to the + law of 1913. Sec. 7. Main features of the law. Sec. 8. Exemptions and + stoppage at source. Sec. 9. The graduation principle. Sec. 10. A system of + taxation. + + +Sec. 1. #Inheritance tax laws.# There remain to be considered at least +two important forms of taxation that are essentially _personal_ in +their unit of assessment, in contrast with the foregoing which are (or +should be, if consistent) essentially _impersonal_[1] These are the +inheritance and the income taxes. + +Until 1916 little use had been made of inheritance taxation for +federal purposes. In that year, however. Congress passed a law which +was expected to obtain about $20,000,000 a year from inheritances. + +Forty-one states in America have inheritance tax laws (in 1915) +which apply generally to property passing either by will or under the +intestate laws of the state. The tax is for state purposes. These laws +differ in many ways, but are nearly all alike in certain respects: + +(1) In applying to the separate legacies rather than to the estate as +a whole.[2] + +(2) In taxing legacies to relatives in the direct line at a lower +rate (or even exempting them entirely) than those to collateral +relatives.[3] + +(3) In exempting legacies below a certain amount.[4] + +(4) In having rates progressing with the size of the legacy; (this +feature is less general, but is prominent in most of the later laws). + +Sec. 2. #Fiscal importance of inheritance taxes.# The fiscal importance +of inheritance taxes has been comparatively not very great (except in +New York State), but it has rapidly grown. In 1903 the receipts from +this source (in 27 states) were over $7,000,000; in 1913 they were (in +35 states) $26,000,000. The spread of inheritance taxes and the higher +and progressive rates applied are an expression in part of the need +of additional revenues and in part of the growing popular concern +regarding the concentration of wealth. Yet the actual legislation is +something of a compromise between fiscal policy (to get revenues) and +social policy (to reduce or to distribute the larger fortunes).[5] In +New York legacies of over $1,000,000 are now taxable at 4 per cent +to relatives in the direct line and to all others at 8 per cent. In +Washington the tax to relatives in the direct line is but 1 per +cent, but to others it may go as high as 12 per cent on legacies over +$100,000. In Wisconsin, somewhat similarly, the tax may rise to 15 per +cent on the excess above $500,000. + +Sec. 3. #Income taxes; general nature.# All taxes, whether assessed upon +the capital value of goods or not, come out of (reduce) the incomes +now or later available for individuals. But there are various ways +of attacking incomes, i.e., of apportioning the tax burden. Income +taxation is that form in which the basis of the assessment and levy +is the income of the taxpayer as it arises (not accumulated wealth, +or capital, or business processes, or expenditures). Of the various +conceptions of income[6] the one mainly employed in income taxation +is monetary income arising in the course of business, supplemented +occasionally (but not consistently) by some items of material income +that are expected to come to the person. There is not in the long run +such a contrast between wealth taxation and income taxation in their +ultimate burden and effect as is usually supposed. + +Indeed wealth (or capital) taxation as applied to accumulated wealth +is more far-reaching than income taxation, for it falls upon the +present worth alike of monetary and of psychic incomes (e.g., the +value of a house whether it is let to a tenant or occupied by the +owner). But, on the other hand, income taxation attacks directly the +monetary incomes from labor, coming as wages, salaries, fees, and +profits in business. This feature goes naturally with the fact that +the income tax is essentially a personal tax, grouping the items of +assessment about a person, whereas the "property" taxes are mainly +(tho not consistently) impersonal, making the piece of wealth the +primary object of assessment. This summation of each person's income +makes income taxation peculiarly suitable for progressive taxation +with the social-welfare motive of equalizing the distribution of +wealth. It is doubtless this technical assessment feature, rather than +any essential advantage as a mode of taxation, that has led to its +recent growth in popular favor. + +Sec. 4. #Income taxation by the states#. Income taxes have been used +widely in European countries, but not so much in the United States. +Numerous attempts have been made by the states to tax incomes, but +with small results. Personal incomes, when sought by local assessors, +proved to be most elusive. There are (in 1913) but seven states with +anything resembling a personal income tax.[7] These are Virginia, +North Carolina, South Carolina, Mississippi, Oklahoma, Massachusetts, +and Wisconsin. Of these states Wisconsin has the most recent law, and +one the widest in its application and the most important fiscally. The +law applies a progressive rate to all incomes (with exemption of +$700 from wages and salaries) and contains elaborate provisions for +corporate taxation. The proceeds are distributed 10 per cent to the +state, 20 per cent to the county, and 70 per cent to the municipality +in which the tax is collected. In the six other states the tax is on +incomes only exceeding a certain amount (North Carolina, $1000, the +other states from $2000 to $3500 exemption); some apply to incomes +from any source but others do not apply to incomes from property +otherwise taxed. The total receipts from these state income taxes in +1913 were but $314,000. + +Sec. 5. #History of federal income taxation.# The income tax seems +destined to play a more important part in the fiscal system of the +federal government. Until 1913, however, its part had been small. It +began to be used under the law of 1867 (when the law passed in 1861 +was replaced before it went into effect). This was repeatedly amended +and finally repealed in 1870, to continue in force until the year +1872. The rate was 3 per cent on the excess of incomes over $600, and +5 per cent on the excess over $10,000. This law was repeatedly +upheld by the United States Supreme Court as not in conflict with +the Constitution. Its fiscal results were not large, as it was never +effectively administered. + +The next income tax law was that of 1894, enacted in connection with +the tariff revision of that year. It was declared unconstitutional +before it had gone into effect. The main ground for the decision was +that a tax on incomes from rent of land as well as on incomes from +personal property is direct, and must therefore be apportioned among +the states according to population. + +In the active discussion of social legislation in the years following +this decision public sentiment developed favoring a renewed attempt to +get such legislation by amending the Constitution. This was shown by +the remarkable fact that a bill for the sixteenth amendment to +the Constitution was passed unanimously by the Senate, and almost +unanimously by the House. It was ratified by three-fourths of the +states and became a law in 1913.[8] + +Sec. 6. #Events leading up to the law of 1913.# Meantime, in 1909 and +excise tax law had been passed, applying to corporations in a manner +not open to the objections found by the Supreme Court to the law of +1894. The Democratic party, which had passed the law of 1894, was +pledged to the passage of an income tax law when it came into power +again in 1913. The reduction of the tariff, as well as growing +expenditures, moreover, made necessary the development of new sources +of revenue for the national government. In other countries the income +tax had been found to be a part of a system of taxation especially +valuable as "a balance wheel" to equalize the revenues and +expenditures. It was deemed by some to be an additional advantage of +an income tax that it would make the richer citizens better realize +the nature and burden of public expenditure. Most other federal +revenues, being derived from the tariff and from taxes on merchandise, +are borne mainly by the purchasers and consumers. + +An income tax was opposed as sectional taxation by many in the Eastern +states where the owners of most of the larger fortunes reside. But to +this Senator Elihu Root replied that the states where there was +the greatest ownership of wealth pay the largest taxation under any +scheme, and ought to. + +Sec. 7. #Main features of the law.# The law as enacted[9] imposes (a) +a "normal" tax of 1 per cent on the entire net income of every +corporation (engaged in business for profit); + +(b) a "normal" tax of 1 per cent on the excess above $3000 of every +unmarried individual's income (or $4000 for husband and wife, as +indicated in the next section); (c) an "additional tax" (often called +a super-tax) ranging from 1 to 6 per cent on individual incomes of +larger amounts than $20,000. There are thus eight classes of persons, +those entirely exempt, those paying only at the normal tax rate, and +six different classes paying a super-tax.[10] + +A person with an income of $1,000,000 thus pays $60,020, this being +the amount indicated, $25,020 for the first half million plus 7 per +cent on the second half million. + +Sec. 8. #Exemptions and stoppage at source#. There are various +exemptions, the first being that of $3000 on every individual income +and of $4000 on the aggregate income of husband and wife living +together.[11] Among other exceptions are sums paid for taxes (except +assessments for local benefits), necessary business expenses, losses +sustained, and (for the normal tax only) those parts of individual +incomes derived from corporations which have paid the tax on them. + +The difficulty of getting an honest and complete assessment of incomes +is great. All taxation is deemed by the taxpayer to be "inquisitorial" +in some degree, and this is particularly true of an income tax. In +England had been developed the plan called "stoppage at source." In +our law the taxation of corporations at the rate of the normal tax, +while requiring them to report the names of those receiving dividends +and interest payments, affords an ingenious way of checking up the +returns of individuals in respect to a class of investments which is +steadily increasing in importance. + +Sec. 9. #The graduation principle#. The most disputed feature of the +income tax is the principle of graduation, or of progression. It is +upheld in part because in this case it but offsets _regression_, that +is relatively heavier taxation on the smaller incomes, in the case of +the other kinds of taxes (tariff, property taxes, etc.). It is urged +further that those of larger incomes, especially the largest, have +marked advantages over others in making investments. Further it is +urged that the higher the income the less does a certain rate cut into +"the amount necessary for good living" (as was said in Congressional +debate). This is in accord with the psychological principles of +choice, of value, and of diminishing gratification. Finally, there is +a widespread approval of the progressive rate just because it in so +far acts as a leveling influence upon fortunes. The "additional" tax +is already important fiscally, yielding over one-half of the total +paid by individuals and one-fourth of the total from corporations and +individuals. + +The income tax returns for the first ten months of the law (March to +December, 1913) showed 356,598 taxable individual incomes, equal to +about 1 per cent of the taxable population (considering minors to be +usually not taxable). Even this proportion, small as it is, is much +larger than that of the European countries having a general income +tax. + +The first ten months' yield (March 1, 1913, to December 31, 1913) was +over $60,000,000. A remarkable fact is that 21 per cent of all taxable +incomes (not persons) were in the single Borough of Manhattan (the +main part of New York City). The receipts from the income tax in +1913 were nearly 10 per cent of the ordinary receipts of the federal +government, and about 2 per cent of total revenue receipts of all +branches of government, the income taxes paid by individuals being +about 1 per cent of the same total, and the super-tax about 1/2 per +cent of the same. + +The receipts from the income tax during the fiscal year ending +June 30, 1915, were $80,000,000, of which $39,000,000 was paid by +corporations and $41,000,000 by individuals. Of the latter sum, over +$24,000,000 was from the super-tax. + +Sec. 10. #A system of taxation.# The task of reforming and developing the +various kinds of taxes and of uniting them into a just and consistent +plan for each of the divisions of government in the United States is +a vast and difficult one. There are many conflicting interests among +states, between states and nation, among the various minor political +divisions, and among individuals and classes. There are also +conflicting opinions regarding many features of the possible practical +plans. Because of these it is safe to predict that progress will not +be made quickly, steadily, nor always directed toward a clear ideal. +If progress is to be rapid, the public must, however, have consistent +principles by which its steps may be guided. In the foregoing kinds of +taxation are the various elements which may be united into a system of +taxation. It is useful to consider how this might be done. + +At the basis of the whole tax structure is taxation, by value, of +concrete wealth at the place where it is situated (_in situ_). This +should be regardless of the distribution of ownership or of the +residence of the owner. The present misnamed "general property tax" +already presents the main outlines of this form of taxation and the +general changes necessary in law and method of assessment have been +indicated above.[12] Corporation taxation may be adjusted to this +either by separate treatment and assignment to state purposes only, +or more simply for most states, by assimilating it with the general +taxation of wealth and allotting due shares of the proceeds to the +various taxing divisions.[13] The national government can, because of +its exclusive power of levying tariff duties and also because of +its exclusive control over interstate commerce, reach the tax-paying +ability of the nation effectively by a combination of tariff and +internal revenue taxes. These become a part of business costs, and are +diffused over the whole population in general prices.[14] + +This system of impersonal wealth taxation may then be supplemented by +personal taxation, applied through inheritance and income taxes. These +forms of taxation extend over and reach many of the same persons and +incomes as do ultimately the impersonal taxes. But the summation +of personal incomes gives the necessary condition for applying the +principle of progression so far as this is, by public opinion, deemed +desirable either for fiscal or for social reasons. + + +[Footnote 1: See above, ch.17, sec. 3, note, and sec. 5, on this +distinction. The poll tax also is personal: see ch. 16, sec. 9.] + +[Footnote 2: In Utah the tax is 5 per cent on all estates over +$10,000.] + +[Footnote 3. Exception, Utah.] + +[Footnote 4: Exceptions are Missouri, New Hampshire, Vermont, +Virginia.] + +[Footnote 5: It would be more consistent with the purpose of +equalizing fortunes to vary the rate not according to the size of the +legacy but according to the size of the fortune which the legatee has, +or would have, after receiving the legacy.] + +[Footnote 6: See Vol. I, p. 26.] + +[Footnote 7: In addition, certain items of receipts of companies +or incomes of individuals are arbitrarily defined as property for +purposes of taxation in a few cases in about fifteen other states. See +Wealth, Debt, and Taxation, Report of the Bureau of the Census, 1907, +p. 622.] + +[Footnote 8: Article XVI. The Congress shall have power to lay and +collect taxes on incomes, from whatever source derived, without +apportionment among the several states, and without regard to any +census enumeration.] + +[Footnote 9: It constitutes sec. 2 of the tariff act of 1913 entitled +"An act to reduce tariff duties and to provide revenue for the +government and for other purposes."] + +[Footnote 10: This may be seen in the following table: + Normal Rate on excess Total + tax on in next class tax on + lower Nor- Addi- upper Total rate + limit mal tional limit per cent + Under $3,000 0 0 0 0 0.00 to 0.00 + $3,000-$20,000 0 1 0 170 0.00 to 0.85 + $20,000-$50,000 170 1 1 770 0.85 to 1.54 + $50,000-$75,000 770 1 2 1,520 1.54 to 2.02 + $75,000-$100,000 1,520 1 3 2,520 2.02 to 2.52 + $100,000-$250,000 2,520 1 4 10,020 2.52 to 4.00 + $250,000-$500,000 10,020 1 5 25,020 4.00 to 5.00 + In excess of $500,00 25,020 1 6 upwards 5.00 to 7.00 + +By legislation in the summer of 1916, after the foregoing was in type, +the "normal" rate was doubled and the additional rates were raised.] + +[Footnote 11: The exemption is $3000 for each if they are not living +together. Thus the law offers a reward of $20 to make marriage a +failure.] + +[Footnote 12: See above, ch. 17, sec. 5.] + +[Footnote 13: See above, ch. 17, secs. 15, 16.] + +[Footnote 14: See above, ch. 15, sec. 14, first paragraph.] + + + + +PART V + + +PROBLEMS OF THE WAGE SYSTEM + + + + +CHAPTER 19 + +METHODS OF INDUSTRIAL REMUNERATION + + Sec. 1. Workers subordinate in early societies. Sec. 2. Workers in the Middle + Ages. Sec. 3. Growth of the wage system. Sec. 4. Practicability of the + wage system. Sec. 5. Time work. Sec. 6. Task work. Sec. 7. Piece work. + Sec. 8. Premium plans. Sec. 9. Aim of profit-sharing. Sec. 10. Examples of + profit-sharing. Sec. 11. Difficulties in profit-sharing. Sec. 12. Defective + theory of profit-sharing. Sec. 13. Purpose of producers' cooeperation. + Sec. 14. Limited success of the plan. Sec. 15. Its main difficulty. + + +Sec. 1. #Workers subordinate in early societies#. As far back as the +history of settled and populous communities can be traced, the masses +of workers have been subordinate. Civilization began with direction, +with obedience to superiors on the part of the mass of men. Even in +the rudest tribes, the women and children were subject to the will of +the stronger, the head of the family. Among the Aryan races the family +system was widened, and the patriarch of the tribe secured personal +obedience and economic services from all members of the community. +Chattel slavery, the typical form of industrial organization in early +tropical civilization, seems to have been one of the necessary steps +to progress from rude conditions; students to-day incline to view it +as an essential stage in the history of the race. But as conditions +changed with industrial development, chattel slavery became an +inefficient form of industrial organization and a hindrance to +progress. + +Sec. 2. #Workers in the Middle Ages#. Serfdom for rural labor and many +limitations on the workman's freedom in the towns were the prevailing +conditions in medieval Europe. Serfdom was both a political and an +economic relation. The self was bound to the soil; the lord could +command and control him; but the serf's obligations were pretty +well defined. He had to give services, but in return for them he got +something definite in the form of protection and the use of land. +Between the lord and the serf there continued an implied contract, +which passed by inheritance from father to son, in the case both of +the master and of the serf. In the towns conditions were better for +the free master class of the artisans who owned their tools and often +a little shop where they both made and sold their products. But the +mass of the workers, shut out from special privileges, bore a heavy +burden. There were strict rules of apprenticeship; gild regulations +forbidding the free choice of a trade or a residence; laws against +migration into the town; settlement laws making it impossible for +poor men to remove from one place to another; arbitrary regulation of +wages, either by the gilds in the towns or by national councils and +parliaments, forbidding the workmen to take the competitive wages +that economic conditions would have forced the employers to pay; +combination laws forbidding laborers to combine in their own interest. +These conditions prevailed even in the periods and in the countries +often referred to as particularly favorable for the working classes +(such as England in the fifteenth century). + +Sec. 3. #Growth of the wage system#. Throughout the Middle Ages these +conditions were gradually changing, and the changes were hastened +by the discovery of America, by the social unrest accompanying the +Reformation, and by other forces. Servile dues in the rural districts +were, by the sixteenth century, commuted for cash payments in England +and had begun to disappear in the other Western countries of Europe. +The agricultural work was done partly by the peasant landowners, +partly by yeomen farmers on their own land, and partly by laborers +hired by landowners or by tenant farmers (enterprisers with some +capital for equipment). The growth of commerce and of the mechanical +trades in the towns required larger ships, factories, and shops, +and increasing investments. This required in the towns an increasing +proportion of hired laborers having little or no capital invested +in industry, and living on wages. This change went on more and more +rapidly with the introduction of machinery in the eighteenth and +nineteenth centuries, and "the wage system" grew steadily to be a more +and more important part of the whole economic structure.[1] + +Sec. 4. #Practicability of the wage system#. This change has brought with +it grave problems of social organization and social welfare, which it +is not the place here to discuss. But whatever be the difficulties of +the wage system it has certain practical merits of workableness which +account for its progress and dominance.[2] The larger the market and +the longer the waiting period in industry, the greater the element of +uncertainty and financial risk. Under the wage contract the employer, +as the one best prepared to do it, takes the risk as to the future +selling price of the product; the worker gets in a definite sum at +once the market value of his services. Wage payment, therefore, is +a form of insurance to the workingman; he gets something definite +instead of taking chances he is ill prepared to take. Wage payment is +a form of credit to the laborer whose labor is applied to producing +the goods for customers distant in time and in place. The employer +advances to the workman the present value of the future sale, +discounting it at the prevailing rate of interest. + +Wage payment implies a contract by which the employee on his part +agrees to render service and the employer on his part agrees to pay +for it. The methods of determining and measuring the amount of service +of the employee are called "methods of industrial remuneration." The +many varieties may be grouped in two classes: time payment and piece +payment, corresponding with the two modes of measuring labor, time +work and piece work. + +Sec. 5. #Time work.# Time work came first and was long almost the only +method. In time work the employee is paid by the hour, day, week, +month, or year, as the case may be. This is very satisfactory for +small enterprises, where the master works with his own hands alongside +of the employee, overseeing him, teaching him, and stimulating him by +his own presence and example of industry. This method prevails still +in nearly all farming work, in many kinds of manufacturing, in most +transportation, in clerical positions in trade, and in general where +the employee must perform a variety of tasks. + +Considering a brief period, it might seem that in time work the worker +is paid by time regardless of his effort or performance. However, +in every industry there is a recognized, fairly definite standard of +accomplishment for those getting the regular market rates of wages, +so that the time-standard implies some performance- or piece-standard +also. But this is judged by the employer only in a general way, and +very commonly men of different degrees of efficiency continue for +some time to receive the same money wage. Still, where any differences +become noticeable to the employer in quantity of work, quality of +work, or personal qualities of honesty, reliability, and good temper, +the better workman is likely to obtain a better position, higher pay, +more regular employment, or some other form of reward. The employer is +more likely at the end of any period of employment, to discharge the +man who falls short either in quantity or quality of work, and to +retain and advance the better worker. The method of time-payment does +not directly tempt the workman to slight the quality of his work by +haste. It does not keep constantly before the worker the thought of +his own interest in rapid work, often with an accompanying nervous and +mental strain. In most occupations, therefore, the workers prefer time +work. It does not take exclusive account of the quantity of material +product, but leaves place for estimating various personal qualities of +the employee which are of value in a business. + +Sec. 6. #Task work#. There are thus both advantages and disadvantages +in time work, and their relative importance varies in different +industries and industrial conditions. Especially is the difficulty +of supervising workers and of ensuring the performance of a certain +standard, or minimum, amount and quality of work great in larger +enterprises. Various methods of measuring the performance of the +worker directly by some other than the time-standards have been +developed. All of these, in a general way, involve the piece work +principle. + +Task work is nominally time work, with a penalty if a certain amount +of product is not turned out within a given period. The agreement may +be that if the specified task is not done within the regular time, +it must be completed in overtime without additional pay. This is also +called "doing a stint." This method has been extensively used in +the ready-made clothing business in America, and is to some extent +involved in many cases of wage payment in manufacturing. + +Sec. 7. #Piece work.# Piece work of the simpler, or ordinary kind, is +that where the payment varies just according to the amount of the +product, by some physical measurement, as yards of cloth woven, number +of pieces turned on a lathe, or amount of type set by a printer. +Usually careful inspection by some agent of the employer serves to +keep the quality up to a certain standard. The rejected pieces are not +paid for, and sometimes also the workmen are required to pay for the +materials wasted by their poor work. Piece payment is convenient for +home work, such as that of rural peasants weaving cloth for commission +merchants or as that of tenement workers in cities. It is also +employed very widely in the larger factories in textile and mechanical +industries. Selling on commission is a form of piece work. + +In piece work the motive to activity is ever present to the worker, +and almost always the worker turns out a larger product when paid by +the piece than when paid by time. The employer benefits by the more +efficient use of his machinery and equipment even when the price per +piece is not reduced with the larger output per worker. The worker's +earnings may increase rapidly under this plan, but as the manual +dexterity acquired is usually of a very special kind which can be used +only on one particular machine, the worker has little opportunity to +resist a cut in his wages. For this reason and because of the undue +strain upon the worker that often occurs, piece work is in many trades +not favored by the workers.[3] + +Sec. 8. #Premium plans.# Various modifications of piece work have been +developed of late, all involving the features of a minimum task and +of a premium for performance beyond that point. These plans are called +"premium plans," "progressive wage systems," and "gain sharing." One +of the first of these, Halsey's premium plan, fixes a standard time +for a job and if the worker falls short of, or merely attains to, +that standard he gets the regular pay; but if he takes less than the +standard time he receives a fixed premium per hour for the time saved. +For example, if the standard time is 10 hours for a $3.00 job and the +premium for speed is ten cents per hour, the worker would receive 20 +cents premium if he did the work in 8 hours ($2.40 +.20, total $2.60), +and 50 cents premium if he did it in 5 hours ($1.50 + 50, total +$2.00). His average wage per hour thus rises as his speed increases; +it becomes 32.5 cents per hour when the job is done in 8 hours, and 40 +cents per hour when the job is done in 5 hours. The reduction of cost +per job to the employer evidently would be 40 cents in the first case, +and $1.00 in the second. This is Halsey's plan, by which the worker +gets one-third and the employer two-thirds of the time saved. + +The same plan has been applied (Weir's method) with a premium that +equally divides between the workman and the employer the time saved. +By Rowan's method the premium is not a fixed sum but a percentage of +the standard rate per hour equal to the percentage of reduction in +time consumed. For example, if in the foregoing example the time were +reduced 20 per cent (to 8 hours) the premium would be 20 per cent of +30 cents, and the workman would receive 36 cents per hour. By this +plan the premium becomes less for the later reductions than in either +of the other plans. The utmost possible wages would be double the +standard rate. + +A number of other variations have been worked out by the promoters of +recent scientific management, and are known as Taylor's, Gantt's, +and Emerson's plans. The authors of all these plans agree as to +the importance of fixing the standard rate so that it will leave a +possibility of considerable improvement with unusual effort, and of +leaving the standard rate and premium unchanged as long as no new +process or new machinery is introduced into the business. If this is +not done the employees lose faith in the plan and refuse to make the +necessary effort to earn the premium. Most of these plans of +payment recently have been connected with experiments and studies in +scientific management to reduce the time and increase the ease of the +operations. + +In a variety of ways a bonus or a premium may be paid for quality, or +for economy in the use of materials (as to a fireman for using less +coal), or for various other results. Every business has its peculiar +conditions, which make certain results especially desirable, and +certain methods of reward practicable. In some industries, for +example, the various plans of piece work and of premium payment are +applied to groups of workers (as in collective piece work), the total +payment being then divided among the members of the group in some +agreed proportion. + +Sec. 9. #Aim of profit-sharing.# Profit-sharing is rewarding the laborer +with a share of the profits in addition to his usual contract wages. +Payments by the piece and premiums for output are solely dependent on +the efforts of the particular workman (or collective group), but +in the plan of profit-sharing a premium is given in addition to the +regular wage if, at the end of the year, the business as a whole has +yielded a profit above a certain amount. Profit-sharing is not merely +a gift; it is done usually in accordance with a definite promise in +advance. The employer adopting the plan does not intend to lose by it. +His purpose is to stimulate the industry of the workers, thus reducing +waste and cost of labor and supervision, and thereby increasing +profits. He offers to divide with the workman the additional profits +which are expected to result from their efforts. There is, in every +factory, greater or less waste of materials, destruction of tools, and +loss of time, that no rules or penalties can prevent. If the worker +can be made to take a strong enough personal interest he will use care +when the eye of the foreman is not upon him. The product also can +be slightly increased in many ways by the workman's exertions or +suggestions. In some cases the quality of the work cannot be insured +by the closest inspection as well as it can be by a small degree +of personal interest. Either responsibility for the fault cannot +be fixed, or the defect is one not measurable by any easily applied +standard. Strikes may be averted, good feeling promoted, and +contentment furthered if the interest of the worker can be made to +approach, and in large measure to become in harmony with, that of the +employer. The economic result of the plan, if it can be made to work, +should be to reduce the costs of these establishments below what +they are. The crucial question is whether profit-sharing alone in any +particular case will insure that the costs will be less than those of +competitors, thus giving a source out of which an increased amount, +really a wage, can be paid to the laborer. For the amount of profits +is affected not only by the amount of output, but also by a number of +other things that are quite outside the control of the workmen. + +Sec. 10. #Examples of profit-sharing.# The profit-sharing plan seems +first to have been successfully tried in Paris, in 1842, by Leclaire, +a house-painter. In house-painting there is often a great waste +of materials and time by men working singly or in small groups in +different parts of the city. By this new method Leclaire enlisted the +aid of the workmen, reduced the costs, and increased the profits. It +is a remarkable fact that the plan has been continued successfully by +the same firm to the present time. It has been tried in many hundreds, +possibly thousands, of cases, and is operating in some form or another +in more than a hundred firms in Europe and America. The most notable +examples of profit-sharing in the United States are the Pillsbury +Mills in Minneapolis, Procter and Gamble's soap-factories, in +Ivorydale, Ohio, the Nelson Mfg. Co., in Leclaire, Ill., and the Ford +Automobile Works, in Detroit. In some cases both manufacturer and +workmen value the system highly. It probably has its greatest success +when applied in prosperous establishments where profits are regular +and large, and where a steady working force is especially desired. +The proportion of business done in this way is not large. One hundred +firms is a very small fraction of 1 per cent of the total number of +firms in Germany, France, England, and America. A still more important +fact is that true profit-sharing has spread little since 1890, tho +various practices have developed under that name. The most noteworthy +of these is the selling of stock, usually at a somewhat lower price, +to the employees of a corporation so that, as stockholders, they may +have a motive to work for the success of the company (e.g., the United +States Steel Corporation). This method as applied to a select few +of the employees, who are advanced to official positions in a +corporation, is very widely adopted. + +Sec. 11. #Difficulties in profit-sharing.# It seems at first difficult to +explain this comparative failure of a plan that looks so attractive +in spirit and of which so much was hoped. Yet objections come from +the side both of the workman and of the employer. The workman lacks +knowledge of the business and is suspicious of the bookkeeping. If +at the end of the year the books show no profits, the workman loses +confidence, considers the plan to be mere deception, and rejects +it. The working of the plan remains in the employer's hands, and the +workman really is not a partner in the business. Moreover, the plan +puts a limitation upon the workman's freedom to compete for better +wages by changing his place of work. It is indispensable to make +length of service in some degree a condition to the sharing of +profits. Workmen, coming and going, cannot be allowed to share; the +percentage given to the others increases with length of employment. +Whenever men are thus practically subject to a fine (equal to the +amount of shared profits) if they accept a better position, there is +danger of a covert lowering of wages. The plan tends to break up the +trade-unions, which is one of the reasons that the employers like it, +and is the main reason that organized labor opposes it. + +The employer on his part objects to the interference with his +management, the troublesome inspection of the books, and the constant +complaints of the workmen. He dislikes to have the profits known; if +they are large, the advertisement of success invites competition; if +they are small, publicity may injure credit and depress the value of +the enterprise. In view of all these difficulties it is not surprising +that while the plan often starts promisingly, it usually fails after a +short trial. Business methods are severely subject to the principle of +the survival of the fittest. Through competition and the survival +of the firms that adopt improvements, better methods must eventually +supplant poorer ones. If a method fails to spread when it has been +tried for seventy-five years and all are free to adopt it, the strong +probability is that it has serious defects inherent in it. + +Sec. 12. #Defective theory of profit-sharing.# It is usually better +to make wages depend on the worker's efficiency rather than on the +profits of the whole business. The strongest motive to efficiency is +present when reward is connected immediately and directly with effort, +not with some result only slightly under the worker's control. Any +change in the amount of profits is only partially and indirectly +related to increased effort of the worker. The "profits" may be +nothing, tho all the manual workers may be exerting themselves to the +utmost. The wage bill is but one of the groups of costs. Profits are +the net result of many influences. Chief among these is the skill in +planning and conducting the business. This function of management is +either performed by the same person that is carrying the financial +risk, or by some salaried employee selected by him. It is this +management function the reward of which should, in theory, be made +to vary with the amount of profits; and in fact such an arrangement +(managerial profit-sharing, so to speak) is undoubtedly in operation +in thousands of cases, but is not included in the usual conception of +profit-sharing. Many salaried managers are in receipt of a share of +profits and are gradually acquiring an interest in partnerships or a +larger share of ownership in the enterprise for which they work. But +ordinary profit-sharing is not in accord with the general trend +toward the centralization of responsibility in the hands of competent +managers, ensuring to the worker a definite amount in advance, as +high as conditions make possible. The system of premiums, or bonus +payments, for output, where it can be safeguarded against abuses, +gives in most cases better results and is rapidly spreading. It is +sounder in conception and works better in practice as a method of +remuneration for most of the workers. + +Sec. 13. #Purpose of producers' cooeperation.# Since the early part of the +nineteenth century many well-wishers of humanity have cherished high +hopes that the whole wage system might gradually be replaced by +the plan of producers' cooeperation among workingmen. Producers' +cooeperation is the union of workers in a self-employing group, +performing for themselves the enterpriser's function. The workers hope +to get what seems to them to be a needless drain of profits into the +pockets of the employer and unnecessarily high salaries to managers. +To do this they must perform the enterpriser's function as to +investment and risk. Collectively or through their representatives +they must undertake to furnish capital and management as well +as hand-work. The capital may be supplied either by the members, +individually or collectively, or may be borrowed from outsiders, +who are thus merely passive investors. Usually the return to capital +invested by members is limited to 5 or 6 per cent, so that this part +of the capital likewise is treated as a passive investment, and all +the real variable profits are distributed to the members as wages. The +hope has been as in profit-sharing to increase the amount of profits +through the stimulus the plan might give to the workers and by saving +in friction, disputes, and strikes. + +Sec. 14. #Limited success of the plan.# Practically the plan has been +made to work in a comparatively few simple industries. The most +notable example of successful cooeperation in America was in the +cooper-shops in Minneapolis. There were few and uniform materials, +patterns, and qualities of product, few machines and much hand-labor, +simple well-known processes, a simple problem of costs, a sure local +market. After more than thirty years the main shop was still in +operation, but with a membership of the older men and with no growth, +A number of the less skilled workers receive ordinary wages. In +America a few of the productive cooeperative companies are found +operating small factories. In England, there have been numerous +successful societies, but all in small enterprises, mostly connected +with agriculture. Within the whole field of industry, this method +of organization makes little if any progress. Most experiments have +failed and the successful ones have become or are tending to become +ordinary stock companies with most of the stock in the hands of a few +men. Therefore, whether losing or making money, they nearly all cease +to exist as cooeperative enterprises. This result has disappointed the +hopes and prophecies of many well-wishers of the working classes. + +Sec. 15. #Its main difficulty.# The main difficulty in producers' +cooeperation is to get and retain managerial ability of a high order. +Failure to do this results in inability to maintain and keep in +repair the equipment and to pay the ordinary returns to the passive +investment, and financial failure follows. There is no touchstone for +business talent, no way of selecting it with any certainty in +advance of trial. This selection is made hard in cooeperative shops +by jealousies and rivalries, and by politics among the workmen. A man +selected by his fellows finds it difficult to enforce discipline. In +cooeperation there is occasionally developed good business ability +that might have remained dormant under the wage system; some +work-men showing unusual capacity cease to be handicraftsmen. But the +unwillingness on the part of the workers to pay high salaries results +in the loss of able managers. Having demonstrated their ability, the +leaders go to competing establishments where their function is not in +such bad repute, and where they are given higher salaries, or they +go into business independently, being able easily to get the needed +backing from passive capitalists. + +Cooeperative schemes thus suffer from the workers' inability to +appreciate the functions of enterprise and management. Most men make +a very imperfect analysis of the productive process. They see that +a large part of the product does not go to the workmen; they see the +gross amount going to the enterpriser, and they ignore the fact +that this contains the cost of materials, interest on capital, and +incidental expenses. Further, they fail to see that the investment +function is an essential one. The theory of exploitation, as +explaining profits, is very commonly held in a more or less vague +way by work-men. With a body of intelligent and thoroughly honest +work-men, keenly alive to the truth, the dangers, and the risks of the +enterprise, cooeperation would be possible in many industries where +now it is not. Producers' cooeperative schemes usually stumble into +unsuspected pitfalls. When a heedless and over-confident army ventures +into an enemy's country without a knowledge of its geography, without +a map, and without leaders that have been tested on the field of +battle, the result can easily be foreseen. + +The cooeperative principle has been embodied much more successfully +and on a larger scale in America in the form of producers' selling +organizations or of consumers' cooeperative stores. As, however, both +of these forms of organization have been developed in America more +largely by farmers than by wageworkers, the discussion of them may +better be undertaken in connection with problems of rural organization +rather than with those of labor. + + +[Footnote 1: See Vol. 1, pp. 227, 318, 322; also above, ch. 2, sec. +14.] + +[Footnote 2: See e.g., Vol. 1, p. 329, on selection of managed and of +managers.] + +[Footnote 3: See below, ch. 20, sec. 6.] + + + + +CHAPTER 20 + +ORGANIZED LABOR + + Sec. 1. Changing relations between employers and wage-workers. Sec. 2. + Need of common action among wage-workers. Sec. 3. Functions of labor + organizations. Sec. 4. Types of labor organizations. Sec. 5. Statistics of + labor organizations. Sec. 6. Collective bargaining. Sec. 7. Limitation of + competition among workers. Sec. 8. Strikes in labor disputes. Sec. 9. Frequency + and causes of strikes. Sec. 10. Picketing and the boycott. Sec. 11. Effects + of organization upon general wages. Sec. 12. Competitive aspect of + organization and particular wages. Sec. 13. Monopolistic aspect of + organization and particular wages. Sec. 14. Open vs. closed shop. Sec.15. + Political and economic considerations. Sec.16. The public's view of unions. + Sec. 17. Future role of organization. + + +Sec. 1. #Changing relations between employers and wage-workers.# The +"organization of labor," or the "labor movement," so striking a +feature of the world to-day, is of comparatively recent origin. It did +not begin and advance _pari passu_ with the beginning and early growth +of the wage-system as above briefly described.[1] In anything like +its modern form the labor movement dates from the early years of the +eighteenth century. Much of the largest part of its history in all +countries, excepting England, is after 1860. Why was organization +among the workers so long delayed after wage-payment became common, +and why when it once appeared did it spread so rapidly in some +directions, and why is it still limited in the main to certain fields +of industry? These three questions are but one question in three forms +and to answer one fully would be to answer all. + +The modern trade union appeared in England shortly before the +industrial revolution,[2] and has extended as fast and as far as +the same stage of industrial development has been attained in other +countries. The effort of wage workers to organize themselves appears +everywhere to result from the separation of the economic and personal +interests of employers and workmen. As the control of industry became +more concentrated in larger units with the advent of power machinery, +the feeling of economic unity among the different ranks of industry +was further weakened. The average workman had less opportunity of +becoming a master, an employer. In the days of the old hand industry, +master, journeyman, and apprentice worked side by side at the same +bench. Almost every apprentice might hope to become some time a +master, and many a one did so. To-day most wage-workers in large +establishments have no hope of rising out of their positions. The mere +largeness of an establishment forbids also the personal acquaintance +of employer and workman. As a result of these changes, the workmen +become more "class-conscious" of their position as wage-workers and +the employers in many establishments take the attitude of buyers of +labor as a mere ware. When the employer then feels the pressure +of competition he is more likely to force the lowest wage that is +possible and to compel the workers to accept less favorable conditions +than if he were in more personal relations with them. Where the +immediate direction of an establishment is intrusted to paid managers +who are responsible to stockholders, the managers' success is judged +almost exclusively by the dividends they succeed in earning. Hence +they are under stronger and more persistent temptation than are active +owners to drive hard bargains with their employees. Many examples +might be found where managers and resident directors have wished to +pursue a more liberal policy than absentee shareholders would permit. + +Sec. 2. #Need of common action among wage-workers.# These same industrial +changes caused employers, even earlier than it did employees, to have +something of a "class-conscious" feeling, which tempered the spirit +of their mutual competition, especially in bidding for the services +of workers. The smaller the number of employers the easier it is by an +understanding to suppress competition on their side. If there is only +one factory of a kind in a town the employer is able at times to drive +a harder bargain with his employees. Especially in times of industrial +depression is a change of employment difficult for the laborer, +involving for him much trouble and loss of time and money in moving. +But it is possible to exaggerate the degree to which competition among +employers of labor is weakened to-day. In the long run and at many +points competition must be felt in all such cases. The notoriously +unfair employer will find his workmen drifting away, his working-force +reduced in number and quality at times of greatest need, and his evil +reputation going abroad among workmen. A better realization of this +fact has led many employers to pursue a farther-sighted policy that +fosters a better understanding and a kindlier feeling on both sides of +the labor-contract. + +Another effect of the growing size of business units is to give the +workers less personal acquaintance with each other. When they are +unorganized they have less unity, common opinion, and power than the +workers in the old-fashioned shop with its close personal acquaintance +and ready interchange of views. In the wilderness of a great modern +factory a worker may be unknown in name and interests to the man +touching elbows with him. Moreover, in America, differences in +nationality and in speech among immigrant workers often effectively +prevent a common feeling of their interests and assertion of them. +There is an analogy between these conditions and the political +conditions that early led simple democracies to give way to +representative governments. So long as a community is small and men +know each other personally, popular government may exist without +complex machinery, but when numbers become larger, public opinion can +be concentrated and made effective only by delegating the functions to +elected representatives. + +Sec. 3. #Functions of labor organizations.# Out of these conditions have +grown the various kinds of labor organizations. Their first object +is to maintain and increase wages. Closely connected with this is +the remedying of various abuses in respect to methods of payment, +measurement of the output, and conditions of work. Almost cooerdinate +with the aim of higher wages of recent years has been that of the +shorter work day. Labor leaders have frequently asserted when the two +demands have been made together, that a reduction of hours is the more +desirable. Better conditions of safety and sanitation in their work +were not the first thought of laborers when they organized. As a +result of habit and ignorance (widely prevalent at that time) they +were remarkably unconcerned about this matter. Reforms in this +direction at the outset had to come largely from sympathetic +observers, the "philanthropists," often described as sentimentalists. +But the modern, more enlightened, labor movement has better ideals +and policies in respect to the safety, sanitation, and decency of the +working places. + +Labor organizations have also secondary objects of very great +importance. They are nearly always in some measure mutual-benefit +associations, and provide in varying degrees insurance against +accident, sickness, death, or lack of employment. All unions in a +measure serve their members as employment bureaus, and some make this +am important feature. Through trade-papers, correspondence, traveling +members, and in meetings, information is exchanged regarding +conditions of employment in various parts of the country. Labor +organizations by means of their discussions and through their special +periodicals are a strong educational force in matters political and +economic. The local labor organizations often come to be the center of +the social activities and interests of many of their members, and even +of all the members of their families. The organizations thus serve the +functions of social clubs, of literary societies, and of civic centers +for their members. + +Sec. 4. #Types of labor organizations.# Among the many organizations of +wage-earners three main types may be distinguished: the labor union, +the trade union, and the industrial union, tho often they are all +spoken of as trade unions without distinction. A labor union admits +all classes of wage-earners and even business and professional men +into the same local chapter. The "Knights of Labor" is the most +notable example that America has seen of this type. The national +organization was composed of local chapters, to membership in which +every one was eligible excepting bankers, lawyers, gamblers, and +saloon keepers. Organized as a single local chapter in 1869 it grew +very rapidly until it attained its maximum membership of 600,000 in +1886. From this point it rapidly declined in membership, and since +1900, altho its organization is still maintained, has been of very +little influence. + +A trade union is an organization of wage-earners in the same +handicraft or occupation. Unions exist among workers in all the old +distinctive handicrafts, such as the printers, stone cutters, cigar +makers, carpenters and in many other groups such as musicians and +retail clerks. The local chapters in many cases have been long united +in national unions (often international, including the United States +and Canada). + +An industrial union is one that seeks to unite all workers employed in +the same class of establishments regardless of their craft or the +kind of work they do. The most notable examples are the United Mine +Workers, the Brewery Workers, and the Industrial Workers of the World. + +In 1881 a number of national trade unions united for certain purposes, +to form the American Federation of Labor with a membership of about a +quarter million workers, which has steadily increased since that date. +The American Federation of Labor now includes also some important +unions of the industrial type. Several strong national trade unions +(the most important being the brotherhoods of railroad employees) are +not affiliated with the American Federation of Labor. + +Sec. 5. #Statistics of labor organization.# The ratio of organized +workers to the population is estimated (figures for 1910) to be +highest in the United Kingdom, being nearly 7 per cent; it is next +highest in the German Empire, being nearly 6 per cent; whereas, in the +United States, it is but 2.3 per cent. This difference is largely due +to the much greater relative importance of agriculture in the United +States. + +The total membership of trade unions in the United States and Canada +is estimated to have been in 1910 about 2,200,000, of which only +about 100,000 were in Canada. This was 5.5 per cent of all persons +(38,130,000) gainfully employed, or 6.8 per cent of male employees, +and 9 per cent of female employees. Organization was very weak (less +than 1 per cent) among the workers in a group of industries occupying +nearly one-half of all workers, including agriculture, the hand +trades, oil and natural gas, salt, and rubber factories. Organization +was not of large extent (1 to 10 per cent) in other groups of +industries occupying more than one fourth of all workers, including +those engaged in producing quarried stone, food stuffs, iron and +steel, metal, paper and pulp, stationary engineers, in public, +professional, and domestic service, and in clerical work. Organization +was of much greater strength, including 10 per cent or more of the +workers, in the remaining industries and occupations. + +If deduction be made of the employing and salaried classes, about +7.7 per cent of all persons occupied were organized. If, further, +deduction be made of agricultural, clerical, publicly employed, +commercial and domestic workers, about 16 per cent of the remaining +13,760,000 persons are organized (of women 3.7 per cent). Among the +occupations most highly organized are those of railway conductors (87 +per cent) and engineers (74 per cent). In the building trades about 16 +per cent are organized, of granite cutters 69 per cent, masons 39 per +cent, plasterers 32 per cent, carpenters 21 per cent, and painters 17 +per cent. Similar striking differences appear among the occupations in +the printing industry; of stereotypers 90 per cent are organized +and of compositors only 35 per cent. These figures point to inherent +differences in the conditions favoring organization. Even in the same +craft a high degree of organization may be found in the cities and +little or none in the smaller towns (e.g., in the case of the printing +and building trades in general).[3] + +Sec. 6. #Collective bargaining.# The fundamental policy of trade unions +is the substitution, for the individual wage bargain, of collective +bargaining between the delegated representatives of the working men +and the employer, or group of employers, or their representatives. +The wage-earners bargaining collectively may be those of a single +establishment, or of a group of establishments in the same locality, +or of a wider territory even national in extent. Accordingly, they are +represented in the negotiations by trade-union officials with +narrower or wider jurisdiction. Employers in some cases had tacit +understandings with each other before laborers were organized. But in +many cases the individual employer was at a marked disadvantage after +the organization of his employees. The result has been the rapid +spread of employers' organizations, so that in industries where +laborers are highly organized, two-sided collective bargaining has +become more and more usual. + +A large part of the effort of trade unions is directed toward ensuring +the use of collective bargaining. This is the purpose of many of +their demands, even of some that hardly appear to have any such +consideration. Collective bargaining practically necessitates the use +of "the standard rate," since only with reference to some standard +rate, a market price for labor, is it possible for a wage contract to +be made by labor officials for a group of men. The standard rate may +be a piece price or a time price, and in many cases the unions strive +to secure the latter as more convenient for their purposes. The +standard time rate usually is but a minimum and many of the more +skilful workers receive wages above the minimum. But the standard +minimum tends to become also the maximum in many cases, the more so +when the union has succeeded in enforcing a pretty high standard rate. + +Sec. 7. #Limitation of competition among workers#. In order that +the representatives of organized laborers may act effectively in +collective bargaining the first condition necessary is that a +large proportion, if not all, of the workers of the trade in the +establishments concerned shall be organized. A common sense of wrong +is one of the strongest motives to bring workers together, and +has prompted the origin of many a local chapter. Then constant and +strenuous efforts are made to bring workers into the organized ranks. +Experienced organizers knowing all the arts of persuasion devote their +whole time to this task, being paid regular salaries. When friendly +argument fails, threats may be used and sometimes personal violence. +The public opinion and class feeling fostered among members of an +organization in times of difficulties are analogous to the sense of +patriotism in the nation at large and at times may displace it in the +hearts of organized laborers as is seen in opposition to the militia +and to the maintenance of order in times of strikes. The most +effective of all peaceful methods if petty persecution rising at times +to social ostracism. The individual who declines to enter the union is +denounced as a traitor to his fellow workers and is made to feel their +scorn. The use of the union card to be carried by every member to show +whether he is in good standing is an effective way of enforcing these +measures. Finally, where all these measures fail, pressure may be +brought upon the employer to get him to force unwilling workers into +the union.[4] + +Further to give control over those working in a trade and to +reduce competition among workers, unions often limit the number of +apprentices and determine who shall have the privilege of learning the +trade. By a variety of regulations they limit the output and in many +cases (tho less frequently now) have opposed the use of labor-saving +machinery. Further to enforce these policies they seek to have each +special kind of work controlled by a special union. This gives rise +to disputes between rival unions and causes annoyance and loss to the +workers themselves, to the employers, and to the general public. + +Sec. 8. #Strikes in labor disputes.# A strike is a concerted stopping of +work by a group of employees to enforce a demand upon the employer. A +lockout is an employer's closing of his shop because of a disagreement +with his employees. The strike is, in its direct and indirect, +immediate and ultimate, effects the most important weapon of the +organized wage-earners in their relations with their employers. To +newly organized laborers the union appeals mainly as an instrument for +striking, for threatening the employer, or for making him suffer to +compel him to accede to their demands. The effectiveness of a +strike lies in the loss it threatens or occasions in the stopping of +machinery, the ruin of materials, the loss of custom, and the failure +to complete contracts that have been undertaken. + +The employers will often, to break a strike, pay to others for a time +more than the current rate of wages. The success of the strikers being +dependent on their ability to keep the employer from filling their +places, their energies are bent upon that end. The losses that strikes +cause to workers in stoppage of wages, to employers and investors in +destruction of plant and in suspension of profits, and to the public +in the interruption of business, aggregate an enormous sum. The direct +losses to employers and strikers in the 20 years between 1881 and 1900 +have been estimated to have been nearly $500,000,000, a large sum, but +amounting to less than 1 per cent of the wage-earners' incomes. It +is, however, impossible to estimate at all exactly losses that in many +cases are indirect and intangible. The strikers are concerned in each +case not with the balance of total losses and total gains to society +as a whole, but with the net gain that they expect to accrue in the +long run to themselves. Viewed in this way it is true that there are +various indirect benefits in strikes that are not easily calculable, +particularly the advances of wages made by employers to avoid strikes +which they know will otherwise occur. In regard to the wisdom of any +contemplated strike, opinion is always somewhat divided, as it is in +regard to the value of strikes in general. + +Sec. 9. #Frequency and causes of strikes#. Strikes were relatively +decreasing in number from 1880 to 1900, but from 1901 to 1905 the +annual average was more than twice as large as in the preceding +decade. On the whole, strikes have been more numerous in periods of +business prosperity when there was a better chance to get concessions +from the employers. But they occur also in the periods following +crises, when the workers seek to minimize cuts in wages and to prevent +the depression of working conditions. More broadly viewed, strikes +appear to accompany readjustments to dynamic conditions. As wages as +a rule rise more slowly than general prices,[5] it was to be expected +that the period since 1900, in which the general price level was +rising at the rate of about 3 per cent a year, should have been marked +by increasing resort to strikes. + +The immediate causes of strikes have been changing in relative +importance. In 1881, at the time of the very rapid organization of +unions, over 71 per cent of all strikes were directly connected +with wage demands (61 per cent for increase and 10 per cent against +reduction). But in 1905 the total for these causes was only 37 per +cent, whereas the proportion of strikes for reduction of hours nearly +doubled (from 3 to 5 per cent) and the proportion of those concerning +recognition of unions and union rules increased fivefold (from 6 to 31 +per cent). Ultimately nearly every demand of the laborers is +related to the question of wages; but these figures show that when +organization is new this relationship is more immediate, whereas +later more effort is directed toward securing the stronger strategic +position that comes with recognition of the union. + +Sec. 10. #Picketing and the boycott#. Picketing by strikers or their +friends is intercepting and accosting all persons approaching or +leaving the place of work, to inform them of conditions and to +dissuade them from working there. When peaceable means fail, often +there is recourse to violence both against the employer and his +property and against nonstriking workers. Indeed, many persons declare +that peaceable picketing is impossible, and it surely is difficult +to attain in view of the temptations of human nature under the +circumstances. + +Almost always connected with a strike is the practice of the boycott, +which is a combination of wage-earners to cut off an employer (or +group of employers) from business dealings. The boycott is found +in varying forms and degrees, broadly distinguished as simple and +compound-boycott. In simple boycott only persons directly interested +in the trade dispute refuse to deal with the boycotted person. The +question arises as to who are to be deemed directly interested, +whether it includes only the actual strikers in a particular +establishment, or whether it includes organized workers in sympathy +with them. The latter case is presented when an "unfair" list is +published in labor journals. It seems that only the former case is a +really simple boycott. The use of the simple boycott, the refusal of +a person, or even of a conspiring group of persons, to deal with a +person with whom they have an industrial dispute, appears to be a part +of the elementary rights of personal liberty. Beyond that point the +boycott is compound in varying degrees.[6] It is the compound form +which is usually referred to in discussion and in court decisions on +the subject. It is the compound boycott that has been described as "a +combination to harm one person by coercing others to harm him." The +compound boycott, as experience shows, has moral limits as well as +legal limits. It is doubtful whether the boycott can be extended at +all beyond the first degree of personal relations without becoming +antisocial, whether it is the weapon of organized workers or +of organized wealth. The endless-chain boycott, a measure of +excommunication without limit, pronounced against an offending +employer, non-union workers, and every one in any way befriending +them, is an effort to drag every one else into a dispute that is +primarily a private matter. + +Sec. 11. #Effects of organization upon general wages.# The crucial +economic problem in connection with trade unions is not as to their +methods (that being rather a political problem) but as to their effect +upon wages. There must be distinguished two questions: first, as to +their effect upon the general level of wages; and next, as to their +effect in raising the wages of the organized laborers alone. As to the +first, the thought has sometimes been expressed by sympathetic social +students outside of trade-union circles that but for the organization +of labor wages in America would be no higher than they were in 1850. +This seems to be assumed in much of the argument of labor leaders, +for they speak as if all wages, but for trade unions, would be at the +starvation level; and they credit everything above that level to the +work of the union.[7] This claim is peculiarly effective in America, +where wages are and always have been relatively high. But proof of the +claim is lacking. As we have seen, even now fewer than 1 in 16 of +all gainfully employed, and fewer than 1 in 12 of those working for +contractual wages are organized. On no principle of value could +the mere organization of one-twelfth of the wage-earners, without +permanently withdrawing them from the labor market, explain the +relatively high wages of the other eleven-twelfths. In many lines +where labor is not organized, as in teaching, clerical, professional, +domestic, and agricultural services, wages have risen as much or even +more than in most of the organized trades. The underlying economic +forces determining the general level of labor-incomes in a country +are much more fundamental in nature than labor unions or protective +tariffs.[8] The trade-union authority already cited seems in another +passage to admit a view not essentially unlike that just expressed +when he says: "Capital is increasing faster than population.... It +seems therefore merely in obedience to natural laws that wages should +rise." + +The only reasons ever suggested for thinking that the organization of +one-twelfth (or any larger proportion of the wage-earners) could in +any general way raise the labor-incomes of those remaining unorganized +are: first, that organized labor sometimes leads the way in securing +favorable legislation; and, secondly, that if organized workers +get higher wages this sets a standard which it is easier for the +unorganized then to attain. Both of these suggestions may have +some little validity in special cases, affecting slightly a small +proportion of the unorganized workers, but neither touches fundamental +causes of general high wages. Whereas, it is clear that when the +unorganized laborers constitute the main body of consumers for the +products of organized labor (and this unquestionably is in large +measure the case) any increase in wages that can be secured through +organization by a portion of the workers must, in part, be subtracted +from the "real" incomes of the unorganized workers. The employer is +middleman, not to a great degree the ultimate consumer of labor.[9] +Some part, it is true, of the higher wage might be taken from profits +or from wealth-incomes, but this would still leave the unorganized +workers the losers. + +Sec. 12. #Competitive aspect of organization and particular wages.# +A different question is presented as regards the influence of +organization upon particular wages, and primarily upon the wages of +organized labor. The trade-union authority before cited says, "Where +there are no unions wages should be lower. This is exactly the case." +And he quotes: "Wherever we find union principles ignored, a low rate +of wages prevails and the reverse where organization is perfect." But +he later explains in part this difference: "The union men are the best +workmen and often employers pay a man more than union wages. This is +not surprising as no man can be a union carpenter unless he be in good +health, have worked a certain number of years at his trade, be a good +workman, of steady habits and good moral character." If this be true, +as doubtless it is to some degree in many trades and places, it is +in accordance with competitive principles that, as the elite of the +trade, the organized laborers should get higher wages than those +outside the unions. Moreover, the unions exist mainly in the more +populous places where costs of living as well as wages range higher +than in the small towns and in the rural districts. A comparison +merely of wages in money in such cases is misleading as to the +conditions of real income. Further, a higher standard of output +prevails in the cities where organization is greatest, and older men +and the less efficient that are unable to "keep up the pace" drift +away into unorganized shops or to villages where no standard union +rate is in force. So far as unions help to develop the intelligence +and promote the sobriety and efficiency of their members, they are +a positive economic force making for higher wages. The book before +quoted expresses, somewhat vaguely, an opinion in accord with these +facts when it says: "It is an error to think that the trade union +seeks to determine the rate of wages. It cannot do that. It can do no +more than affect them." And so, with organization as well as without, +the wages of individuals and of classes of laborers are determined by +the general principles of price as applied to their services. Where +neither the employer has a monopoly in his business nor the organized +laborers have a monopoly of the labor supply, there is two-sided +competition in the labor bargain, and organization may help to raise +particular wages inasmuch as it acts in the competitive ways above +mentioned and as it helps to restore to the laborers a truer equality +of competition. + +Sec. 13. #Monopolistic aspect of organization and particular wages.# The +action of organized labor is not, however, limited to the competitive +field, above discussed. Wages in particular industries may, by +the action of trade unions be raised and maintained above a true +competitive rate. This of course can be done only in accordance +with the principles of the service-value to the consumer and of +service-price in the employment-market. The supply of labor is in a +variety of ways artificially limited by the efforts of the unions. It +may be done temporarily by striking when a failure to fill orders will +cause the employer exceptional loss. Violence in strikes and boycotts +is often the desperate attempt to create and assert a measure of +monopoly power where of itself it does not exist, i.e., where other +workers stand ready to take the jobs at the prevailing rates of wages. +Monopoly is created if apprentices are limited to fewer than in the +long run would be attracted into the trade by the prevailing wages. +It is created if the unions artificially limit output to less than +is consistent with the health of the worker. Monopoly is created if +unions strong enough to keep "scabs" from getting work, fix their dues +high or put other obstacles in the way of increasing the membership. +Probably the most striking cases of high wages for organized labor are +of this kind. The element of labor-monopoly evidently is mingled in +all degrees from the slightest to a very great amount, in particular +economic situations. + +Sec. 14. #Open vs. closed shop.# The question of labor monopoly is +involved in the very crucial question of the closed vs. the open shop. +A closed shop (or union shop) is a shop in which no non-union men may +be employed, even at union wages. Its existence is evidence that the +union is strong enough to compel the employer to act on this principle +and thus virtually to force all his employees into the union. The +refusal of a demand for the closed shop is often the ground for a +strike. Where this is so unions usually assert that the closed shop +is essential to the existence of the union. If union and non-union men +work side by side there are many ways in which the employer is able +to discriminate so as gradually to break down the union. If business +slackens, the union man may be the first to be discharged; if any +preference is given it is to the non-union man. While this may be +true, it would seem, on the other hand, that an unmodified closed +shop, with the conditions of membership in the control of the union, +creates a distinct monopoly of labor leaving the employer helpless in +any wage dispute and enabling the union to enforce its every demand +regardless of the competitive conditions of the labor-market for that +class of services. + +Sec. 15. #Political and economic considerations.# The question here takes +on a broad aspect, Is the closed shop, and are the other policies of +trade unions, morally right; and ought they to be legally sanctioned? +The answer to such questions is not for the economist alone to give. +The questions involve other than economic considerations. They involve +moral and political considerations--not merely existing formal law, +but the fundamental issue of personal liberty and of interference with +the liberty of some citizens by another group acting without political +authority. For example, if a workman is unable to earn the standard +rate[10] and is not permitted to take less, he is forced to move to a +place where there is no union, or is forced out of the trade entirely. +In the latter case he probably is compelled to take a lower wage +than he could get in his regular occupation. Likewise, this change +artificially increases the pressure of competition and reduces the +wages of others in the occupation to which he turns. So in the case of +persons prevented from becoming apprentices in a trade, or kept from +taking work by threats, or by the dread of boycott, or by the fear of +violence, in any degree however slight, there is present an element of +personal coercion by the organized laborers. This is the price others +are made to pay for a favorable effect on the wages of the organized +laborers. Now the strictly economic question concerns merely the part +as to the effects upon wages, and the economist (as such) is going +outside of his special field when he pronounces on the moral rectitude +(and the desirability in law) of such acts and policies. One who fully +shares the feelings of the organized workers will believe that the +winning of a strike or the general improvement of the strikers' +condition is so important that it outweighs the evils to other +individuals and to society as a whole. Indeed, to one in that state +of mind the evils appear very small or nonexistent. The economist can +only issue the warning that the commonest illusion he encounters +is the belief of each class--commercial, banking, manufacturing, +wage-earning--that what is for its particular interest is, in a +peculiar manner, for the general interest, so much as to justify +favoring legislation or special exemption from the general law, or +even sheer lawlessness. + +Sec. 16. #The public's view of unions.# We may, however, observe the view +of the onlooker striving to be impartial. The attitude of the public +in labor disputes, and particularly in regard to the closed shop, is a +vacillating one. The general public sympathizes in large measure with +the unions in their efforts up to a more or less uncertain point; +but the public does not like to see organized labor with the power to +dictate terms absolutely to the employers any more than it likes to +see employers crush the union. The unions are effective in varying +degrees in strengthening the bargaining power of the workers, and +accordingly the results vary not merely in degree but in kind. The +public wishes to see "fair play," and up to a certain point the +union is a device to get fair play. In truth, what is in the public's +thought, somewhat vaguely, is approval of unions so far as they go +to establish a real equality in competitive bargaining with the +employers, but disapproval where the power of the union gets greater +and becomes monopolistic. It is at this point that organized labor +loses the sympathy of most of "the general public" outside of unions. +When the union tries to force a higher wage than the market will +warrant, when it strives not to establish but to defeat competition, +the public condemns. It sees, tho not quite clearly, that such action +makes an unstable equilibrium of wages which tempts to constant +friction and discord with employers and with unorganized laborers. It +sees also that if the unions force a wage higher than a fair and open +market affords, this is rarely done at the expense of the employer; +that in the long run it is at the expense of the purchasing public +itself, including the unprivileged workmen.[11] + +In accordance with these facts and opinions there has developed, at +least in one respect, a pretty definite conviction on the part of the +public regarding the closed shop, namely: the closed shop should go +only with the open union. A union under the closed shop policy is +exercising a quasi-public function, that of controlling the industrial +action of private citizens against their will. The union therefore, in +this view, must cease to be a purely private, voluntary organization, +and become in some respects subject to public regulations as to +its internal rules and administration. This view, however, is very +unacceptable to the leaders of organized labor in America, and there +the question now stands. + +Sec. 17. #Future role of organization#. In the light of the principles of +wages it appears that organization most easily gains results, and +the most stable results, when wages are below or near the competitive +rate. An earnest effort on the part of the workers is necessary for +them to get the share that true competition would accord them, but +the attempt to force wages beyond that point must be the occasion +of increasing friction. With so modest an ideal however, as the true +competitive wage, organized laborers and their leaders cannot be +expected always to be content. + +Aside from its effects upon the wage-bargain, unionism finds +its greatest justification is in its unspectacular fraternal, +mutual-benefit, and educational functions. The chief forces favorable +in the long run to wages that can be affected by organization are +domestic peace, order, and security to wealth; honesty and good faith +between man and master, in law-maker and in judge; efficiency and +intelligence of the workers; and far-sighted social legislation. Some +of these contribute to greater productiveness, others to a fairer +distribution. In all these ways organized laborers have made valuable +contributions, unfortunately neutralized in many cases by a narrow +class outlook. Organized labor is here to stay for a long time to +come, and as the elite of the wage-earning class it should, and +probably will, be an increasing force for political betterment and for +social welfare in the republic. + + +[Footnote 1: See ch. 19, secs. 1-3.] + +[Footnote 2: See Vol. I, p. 459.] + +[Footnote 3: See _Quarterly Journal of Economics_, May, 1916, article +by L. Wolman.] + +[Footnote 4: See below, sec. 14, on the closed shop.] + +[Footnote 5: See Vol I, pp. 223-224, and above, ch. 6, sec. 12 and ch. +10, sec. 7.] + +[Footnote 6: The "unfair list" is usually given as a form distinct +from either the simple or compound forms. The "fair list" published +either by labor journals or by a consumer's league is not declared to +be a boycott.] + +[Footnote 7: In a book by an English trade-unionist, Trant, reprinted +and circulated by the American Federation of Labor as representing its +theory and claims, all the advances that have been made in wages are +said to be due to the trade-unions.] + +[Footnote 8: See Vol. I, pp. 227, 439, 466, 467, 504-507; and above, +ch. 14, sec. 8.] + +[Footnote 9: See Vol. I, pp. 217, 222-223, 352, 356.] + +[Footnote 10: See above, sec 12.] + +[Footnote 11: We are expressing here the general opinion, not +pronouncing a final justification of competition as a rule of conduct. +On this something will be said later, in ch. 31.] + + + + +CHAPTER 21 + +PUBLIC REGULATION OF HOURS AND WAGES + + Sec. 1. Spread of the shorter working day. Sec. 2. The shorter day and + the lump of labor notion. Sec. 3. Fewer hours and greater efficiency. Sec. 4. + Child-labor. Sec. 5. Child-labor legislation. Sec. 6. Limitation of the working + day for women. Sec. 7. Limitation of the working day for men. Sec. 8. + Broader aspects of tins legislation. Sec. 9. Plan of the minimum wage. + Sec. 10. Some problems of the minimum wage. Sec. 11. Mediation and voluntary + arbitration. Sec. 12. Compulsory arbitration. Sec. 13. Organized labor's + attitude, toward labor legislation. Sec. 14. Organized labor's opposition to + compulsory arbitration. Sec. 15. The public and labor legislation. Sec.16. + The public and compulsory arbitration. + + +Sec. 1. #Spread of the shorter working day.# Since about 1880 a shorter +working day has been one of the prime objects of organized labor in +America. Notable progress was early made in some trades, reducing +hours from 11 to 10, or from 10 to 9, and in a few cases from 9 to 8. +In the building trades in the cities, especially, the eight-hour day +has come to be well nigh the rule. In 1912 it was estimated[1] that +1,847,000 wage earners were working in the United States on the +eight-hour basis; of these 475,000 were public employees. A large +proportion of the remainder were women and children whose hours were +limited by law, or were men working in the same establishments with +them. Since that date the eight-hour day has been more widely adopted +both through private action in many establishments and by legislation. +The year 1915 witnessed an especially rapid spread of the eight-hour +day. + +Sec. 2. #The shorter day and the lump of labor notion.# The shorter +working day is advocated by most workers in the belief that it will +result not in less pay per day, but in even greater pay than the +longer day, even if the output should be decreased. This view is +connected with the lump of labor notion.[2] It assumes that men will +work no faster in a shorter day, and that there is so much work to be +done regardless of the rate of wages; and concludes that the shorter +day will reduce the amount of labor for sale and cause wages to rise. +To the extent, however, that laborers, as consumers, mutually buy each +other's labor, evidently this loss due to curtailing production must +fall upon the laborers as a class. The workers nearly always call for +the same daily pay for a shorter day, which means a higher wage per +hour. If wages per hour increase less than enough to make up for the +fewer hours,[3] the purchasing power of the workers must be reduced. +If the output per hour is increased proportionally to the pay per +hour, the existing wages equilibrium would not be disturbed. But if +the output increases not at all or in less than the proportion of +the increase in pay, there is an inevitable disturbance of the wage +equilibrium. In a competitive industry this would compel a speedy +readjustment of wages downward. If a certain group, or large number, +of workers were to begin turning out only 80 per cent as large a +product as they did before while getting the same money wage, the +costs per unit would be thereby increased. Prices must rise or many of +the establishments must close, and then prices would rise as a result. +This must throw some of the workmen out of employment and create a +new bargaining situation for wages. If the general eight-hour day were +applied to every industry and to all wage workers at once, then +all workers and all employers in the industry would be in a like +situation. But at once there must occur changes of consumers' +choices in a great number of ways. If there are one fifth fewer goods +evidently at least one fifth of the consumers must go without. This +would largely be the wage workers. The things of which wage labor +makes up a large part of the costs will rise in price relative to +the things of which self-employed labor and of which materials +and machinery make up a relatively larger part. This must compel a +reduction of the demand for the products of wage labor relative +to other things, and be reflected to labor in a lower wage. This +reduction would not necessarily be just in proportion to the reduced +output (that is, say, 20 per cent if from 10 to 8 hours, or 11 per +cent, if from 9 to 8 hours). It might even be more, but probably would +be somewhat less. In any case, both the money wages and the real wages +of laborers, either in the particular trade or generally, must be +reduced by a general reduction of hours that results in a decreased +output. In such cases, even when the workmen by a strike or general +movement secured the same wage scale for a day of fewer hours (a +higher wage per hour), they would be unable to hold it excepting where +they had monopolistic control of the trade. + +In a period of rising prices due to an increasing supply of gold, the +readjustment of wages (per hour) away from an artificially high level +down to a competitive rate goes steadily on. Even when money wages +remain the same their purchasing power declines at such times, and +this serves soon to bring the high money wages into accord with the +lower value of the services.[4] + +Sec. 3. #Fewer hours and greater efficiency.# Quite contrary to the +foregoing view is the claim that in the shorter day the rate of work +is so increased that the output is at least as large as in the longer +day, or even larger. A faster working pace is possible with a shorter +day, particularly in those operations calling for physical or mental +dexterity. This view is less attractive to the workers than the +preceding one, but is more acceptable to the employers and to the +public. The change undoubtedly has resulted in many cases in the +manner indicated, and could be made to result so in many other cases +by applying the methods of scientific management. But it is a change +which cannot be repeated indefinitely and under all conditions with +like favorable results. Whether in any particular case it can be, +depends in part on the length of the working day at the start. Such an +increase in output might occur in a change from exhausting hours, as +from 12 to 10, and again from 10 to 9, and yet not be possible in a +change from 9 to 8. Moreover, the speeding up of the workers beyond +a certain point may have had physiological effects outweighing the +benefit from shorter hours. It is now said that with the increase of +automatic machinery there are more and more workmen who much of the +time have merely to watch the machine-tool run, and occasionally +adjust the material. There has, however, been collected a notable +body of evidence to show that, in many industries and in different +establishments using much machinery, a reduction of hours to a number +as few as eight has been followed by the increase of the output per +worker, or by improvement in the quality of work, or by improvement +in the management, resulting in a reduction of the cost of production. +This is often sufficient, or more than sufficient, to compensate for +the shorter time. Wages have remained as high as, or higher than, +before, and employment has been more regular. So far as this result +is due to the individual worker, it is explained by the same evidence +referred to below[5] as bearing upon the health of the worker. +This evidence tends to prove that with longer periods of rest and +recreation the worker lives in a physical and mental condition fitting +him far better for his work, and for continuing his working life. + +Sec. 5. #Child-labor.# All the foregoing arguments are weighed in terms +of private incomes and of the value of the products, whereas the main +considerations that have of late been influencing legislation and +judicial decision in favor of shorter hours have been those of public +welfare. The legal limitation of working hours is being treated +primarily as a health measure, into the judgment of which is more and +more entering a broader conception of the happiness, morality, and +opportunities for good citizenship for the worker and his family. + +In agricultural conditions, such as have prevailed generally in +America, there is little need of limiting the hours of work and the +age at which children may begin to work. The barefoot boy trudging +over clover fields to carry water to the harvesters may be the +happier, healthier, and better for his work. Child-labor in +agriculture has never become a social "problem" so long as the +children work with their own parents at their own homes; but the labor +of children for wages, especially in gangs on large farms (as in +beet cultivation and cranberry picking) or in canning factories, +has exhibited evils as pronounced as any in urban manufacturing +conditions. + +The evil of forcing children into factories was early recognized. +The most obvious evils of child-labor are neglect of the child's +schooling; destruction of home life; overwork, overstrain, and loss of +sleep, with resulting injury to health; unusual danger of industrial +accidents; and exposure to demoralizing conditions. The usual +assumption that the worker is able to contract regarding the +conditions of labor on terms of equality with the employer is most +palpably false in the case of children. The child, subject to the +commands of his parents and guardians, is not a free agent. Lazy +fathers are tempted to support themselves in idleness on the wages +of their young children. Often poverty leads the parents to rob their +children of health, of schooling, and of the joys of childhood. The +competition of child-labor also depresses the wages of adults, and +thus the evil grows. + + +Sec. 5. #Child-labor legislation.# The limitation of hours was first +applied to children working in English factories early in the +nineteenth century and thence has extended throughout the world, +tardily following the spread of the factory system. The first American +law of the kind was in Massachusetts, in 1842, limiting to 10 hours +the labor of children under twelve years of age in manufacturing +establishments. All the earlier state laws established low minimums of +age and high maximums of hours, and were poorly enforced for lack of +adequate administrative machinery, this in turn being the result of +lack of active public interest. In all these respects many states +gradually improved their child-labor laws in the latter part of +the last century, and much more rapidly since 1903. Now the maximum +working day for children in about one half of the states is 8 hours, +in one quarter is 9 hours, and in one quarter is 10 hours (and in +a few southern states, 11 hours). Night work by children is very +generally forbidden (in about forty states). During the same time the +minimum age has been pretty generally raised to fourteen years for +factory work, with higher ages (sixteen, eighteen, or even twenty-one) +in some states for certain occupations dangerous to health or morals. +In addition to these general limitations, special provision is made +for individual examinations to determine whether the child is mentally +and physically fit to work and has met the requirements of the +compulsory education laws of the state. + +The most important child-labor legislation in recent years was the +enactment of the long debated national child-labor law (passed +in August, 1916). This prohibits the interstate shipment of goods +produced in factories wherein any child has, within thirty days, been +employed under unfavorable conditions as to hours and time of work as +specified in the act. The passage of this act was the culmination of +years of efforts in and out of Congress. + +Child-labor legislation viewed as a merely negative policy is not of +great moment. Its real significance is to be judged only in connection +with the broader social policy of protecting and developing all of +the children of the nation to be healthy, intelligent, moral, and +efficient citizens. Children growing into blighted and ignorant +manhood and womanhood are threats to society. + +Sec. 6. #Limitations of the working day for women#. But little later than +the limitation of child-labor usually comes some legislation to limit +the hours and conditions of employment of women. The grounds of this +policy are that women likewise are less able than men to protect +themselves in the labor contract, that they are physically weak and +are peculiarly exposed to certain dangers to health, that as future +mothers they need protection for their own and the public welfare, and +that in the period of maternity the dangers are especially great. The +work of women in factories operates in some ways to depress the wages +of men, and it is harmful in its effects upon the home and family +life. At present five states limit the hours of women to 8 a day, +twelve to 9 a day, fifteen to 19 a day, four to 11 or less a day. A +number of states forbid the work of women in designated places of work +such as saloons, mines, or where constant standing is required. Only +as late as 1911, in America, has legislation, now in four states, +given maternity protection, as is now more fully provided in European +countries in connection with systems of health insurance. + +In all of the great industrial countries of Europe night work by +women is restricted (prohibited between 10 P.M. and 5 A.M. or yet more +narrowly limited); but legislation along this line is found in only +eight American states. + +Sec. 7. #Limitations of the working day for men#. The general assumption +made in law has been that the adult male worker is competent to judge +of the working conditions, hours of labor, and wages, and is capable +of protecting his own interests sufficiently by his power of refusal +to accept employment. The legislatures have, much more tardily than in +their legislation for children and for women, acted contrary to this +assumption, but, when this has been done, the courts in America +have vigorously asserted the general doctrine and denied the +constitutionality of the laws. However, some exceptions were made in +legislation, and, after much apparent hesitation and vacillation, were +allowed by, the courts to stand, and these have now grown in number +until they form an impressive total. + +These exceptions have come in various ways. There is first, the +eight-hour limitation in public employment, required in federal +employment in 1868, really effective since 1892, and now in force +likewise in about two thirds of the states. In almost the same +jurisdictions--national, state and municipal--eight hours is the legal +day on work done in private business for the governments. Work on +railroads and street railways, particularly in the direct operation of +trains, such as the work of dispatchers, signal men, and trainmen, +is subjected to a large variety of regulative measures, hours being +limited in some cases to 8, in others to 9, 10, 12, or 16, and in +a number of cases a specified minimum number of hours of rest is +required after the maximum hours of labor. These laws are primarily +for the protection of the public, but they afford a protection to the +employee much needed, as many well-authenticated cases of excessive +and exhausting hours demonstrate. + +The limitation of hours has very recently been extended to many +private businesses in which exceptional conditions exist affecting the +health of the workers or the safety of the public. This development +has occurred almost entirely since the United States Supreme Court in +1898 (Holden vs. Hardy) sustained a Utah statute limiting to eight +the hours of labor in underground mines. Now 8 hour laws in certain +specified cases are found applying to mines, smelters, tunnels, and a +variety of other kinds of work, and in a few cases the limit is 9, 10, +or 11 hours. + +Sec. 8. #Broader aspects of this legislation#. The subject took on a new +aspect when the legislature of Oregon, in 1913, declared broadly that +"no person shall be hired, nor permitted to work for wages, under +any conditions or terms, for longer hours or days of service than +is consistent with his health and physical well-being and ability to +promote the general welfare by his increasing usefulness as a healthy +and intelligent citizen," and fixed ten hours as the limit of work +consistent with such a measure of health and welfare, in work in any +mill, factory, or manufacturing establishment. This law was sustained +by the Supreme Court of that state and was carried on appeal to +the United States Supreme Court.[6] In support of the law there was +presented a voluminous brief giving a most impressive body of evidence +from scientific and from practical business sources, to show the many +evils, popularly unsuspected or underestimated, that result from long +hours even in industries of no exceptional hazards.[7] Physiological +and psychological tests demonstrate that the fatigue following more +than a moderate working period not only reduces immediate efficiency, +but so poisons the system that greater liability to accident, disease, +intemperance, immorality, and premature decay, results. + +Two main purposes appear somewhat intermingled in this legislation +in limitation of hours. The first purpose is to protect the public +directly where the safety of others is dependent on the health and +efficiency of the worker. The second purpose is to protect directly +the worker's health and welfare, that policy being recognized to be +in the long run the best likewise for the public welfare. In legal +reasoning it is being recognized that the individual wage-worker, even +the adult male, is not in a position to judge the number of hours he +ought, for his own good, to work, and is unable to fix the length of +his own working day. As a matter of economic theory, the usance of a +child, a woman, or a man, is merely that kind and amount of +service that can be given out by each without repressing the normal +possibilities of growth, reducing the normal health and vigor, or +shortening the normal period of healthy productive human existence.[8] +It is becoming a general social policy to prevent the abnormal strains +of industry that cause the unnatural deterioration of the human factor +in industry. A wage-worker may be permitted to sell his daily _net_ +fund of working power--his usance--but not his life. + +Sec. 9. #Plan of the minimum wage.# Even more recent than the legislative +regulation of hours downward is the attempt to regulate wages upward +in the case of certain low-paid wage-workers. The modern[9] movement +for the minimum wage began in Victoria in 1896, and it soon extended +to nearly all the other Australasian states. Great Britain applied the +plan in 1910 to industries in which wages were exceptionally low. The +plan was first adopted in the United States by Massachusetts in the +year 1912, tho in an emasculated form, and spread so rapidly that at +the end of 1915 it was found in at least 11 states. Minimum wage +laws usually lay down "a living wage" as the standard to be used, +and either prescribe a flat rate of wages, or, more often, leave the +decision in each case to the wage commission established to administer +the law. + +Generous sympathies have guided this movement of which much has +been hoped and which, on the other hand, has always had its adverse +critics. The most that can be claimed for it by its friends after more +than twenty years of experience, is that the "dire predictions" have +not been verified. In truth it would seem that the plan as yet has not +been tried on a scale that could yield very large fruits either +for good or for evil. The persons whom it is sought to aid are only +selected groups of the lowest paid workers, generally limited to +minors and young women, who in many cases are those of immigrant +families in urban districts. A large volume of discussion on this +subject has developed, mostly of an _a priori_ nature, of which we may +here touch only a few of the salient points. + +At first glance the principles involved in the legislation limiting +hours and those in minimum wage legislation may seem to be the same. +But an important difference soon appears. In the former case the evil +is that of a too long working period, injurious to health, and this +can be reached directly and stopped by an efficiently administered +law. But in the latter case the real evil is industrial weakness and +incapacity such that the workers are unable to command "a living wage" +in a competitive market. A minimum wage law, by itself, neither cures +the industrial incapacity nor ensures employment to the industrially +weak at any wage. The law does not attempt to compel employers to +employ at the legal minimum wage every one who wishes to work; it +merely declares that the employer shall _not_ employ any one whom, in +his employ, he finds to be not worth that high a wage. + +Sec. 10. #Some problems of the minimum wage#. Unless the demand for a +particular kind of service is absolutely inelastic (a rare if not +impossible situation in a large market), there must be fewer jobs +for the less capable workers at high than at low wages, other prices +remaining the same. Further, some of the less capable workers must be +crowded out of such jobs as remain; for an artificially higher wage +attracts into an occupation some from other occupations before paid +more highly. It seems to be admitted by the friends of minimum wage +legislation that this result is logically to be expected and that to +some degree it appears. Of course it is never possible to tell to just +what extent workers have been and are being excluded in this way from +any particular establishment or occupation. Forbidden to earn what +they can, the poorer workers must become dependent on charity. It +may be said, and perhaps truly: better this than underpaid labor +destructive to the health of the workers and evil in its competitive +effects upon other wage workers. + +In most discussions of the wages of women there is a ready confusion +of sympathetic ideals of what one would like to see with the cold +facts as they are. Women's services (especially those of young women) +have increasingly of late been coming upon the labor market in such +a way as to cause abnormal congestion in a few occupations. Employers +have not caused low wages in these cases. Partly these occupations +are the clean, light, and agreeable ones, partly they have a relative +social glamour, largely they can be followed for a few years near the +home of the worker, nearly always they may be undertaken with brief +training and little skill. Investigation has shown that at least +eighty per cent of this group of girl workers live at home. A wage +that is amply a "living wage" when used as a pro-rata contribution +to an American family income is frequently insufficient for the girl +living "independently." Such a girl is, under the conditions, unable +to earn a living in her chosen occupation, and it may be better to +recognize that fact and to deal with such individual cases as appear +among the one fifth of all girls employed. + +The one unquestioned service of the minimum wage law is that of +diagnosing the evil of low wages rather than in remedying it. +The minimum wage law brings to light the industrial incapacity of +particular individuals to earn a living wage. The direct remedy is to +abolish the incapable workers or their incapacity by such methods +as regulating foreign or cityward immigration, custodial care of the +physically, mentally, and morally weak, vocational guidance, and +more effective measures of industrial education. Alongside of the +abnormally low paid occupations or elsewhere in the industrial +organization are other occupations in which with, or often +even without, special training, the sweated workers could get, +competitively, more than the minimum wage, if they could, or would, +qualify for the work. + +Sec. 11. #Mediation and voluntary arbitration#. The labor controversies +in which the public has the largest interest as a third party[10] +are those which result or may result in strikes. The public interest +becomes acute when a strike results in interference with the +individual freedom of other workers and of nonparticipants, when it +causes a blocking of the highways and disturbance of the peace, and +when it prevents the regular production and transportation of the +commodities which the public consumes. The public, therefore, has +steadily become more interested in all methods and agencies designed +to conserve better relations between employers and wageworkers, and to +diminish or, if possible, to do away with strikes when individual and +collective bargaining between the two parties fail. + +_Mediation_, or conciliation, is the effort of a third party to get +the two parties to a trade dispute to come together to agree peaceably +upon a settlement. Mediation may be voluntarily undertaken in a +particular case by any citizen or by a public official, usually the +executive (mayor, governor, or President); or it may be by a regular +public state or national commission charged with this duty (as in some +17 states). + +_Arbitration_ is the decision, by a disinterested person (or +commission) to whom it is submitted, of the exact terms, after a +provisional settlement of a dispute. It is voluntary when the parties +agree in advance to accept the verdict, and compulsory when they are +compelled by law to submit to arbitration and abide by the verdict. + +Some provision either of voluntary private or of public agencies +to mediate between the parties in labor disputes and to facilitate +voluntary arbitration has been made of late in most communities of the +civilized world, including 32 of our states, and the nation as a +whole particularly in respect to disputes between railroads and train +operatives engaged in interstate commerce.[11] No one objects to +them, and they accomplish much good, but fail oftenest in the greater +emergencies because of the unwillingness of one or the other party +to submit the case, or because of lack of any power to enforce the +decisions. + +Sec. 12. #Compulsory arbitration#. The serious question in the subject of +arbitration concerns the introduction of the principle of coercion by +government, in compulsory arbitration. This, in principle, is pretty +radically different from voluntary arbitration, for as it denies to +the parties the right to settle their dispute by private agreement, +it becomes in effect the legal regulation of rates of wages and +conditions of work. In principle this was involved in the legal +regulation of wages in England from the fourteenth to the nineteenth +centuries. The plan is closely approached in the industrial courts +that are now provided in a number of European countries for a cheap +and expeditious settlement of small disputes regarding trade matters, +arising in the relations between employer and employees. The new +modern development began when New Zealand passed a compulsory +arbitration act in 1894, followed to some extent since by all the +other Australian states, largely through the action of the Labor +party. Through the operation of its act New Zealand came to be called +the "land without strikes," tho the description was inaccurate, +especially after 1907. The Canadian Industrial Disputes Act of 1907 is +an example that has had influence upon public opinion everywhere, and +has been followed to some extent in recent legislation in New Zealand, +America, and elsewhere. It involves the compulsory principle in a +limited degree, making it unlawful in public utilities and mines to +change the terms of employment without thirty days' notice, or to +strike or lock-out until after investigation and hearing before a +board to be nominated for the purpose. The Colorado Act of 1915 goes +even beyond the Canadian act in its scope. The plan seems destined to +have wider applications and a larger development in the not distant +future. Let us note the general attitude of the various interests +concerned. + +Sec. 13. #Organized labor's attitude toward labor legislation#. Labor +organizations hitherto have been in their legal nature almost entirely +private and voluntary. They are seldom incorporated and are rarely +even recognized in any way by legislatures and by courts, which deal +merely with the members as individuals.[12] Their private character, +combined with their limited membership as compared with the total +population, leaves them without the power to accomplish legally by +themselves the results which they desire in their own interest. Hence +they are tempted at times to usurp public authority over the field of +private rights in industry.[13] In other cases, when they have come +to the end of their unaided powers, they invoke the aid of the law to +accomplish their objects. But the appeal of organized labor to the law +is special and qualified, being confined to cases where the actions +of others are controlled to the advantage of the union, such as +regulating the work of women and children, controlling the acts of +employers in respect to construction of factories, and limiting the +length of trains. This does not imply a peculiarly selfish attitude +on the part of organized labor. Action together in any social group +always develops in men their loyalty and spirit of cooeperation without +always making them more considerate to those outside of their group. +Indeed, often men acting through their chosen officials, private or +public, are more selfish collectively than they are individually. +The leaders of any group of men, whether of wage workers, merchants, +manufacturers, or political constituents, find it necessary to +show that the interest of their supporters rather than a broader +"sentimentality" is uppermost in their thought. And further, the +jealousy of any limitation of their power is as powerful a motive in +one group of men as in another. All are made of the same human clay. +But the stronger and more successful a labor organization is, the +more vigorously do its leaders resist any legislation that limits the +functions and field of action of the labor leaders, or that settles +labor troubles in a way that makes the voluntary labor organization +less necessary to the individual worker. Of course self-help, as a +spirit and as a policy, is a virtue, if it does not sacrifice the +rights of others. But if the facts above suggested are borne in mind +they will help to explain the otherwise often puzzling attitudes of +organized labor toward different measures of social legislation. + +Sec. 14. #Organized labor's opposition to compulsory arbitration.# +Organized labor in America has attained to a highly influential +position. On the whole it constitutes an "aristocracy of labor," +consisting largely of skilled workers that obtain a wage exceeding +that of unskilled workers to a degree not seen anywhere else in the +world. In this they have been favored by a combination of conditions +which it is not possible to describe briefly; suffice it here to say +that organization is itself not the whole explanation, but only +a small part of it. That organized labor, officially, is strongly +opposed to compulsory arbitration in America, is thus perhaps +sufficiently to be understood on the principle of "Let well enough +alone." When in August, 1916, a strike on the entire railroad system +was threatened by the four railroad brotherhoods, and some action was +proposed in the form of the Canadian act, the trade-union officials +issued a statement containing these words: "Since the abolition of +slavery no more effectual means has been devised for insuring the +bondage of the workingman than the passage of compulsory investigation +acts of the character of the Canadian Industrial Disputes Act." Within +less than a week the brotherhoods called off the strike after Congress +had passed an act giving the men immediately the eight-hour +day--a substantial part of what they had asked--and providing for +investigation, by a commission, of the effects of the rule. This is +compulsory upon the railroads but it is not compulsory upon the men to +accept these terms. + +Sec. 15. #The public and labor legislation.# It has come to be recognized +that in every serious labor dispute, especially in such as develop +into strikes, those concerned are not merely the two parties, +employers and employees, but a third party, the public, consisting of +every one else whose interests are not directly or indirectly bound up +with one of the other two parties. The line of demarcation is not easy +to draw exactly. An individual may be divided in sympathy, inclining +to the one party perhaps because of some personal friendships or class +loyalty or to the other party because of material investments, while +in the main having interests distinct from either. But wherever +the public is drawn in as a party, it includes far more persons +and embraces far larger interests than does either of the other two +parties or than do both of them together. The public becomes a party +primarily because it consists of the purchasers and consumers of the +products, who are deprived of the usual supply of goods, more or +less essential to their welfare or even to their existence. With the +increasing division of labor and complexity of industrial organization +more and more kinds of business have, in a greater and greater degree, +become "affected with a public interest." The public becomes an +unwilling party, therefore, in every serious labor controversy. + +In order that any kind of labor legislation shall be enacted, it is +necessary (so far as we have a government by public opinion) for a +majority of the public to be convinced that the conditions are such +as call for governmental interference. It becomes so convinced in +two broadly distinguishable classes of cases: one, when the masses of +unorganized workers are too weak to secure for themselves conditions +of work and wages consistent with health and morality; and the other, +when strong bodies of organized workers, in their attempts to win +their ends in an industrial dispute, exceed their private rights and +invade the public welfare. + +Sec. 16. #The public and compulsory arbitration#. Where the railways are +owned and operated by the state (as is now the case pretty generally +except in America and Great Britain) the question of the "right to +strike" arises from time to time, in critical forms. The logic of the +situation compels even those officials that are of the labor party or +are most favorable to labor, to maintain an uninterrupted service on +the public railways. The experiences of that nature in France and in +Australasia have been notable. Nowhere in the United States has the +principle of compulsory arbitration been adopted, but at the time of +the great anthracite strike, in 1902, public sentiment grew strong in +favor of it. As a result of the intolerable conditions in the mines of +Colorado was passed the compulsory investigation act of 1915 in that +state. In 1916 the threat of a general railroad strike brought from +many quarters strong expressions of condemnation in principle, of the +strike as a method of settlement of wage disputes on the railroads. +And in the end the organized laborers themselves accepted, apparently +with much satisfaction, a law involving the legal fixation of wages +and the principle of compulsion as applied to the employers. + + +[Footnote 1: By the Secretary of the American Federation of Labor.] + +[Footnote 2: See Vol. I, pp. 458-467.] + +[Footnote 3: For example, increase less than 25 per cent per hour in +changing from a 10 hour to an 8 hour day.] + +[Footnote 4: See above, ch. 6, sec. 12.] + +[Footnote 5: See especially, sec. 8.] + +[Footnote 6: At this writing the case, Bunting vs. the State of +Oregon, is still undecided.] + +[Footnote 7: Published as "The case for the shorter working day," by +the National Consumers' League, see especially pp. 621-892.] + +[Footnote 8: See Vol. I, pp. 135 and 197.] + +[Footnote 9: Much public regulation of wages occurred in Europe until +near the end of the eighteenth century. In England this was done +mainly by the justices of the peace and, in the main was directed +toward limiting the demands of the wage-workers.] + +[Footnote 10: See below, sec. 15.] + +[Footnote 11: By the act of 1888, the Erdman act of 1898, superseded +by the Newlands act of 1913, and supplemented by measures for +mediation by the Department of Labor.] + +[Footnote 12: The few exceptions to this statement are mostly recent; +such as the recognition of the unions in New Zealand in 1894 as +parties in the plan of compulsory arbitration, and in Great Britain +in 1909 as agencies through which unemployment insurance may be +administered.] + +[Footnote 13: As appeared in ch. 20.] + + + + +CHAPTER 22 + +OTHER PROTECTIVE LABOR AND SOCIAL LEGISLATION + + Sec. 1. Evils of early factory conditions. Sec. 2. Improvement of factory + conditions. Sec. 3. Limitation of the wage contract. Sec. 4. Usury laws. Sec. 5. + Public inspection of standards and of foods. Sec. 6. Charity, and control of + vice. Sec. 7. City growth and the housing problem. Sec. 8. Good housing + legislation. Sec. 9. General grounds of this social legislation. Sec. 10. + Training in the trades. Sec. 11. Prevalence of unemployment. Sec. 12. Evils of + unemployment. Sec. 13. Definition of unemployment. Sec. 14. Individual + maladjustments causing unemployment. Sec. 15. Maladjustment of wages + causing unemployment. Sec. 16. Individual maladjustment in finding jobs, + Sec. 17. Public employment offices. Sec. 18. Fluctuations of industry causing + unemployment. Sec. 19. Remedies for seasonal fluctuations. Sec. 20. Reducing + cyclical unemployment and its effects. + + +Sec. 1. #Evils of early factory conditions#. The time is but brief in +the life of nations since the main manufacturing processes, now mostly +conducted in great factories, were carried on in or near the homes +of the workers. This change has been reflected in the meaning of +"manufactures," which first meant literally goods made by hand but now +conveys the thought of goods made by machinery. The craftsmen worked +alone in their own homes or with the help of their wives and children. +If the master craftsmen had other helpers these were usually lodged +and fed in the homes, and were taught by the side of the masters' own +families. The old English law of master and servant was the labor law +of that time as, to some extent, it still is to-day in Great Britain +and America. The living and working conditions of the wage-workers +were in general the same as those of the master himself and of his own +family; and this was the best possible guarantee that the conditions +would be kept up to the best standards of that time. The same change +in industrial relations that led to the rise of the organized labor +movement[1] revealed new and often horrible neglect and evil in +and about the factories. They had been erected with no thought of +sanitation, safety, and decency for the workers. + +Sec. 2. #Improvement of factory conditions#. Legislation to remedy these +evils began in England a century ago, and the English code of factory +laws, regulating the construction and operation of factories and +providing for their inspection, has become voluminous. It has been +copied, and in some respects improved, by all of the great industrial +nations. This is true in America of the manufacturing states, tho the +agricultural states have still very few such regulations. As a result +of these measures, accompanying and stimulating an enlightenment +of the employers' self-interest, there has been a very remarkable +improvement in such matters in recent years. In many American +factories erected in the last quarter-century the conditions as to +lighting, heating, ventilation, stairways, fire-escapes, protection of +the workers against accidents, and lavatory and sanitary arrangements, +are better than the best conditions ever existing in domestic +manufactures. A somewhat corresponding improvement has taken place on +railroads, in mercantile establishments and, perhaps less, in mining. + +Factory legislation often has been opposed by employers because of the +expense it causes; but if the regulations apply to all factories, the +expense becomes a part of the cost of production and is shifted, like +the other expenses of production, to the general body of consumers, +of which the employers form only a small part. Much of the recent +progress in some establishments has, however, gone much beyond the +requirements of any existing laws. Many employers recognize that it is +costly and unprofitable to themselves to allow their workmen to be in +surroundings that reduce their vitality and efficiency, such as do the +conditions mentioned at the close of the preceding section. + +Sec. 3. #Limitation of the wage contract#. In general the law does +not attempt to interfere with the making, by individuals, of such +contracts as they choose to make. Its main function is to interpret +and enforce the contracts that are made. But there has been an +increasing group of exceptions to this general statement. It was +forbidden even by the English common law for wage-workers under +some conditions to sign away their right to claim damages in case +of accident, and many recent statutes have added more specific +limitations in this respect.[2] Legislatures and courts have been +particularly watchful of the interests of children, who are usually +deemed incapable of entering into contracts binding them to their +injury. Sailors, likewise, have been somewhat exceptionally treated, +because, journeying far from home, they are under the often despotic +control of their employers. The English courts may even change the +contract if the sailors have been coerced by their masters. + +Laws regulate the form, time, and methods of payment in manufactures +and mining. Companies sometimes keep stores and pay the workers in +mines and factories in goods instead of money. Such a store in the +hands of a philanthropic employer might easily be made, without +expense to himself, a great boon to his workmen, giving them the +benefits of consumers' cooeperation. But the usual result is told +by the fact that such stores are often known as "truck stores" and +"pluck-me stores," and heartily disliked by the wage-workers. They +are most often found where some one large corporation dominates in +the community, as in a mining district, and the workers are in a very +dependent condition. If the higher prices demanded practically lower +real wages, it would seem that the worker had an immediate remedy in +his power to demand higher money-wages. Recognizing that this is for +the most part an illusion--for it is just in such places that the +conditions for free competition are least present--the law in many +states prohibits these stores. It regulates also the measuring of +work, fixing the size of screens and of cars used in coal-mining. +The law is especially favorable to the hand-laborer in regard to the +collection of his wages, requiring monthly or fortnightly or sometimes +weekly payments. Mechanics' liens give to workmen in the building +trades the first claim upon the products of their labor. + +Sec. 4. #Usury laws#. The limitation by law of the rate of interest that +may be charged affects many persons outside the ranks of wage-workers. +Usury laws are found almost universally in civilized lands. By usury +was formerly meant any payment for the loan of goods or money; now it +means only excessive payments. In former times moralists and lawmakers +were opposed to all usury or interest. The reason for this attitude +is not hard to find.[3] Most loans were made in times of distress. The +sources of loanable capital and the chances of profitable investment +were few. But for the last four centuries there has been on the +question of usury a gradual change of opinion, beginning in the +commercial centers and progressing most rapidly in the countries +with the most developed industry. A moderate rate of interest is now +everywhere permitted; but in all but a few communities the rate that +can be collected is limited by law, and penalties more or less severe +are imposed upon the usurious lender. + +Usury laws are practically evaded in a number of ways within the +letter of the law.[4] Many persons maintain that they do more harm +than good even to the borrower, whom they are designed to protect. In +a developed credit economy, where a regular money-market exists, they +are superfluous, to say the least, as most loans are made below the +legal rate. Such laws, however, have a partial justification. In a +small loan market they to some extent protect the weak borrower at the +moment of distress from the rapacity of the would-be usurer. There +has been great need to check the rapacity of the "loan-shark" in the +cities. Usury laws are fruits of the social conscience, a recognition +of the duty to protect the weaker citizen in the period of his +direst need. Their utility is diminishing; and at best they are only +negative in their action, preventing the needy borrower from borrowing +when his need is acute. In many European countries a more positive +remedy has been found in the provision of public pawn-shops. In +America a very little has yet been done in this way, and that mostly +by private philanthropy.[5] + +Sec. 5. #Public inspection of standards and of foods#. The determination +and testing of standards of weights and measures has long been a +function of government. English laws of the Middle Ages forbade +false measures and the sale of defective goods, and provided for the +inspection of markets in the cities. Usually, the self-interest of +the purchaser is the best means of ensuring the quality of goods; +but personal inspection by each buyer frequently is difficult and +time-consuming, requiring special and unusual knowledge of the +products and special costly testing apparatus. The states and the +nation undertake, in some cases, therefore, to set minimum standards +of quality, and to enforce them by governmental inspection. Government +coinage had its origin in this need. + +This policy is applied, however, mainly to commodities affecting +health; its application to art products, except to protect the +morality of the community, would be difficult or unwise. Recent +legislation in many lands and in all of the American states has +developed greatly the policy of insuring the purity or the safety of +many articles consumed in the home; notable is the Federal Pure Food +and Drug Act of 1906. The federal law levying a tax on oleomargarine, +however, was designed as protective legislation in the interest of the +farmer. Public regulation and inspection sometimes raises the price, +but the cost is small compared with the convenience and the benefits +resulting to the citizen. + +Sec. 6. #Charity, and control of vice#. The public relief of the +defective classes, insane, feeble-minded, and paupers, is a part +of the social protective policy. The public interest undoubtedly is +served by having these suffering classes systematically relieved, but +the extent and nature of the provision are questions ever in debate. +Still more debated is temperance legislation, both as to licensing and +as to prohibiting the liquor traffic. Nowhere is the manufacture and +sale of intoxicating liquor treated quite like the traffic in most +other goods, because it is recognized that the public interest is +affected in a different way. While it is beyond question that society +should protect itself and its innocent members against the drunkard, +it is more doubtful whether it owes to the man, for his sake, +protection against his own blunders. Not even the gods can save the +stupid. Temperance legislation is strongest in its social aspect. The +opponent of it usually champions the individualist view; its partizans +uphold, in varying degrees, the social view. + +Similar questions arise regarding lotteries, gambling, betting, and +horse-racing. When a man backs a worthless horse against the field, +money probably is transferred from the stupider to the shrewder party. +The philosopher may say that the sooner a prodigal and his money +are parted the better; but the broken gambler remains a burden and a +threat to honest society. Gambling, lotteries, and speculation cause +embezzlement, crime, unhappy homes, and wrecked lives.[6] Here are +to be found with difficulty the true boundaries between ethics and +expediency. A busybody despotism may protect the fool, but it thereby +helps to perpetuate and multiply his folly; yet if the fool is left +alone, he too often is a plague to the wise and the virtuous. + +Sec. 7. #City growth and the housing problem#. In 1790, of our population +only 3 per cent lived in cities of over eight thousand inhabitants; +in 1900 the percentage was 33. Then the largest city (Philadelphia) +numbered 50,000; in 1910 the largest city (New York) numbered +5,500,000; that is, 110 times as large 120 years later. The total +number of persons living in cities of 8000 had increased in more than +double that ratio. The rapid growth of cities brought with it many +evils. Considered in their more material aspects, nearly all of these +are summed up in the expression "the housing problem." + +As population grows denser in cities, land rises in value, yards and +gardens narrow and then disappear, light, sun, and air are shut out, +and cleanliness, decency, and home life become more difficult and, +for many, impossible. The residents gradually group themselves in +districts corresponding to their economic incomes, and the poorer +parts of the population become tenement dwellers in the neighborhood +of factories or become segregated in "slum" districts of unsanitary +and dilapidated houses. + +Sec. 8. #Good housing legislation.# Two policies are open under +these conditions. The one, always followed for a time, is to leave +individual self-interest unguided to solve the problem. If the tenant +agrees to rent a disease-breeding house, he is the first to suffer. +The interests of investors, it is said, will supply as good a house +as each tenant can pay for. The other policy now adopted is to set +a minimum standard of sanitation and comfort, in respect to plans, +lighting, materials, and proportion of lots to be covered, to which +standard all builders and owners must attain. Complying with the legal +requirements, they are left free to collect whatever rent they can +get. As one bad building may bring down the rent of all on the street, +such legislation may sometimes be in the interest of the body of +landowners as against the selfish desires of some individuals. Mainly, +however, the regulation is in the interest of the tenants and of +society as a whole, and against that of the landlords. The rents +from slum property are threatened, hence the strong opposition always +manifested against tenement-house legislation by some landlords, +architects, and contractors, who fight it as an interference with +their interests and as a confiscation of their property. It is not +unlikely that this policy has the effect of making rents too high for +some poorer tenants and driving them into the country. But this result +is not so undesirable. Moreover, the control and inspection of housing +conditions has in a few states been made statewide to reach even "the +country slums" which lately have been recognized to exist. Enlightened +sentiment to-day favors efforts to destroy the breeding-places of +disease, misery, and crime, no matter where they may be. + +Property owners are in many communities no longer left free to +determine height of buildings, appearance, or even the uses for which +houses may be erected in any district. American cities have still much +to learn in this regard from the example of many European cities which +have developed the art of city planning with wonderful results in +beauty of landscape and of architecture, in practical economy for +business, and in the health and welfare of the mass of the people. + +Sec. 9. #General grounds of this social legislation#. Why are not such +matters as we have been discussing safely left to individuals? It is +for the interest of every one that his back yard should not be a +place of noisome smells and disagreeable sights. But men are at times +strangely obstinate, selfish, and neglectful, and through one man's +fault a whole community may suffer. The refusal of one man to put +a sewer in front of his house may block the improvement of a whole +street. The heedlessness of one family may bring an epidemic upon an +entire city. There must be a plan, and by law the will of the majority +must be imposed upon the unsocial few. Where voluntary cooeperation +fails, compulsory cooeperation often is necessary. Thus health laws, +tax laws, and improvement laws regulate many of the acts of citizens, +limit the use of property, and compel men to better social courses +against their own wishes and judgments. + +All such laws as these are protective legislation, in that they depart +from the rule of free trade taken in its broadest sense. It does +not follow, however, that all these laws stand or fall together. The +justification of such measures is limited and relative, and therefore +of varying strength. All protective measures are alike in that +the free choice of one citizen is forbidden by law in the supposed +interest of some other citizen who is to be "protected." While the +purpose of the tariff is economic and political, in a large majority +of social laws the moral purpose is fundamental. It is the demand of +humanity that competition be placed upon a higher plane. Most social +legislation is to protect the weak from being forced into contracts, +or from living in conditions injurious to their welfare and happiness. +The justification for these limitations upon the right of private +property, upon the free choice of the individual, upon "free +competition," must be found in the social result secured. The best +test of social protective laws is their contribution to a higher +independence and to a freer competition on a higher, more worthy, and +more humane plane. + +Sec. 10. #Training in the trades#. Free elementary and secondary +education has become the all but unquestioned public policy in the +American commonwealths. The main motive for it has been the belief +that education in books is a necessity for good citizenship in a +republic. At the same time it has been thought that the training of +the school would help the child to earn a living. This appears to have +been true so long and so far as it was combined with, or supplemented +by, industrial training on the farm, in the home, and through +apprenticeship in the manual trades, as once was so prevalent. But +industrial conditions have changed. Most of the old-time education +of the schools has now little relation to the industrial life of the +great majority of the children, for few enter clerical or professional +callings. Germany was the first nation to recognize the new +educational need (in fact, never as urgent there as here) and to +provide for systematic and efficient training in all the industrial +arts. Since the beginning of the century the American public has been +awaking to the needs of the situation. We appear to be on the eve of +a great development in industrial training that will equip youth for +more efficient life in business and in the home, either in rural or in +urban conditions. + +Sec. 11. #Prevalence of unemployment.# Many other forms of social +legislation on behalf of the common man might well deserve, did +time and space permit, a larger measure of the economic student's +attention. However, excepting the subjects treated in the next two +chapters, the one remaining that is most important at this time is the +problem of unemployment. + +In every country and at all times where the wage system prevails, some +wage-workers, now more and now less, are "out of work" and unable to +get it. The proportion that they constitute of all workers cannot, +with the aid of any existing statistics, be exactly told, nor +can exact comparisons be made between different countries. Of +the magnitude, importance, and difficulty of this "problem of the +unemployed" there is, however, no question. It is greatest, speaking +generally, in manufacturing industries, tho, among the various kinds, +great differences in this respect appear. In 1900 the United States +census reported that of all persons in gainful occupations 2.5 per +cent had been unemployed more than half the year, 8.8 per cent from +three to six months, and 11 per cent one to three months, a total of +22.3 per cent more than one month.[7] In 1911 in a large group +(nearly all) of the manufacturing industries, the minimum number of +wage-earners employed (in January) was 13 per cent below the maximum +(in November). In some the difference was much greater (e.g., 24 +per cent in the iron industry, 63 per cent in the brick and tile +industry). Statistics of unemployment among trade-unions in New York +and Massachusetts indicate that the annual average of unemployment is +between 12 and 15 per cent. In some years upwards of 10 per cent +of all the working time of the wage-earning population is lost by +unemployment. + +Sec. 12. #Evils of unemployment.# A considerable part of the total in +an ordinary year may be set aside as "normal" in the sense that it is +allowed for in the wage-workers' plans;[8] and a part of it may even +be desirable. Yet there remains an inconceivable sum of suffering in +the lives of the workers, and an enormous economic waste of +productive energy not only for them but for the whole community. +The irregularity, and occasionally the excessive duration, of these +periods of unemployment too often makes unemployment not a beneficent +vacation (comparable to shorter hours), but a period of tragic +anxiety, demoralizing and unfitting for return to work. Irregular work +is generally recognized to be a greater cause of poverty and of actual +pauperism than is a low wage regularly received. + +Sec. 13. #Definition of unemployment.# Unemployment is the state of a +wage-worker for the time out of a job. But this definition needs to be +further explained and limited if it is to be useful in the discussion +of unemployment as an evil calling for social remedy. There must be +set aside the cases where the lack of a job is due to one rest day +in seven and to legal holidays, a total of nearly 65 days in most +American states; to the worker's being on strike; to temporary +sickness; finally, and more difficult to distinguish, that due to +continued disability, physical, mental, or moral, to do the work up to +an acceptable standard and to retain a job in the occupation chosen +by the applicant. The first cannot be called a problem, and the others +constitute the problems of strikes, of industrial sickness, and of the +unemployables, respectively. + +There still remain some unanswered questions such, for example, as: +whether in seasonal trades (e.g., teaching, or the building trades) +allowance should be made for normal vacations and for slack times, +not to be counted as unemployment; and whether lack of work at one's +principal occupation is ever or always unemployment when the person is +actually employed or can get work at some lower paid employment. The +more frequent answer to these questions is in the negative but this +in some cases is almost palpably absurd. Further study is necessary to +work out a generally acceptable concept of unemployment. + +Sec. 14. #Individual maladjustments causing unemployment.# The cause +or causes of the evil must be ascertained before a remedy can be +intelligently applied. It is pretty generally agreed that unemployment +is essentially a problem of maladjustment of the labor supply, and not +that of an absolutely and permanently redundant supply. That is, there +is, under static conditions, work for all to do at various rates of +wages that would bring about a value equilibrium of services.[9] The +maladjustments are either of an individual or of a general character. +Individual maladjustment may be due to a mistake in choosing an +occupation (e.g., through the vain ambition of one unfitted to be +an artist, actor, lawyer, or teacher); or to failure to acquire by +adequate training the necessary skill; or to loss of capacity by +accident, old age, or failure of mental or moral powers; in all +of which cases the problem verges upon or becomes that of the +unemployable. The "can't-works" and the "won't-works" must be divided +from the "want-works." If there is any remedy in such cases it must be +through re-education, personal reform, or change of occupation. + +Many persons look upon this type of cases as almost wholly accounting +for the problem of the unemployed. They are confirmed in this opinion +by the fact that the out-of-work group in any trade at any time is, on +the average, the least efficient group of workers in the trade. This +results from selection by the employers. This selection is due to +the _relative_ not to the _absolute_ efficiency or inefficiency of +workers, and must result whenever there are any discoverable economic +differences in the workers (all things considered) that are employed +at the same wage. This would continue even tho the poorest workers +were to raise their efficiency above that of the best men now +retained. "Personal inefficiency" may explain a chronic low wage or +absolute unemployability in a particular case, but it does not +explain intermittent lack of work for those willing and able to work. +Unemployment is a social problem and not merely an individual problem. + +Sec. 15. #Maladjustment of wages causing unemployment.# It seems +highly probable that the artificial maintenance of a wage above the +competitive, or value-equilibrium, rate of the individual, whether +this be done by sympathy, by custom, or by the action of trade unions, +must cause some maladjustment of workers in relation to available jobs +and thus increase unemployment. To doubt this is again to maintain +the absolute inelasticity of the demand for labor with changes in its +price.[10] If the true equilibrium wage in a certain industry were +$3.00 a day, then a wage of $4.00 a day would attract to the trade +more than enough workers to meet the demand for labor in normal +periods (unless entry to the trade is controlled by monopoly power), +and at length the losses from unemployment would balance the day-wages +received in excess of the rate obtaining elsewhere for that quality +of labor. Any artificial obstacles to change of occupation or to +concessions in the kind of work done and in the rate of wages must +operate to increase the maladjustment. So far as this maladjustment +occurs, it may cause unemployment neutralizing the apparent gain +of higher day-wages obtained by monopoly power. The very inertia of +wages, however, in new price situations[11] makes the wage-workers +resist more vigorously such a policy of wage concessions. Moreover, +the difficulty here indicated is more particularly one occurring +in static conditions and is to be distinguished from the dynamic +maladjustments next to be considered. + +Sec. 16. #Individual maladjustment in finding jobs.# Another kind of +individual maladjustment is the failure of the jobless man to connect +with the manless job. A certain amount of this maladjustment must +exist in the most stable industries and in the most settled industrial +conditions. Fluctuations occur in the market demand for the products +of various establishments, requiring the taking on or laying off of +some men. Fluctuations occur in the plans both of employers and of +wage-workers as a result of age, of removal, for reasons more or +less non-economic, of desire to change occupations, of variations in +health, and of countless other causes. The needs of the employer for +a worker, and of the worker for a job, are mutual. To a large degree +these various fluctuations are mutually compensatory, workers going +and coming, orders increasing here and decreasing there. Total jobs +and total workers capable of filling the jobs, are at any moment in +normal times equal quantities, if they can be brought together. But +almost everywhere is lacking a real labor-market. The substitutes +for it are largely ineffective: trade-union action, employers' +associations, "want ads," cards in shop windows, weary walks from door +to door, lines of waiting men outside of factories, private employment +agencies. At their best the private employment agencies perform +valuable services within limited fields, but they are uncoordinated, +and utterly inadequate to meet the chief need, and at their worst they +are the instruments of great abuses against the unemployed. + +Sec. 17. #Public employment offices.# Vigorous efforts to create local +"free employment offices," or "labor exchanges," began in a number +of countries about 1895. The movement gained headway in the next ten +years and has since steadily grown. In Germany the chief exchanges +have been founded and conducted by the municipalities (while others +are controlled by the unions and by groups of employers) and have +remained largely decentralized, tho cooeperating to some extent through +voluntary state conferences of officials of the exchanges, and since +1915 required to report to the imperial statistical office. The total +number of exchanges in Germany (in 1915) was nearly 3000. The general +results have been remarkably good, altho not completely satisfactory. + +Every industrial country of Europe has done something of this kind. +Great Britain, however, after some experiments with a similar +local system, established in 1909 the first national system of +"labor-exchanges." In America the movement is developing in three +directions, through municipal, state, and federal offices. These are +united (since 1913) in an "American Association of Public Employment +Offices." In 1915 there were known to be 99 state and city employment +offices distributed through 30 states, besides federal offices +operated in 18 cities in connection with the Bureau of Immigration. +The clearly recognized task is now to cooerdinate these various +agencies into an efficient national system, eliminating partizan +politics and elevating the management of all branches to the plane +of professional service. Through these agencies can be operated an +industrial service, analogous in function to the weather bureau, and +reporting from day to day the pressure of demand and the prospects for +labor in the various parts of the country. The economic results of +a complete, exclusive, and efficient service of this kind would far +exceed its legitimate cost to the community. + +Sec. 18. #Fluctuations of industry causing unemployment.# Any one of the +maladjustments in employment thus far considered may occur at a +given moment, in static conditions of industry. But there are +also maladjustments resulting from more general industrial changes +throughout a period of time. The two main types of these are seasonal +and cyclical changes, the one occurring within a year, and the other +occurring within the longer period of the business cycle. At the +downward swing of these seasonal and cyclical changes the number of +would-be workers exceeds the number of jobs [12] and the resulting +unemployment is greatest when the minor and the major swings are both +downward, about midwinter in a period of industrial depression. Thus +in 1893-94, and to a lessening degree in 1894-95, 1895-96; in 1907-08, +and 1914-15. Of course employment offices alone are no remedy for the +exceptional difficulties of such times, and the individual, whether he +be an unfortunate "out-of-work" or a more fortunate well-wisher, feels +helpless in the face of the overwhelming burden of distress. Such +a situation is declared by the radical communists to spell the +bankruptcy of the wage-system; while the most conservative students +of the subject confess that this periodic chaos in the labor market is +the strongest indictment of, and involves the gravest dangers to, the +existing economic and social order. + +Sec. 19. #Remedies for seasonal fluctuations.# But of late there has been +a growing hope that an answer may be found to this economic riddle of +the Sphinx. A number of different measures are being experimentally +tested and applied. Many years of effort will be required for the +perfecting of these plans separately and collectively. Some of these +plans may be here indicated, however briefly. To remedy seasonal +fluctuations within the establishments output may be regularized by +taking orders in advance; by producing various products successively +in the same factory; by overcoming weather conditions as has been done +successfully in brick and tile making, ditch digging, and building +operations; by transferring workers from one department of an +establishment to another; by improving the employment departments so +as to build up a more stable force, thus reducing the great expense +of "hiring and firing" and the loss through training "green hands"; by +varying the length of the working day while keeping the same working +force throughout the year; by cooeperating with other industries +to build up a regular working force and transferring it from one +establishment to another with seasonal changes. + +Of great aid in a number of these measures is a broader industrial +training for the workers, making them more able to change from one +occupation to another. For this purpose every period of unemployment +and of temporary shortening of the working day ought to be used as +a time for trade education, by the recently devised and successfully +applied "short-unit courses for wage-earners."[13] + +Sec. 20. #Reducing cyclical unemployment and its effects.# The +maladjustments due to the movement of the business cycle are even more +difficult to remedy completely, but are diminished by every measure +that helps to reduce the great financial fluctuations.[14] Further, +many communities have already begun to plan large public works more +systematically so that they may be carried on mainly when private +business is more slack. A comparatively small amount of such work +would serve as a gyroscope to preserve the balance of employment for +a large part of the less skilled workers. It has been estimated by +Bowley, an English statistician, that in the United Kingdom, it would +be necessary to set aside only 3 per cent of the annual expenditure +for public works to be used additionally in years of industrial +depression, in order to balance the wage loss at such times. This is a +well-nigh incredibly small proportion, hardly as great as that of the +weight of the gyroscope compared with the car or ship to which it is +applied. It is hardly to be doubted that hitherto, in America, public +undertakings have been executed much more largely in periods of +business prosperity, and have been diminished during "hard times," +thus greatly accentuating the harmful swing of the labor-demand. +Finally, unemployment insurance, which has already been applied +by parliamentary legislation in Great Britain to a group of nearly +3,000,000 wage-workers, is an indispensable and highly hopeful +measure of relief. The place of this in a general system of industrial +insurance will be indicated in the next chapter. + + +[Footnote 1: See above, ch. 20, sec. 1.] + +[Footnote 2: See ch. 23, secs. 5-7, on the old law of employer's +liability.] + +[Footnote 3: See Vol. I, pp. 292-293.] + +[Footnote 4: See Vol. I, p. 304.] + +[Footnote 5: See Vol. I, pp. 293 and 303.] + +[Footnote 6: See above, ch. 12, sec. 2.] + +[Footnote 7: Great importance should not be attached to these +figures for they contain errors resulting from the inexact notions +of inexperienced enumerators as to what constitutes unemployment, +and from the inclusion of all persons gainfully employed, whether +self-employed or in professional, salaried, or wage-earning +positions.] + +[Footnote 8: See Vol. I, p. 207, on irregularity of employment as +influencing wages, psychic income, and choice of employment.] + +[Footnote 9: On static, see Vol. I, ch. 32; on the scarcity of labor, +see Vol. I, ch. 18, sec. 2 and references there; on value of +services and wages see Vol. I, ch. 18, especially sec. 3, and ch. 19, +especially sec. 7.] + +[Footnote 10: See above, ch. 21, sec. 9 on the minimum wage.] + +[Footnote 11: See Vol. I, p. 223, on friction in the adjustment of +wages.] + +[Footnote 12: See above, ch. 10, secs. 6 and 7, on the industrial +crisis.] + +[Footnote 13: See Bulletin of the United States Bureau of Labor +Statistics, No. 159 (April, 1915). ] + +[Footnote 14: See above, ch. 8, secs. 6, 7; ch. 9, secs. 6, 8; ch. 10, +secs. 14, 16; ch. 14, sec. 12. ] + + + + +CHAPTER 23 + +SOCIAL INSURANCE + + Sec. 1. Purpose and meaning of social insurance. Sec. 2. Increasing need + of social insurance. Sec. 3. The new era of social insurance. Sec. 4. Features + of social insurance. Sec. 5. Historical roots of accident insurance. Sec. 6. + Development of compensation for accidents. Sec. 7. The compensation plan + in America. Sec. 8. Standards for a compensation law. Sec. 9. Historical + roots of sick-insurance. Sec. 10. Need of sick-insurance in America. + Sec. 11. Old-age and invalidity pensions. Sec. 12. Unemployment insurance. + Sec. 13. Need of ideals in social insurance. Sec. 14. Insurance rather than + penalty. Sec. 15. The compulsory principle. Sec. 16. State insurance and + a unified system. Sec. 17. The contributory principle. + + +Sec. 1. #Purpose and meaning of social insurance.# In importance +surpassing at present any one of the various measures on behalf of +the wage-earning class that have thus far been considered is the +remarkable development now under way of plans and agencies to provide +insurance for "the common man." Insurance means making some kind +of provision out of present means, so as to reduce the injury and +suffering that would result from a future mishap. Usually, likewise, +it implies uniting with others to distribute the expense fairly over +all in the group. Social insurance is the term most frequently applied +to the various institutions and plans provided, more or less under +the regulation of law, for the protection of the lower-paid workers in +most modern countries. The terms industrial insurance and workingmen's +insurance are likewise used. The principal types of events for which +social insurance in its various branches provides, are (1) accident, +(2) sickness, (3) incapacitation (either by old age or by invalidity, +that is, permanent failure of health within the normal working years), +(4) death (generally called "life" or "survivor" insurance), and (5) +unemployment. + +The direct aim of social insurance is not to prevent these mishaps +(tho that may be an indirect result), but it is to provide some +financial indemnity for the economic loss and expense involved in the +mishap. The principal kinds of losses are two. First, that occasioned +directly in caring for the sick or injured person, the expense of +medical attention, nursing, hospital care, drugs and special apparatus +such as crutches and glasses, and burial expenses. The second is the +loss of income because of inability to work as a result of injury, +of illness, or of permanent disability, or (in the case of life +insurance) of the death of the bread-winner, or of want of employment. + +Sec. 2. #Increasing need of social insurance.# In various connections we +have observed how the changes that have been occurring in modern times +have increased the uncertainties of the industrial life and of the +earning power of the mass of the workers.[1] It should be further +observed that in city conditions, a working family does not have, as +in agricultural conditions, the supplementary sources of income from +garden, field, forest, and stream, and it is not so possible to use +the earning power of children, of old people, and of the partially +disabled. The faster working pace of factories, the rapid fluctuations +of employment with changing fashions, inventions, shifts of +population, and waves of industrial prosperity and depression, all +have introduced new risks and problems into the worker's life. The +increasing payment of wages in money, and the more temporary nature +of employment of men in many kinds of factory work, have added to +the problem. With these changes have come a growing interest in +the welfare of the mass of the workers and a growing sense of +responsibility on the part of the public. + +There is an appalling mass of misfortune in the United States +requiring social insurance for its relief, altho satisfactory +statistics of the various types of misfortune are still lacking. On +the basis of the experience of private industrial insurance companies +it appears that there are not less than 25.000 fatal industrial +accidents yearly, and 700,000 injuries causing disability for more +than four weeks, to say nothing of the enormous number of slight +injuries--if injuries, many of them very painful, disabling for a +period from one day to four weeks, should be called slight. As to loss +of time due to illness, the experience of Germany shows an average of +eight or nine days a year per worker, which figure, applied to those +gainfully employed in America, would mean nearly 300,000,000 days of +illness, or 1,000,000 one-man working years, causing a loss estimated +to be $750,000,000 annually. + +It is estimated that one on eighteen of American wage-workers attains +the age of sixty-five with no financial provision for old age, and +that about 1,250,000 persons above the age of sixty-five are dependent +on their families or on charity, public or private, receiving +$250,000,000 yearly. + +The losses and suffering to dependents due to the death of the +bread-winner are very partially accounted for by accidents, but no +estimate of much value can now be made of the other cases. Some notion +of the losses from unemployment has been given in discussing that +subject in the preceding chapter. + +Sec. 3. #The new era of social insurance.# Some not insignificant +attempts to deal with these problems were made throughout the +nineteenth century, but the new era of social insurance may be said to +date from the message of the Emperor William to the German Reichstag +in 1881, in which he said: + + We consider it our imperial duty to impress upon the Reichstag the + necessity of furthering the welfare of the working people.... In order + to realize these views, a bill for the insurance of workmen against + industrial accidents will first of all be laid before you; after which a + supplementary measure will be submitted, providing for a general + organization of industrial sick-relief insurance. Likewise, those who are + disabled in consequence _of_ old age, or invalidity, possess a + well-founded claim to more relief on the part of the state than they have + hitherto enjoyed. + +The program here outlined was carried out by the enactment between +1883 and 1889 of a series of laws, which taken together constituted +a pretty effective system of social insurance for the mass of +wage-workers in the German Empire. Later amendments have extended +and improved the various features of the plan, which has served as a +stimulative example to other countries. America has been the tardiest +among all the industrial nations to undertake this kind of social +reform. + +Sec. 4. #Features of social insurance.# The plans of social insurance, +in force in various countries, present a great variety of features +combined in many ways. The main characteristics in which they may +differ relate to (1) the element of compulsion, (2) contributions by +the insured, (3) the nature of the insurance organization. + +Insurance may be _voluntary_ or _compulsory_. It is voluntary when +the state simply encourages the formation of insurance agencies, and +perhaps contributes something to them, leaving it to the individuals +to insure themselves as they choose, in mutual societies, or in +privately managed companies. In the case of accident insurance, +however, there is often a semi-compulsion by which the employer is +requires to pay indemnity to his workers, according to fixed scales of +compensation, but is left free to insure himself against this risk +or not as he pleases, in which case it is still called voluntary +insurance. Compulsory insurance is that which the state requires to +be provided be means of some mutual organization of the insured, or of +the employers, or by the state. + +Insurance may be _contributory_ or _noncontributory_. It is on the +contributory plan when the insured workers contribute something +toward the premiums that provide the funds for eventual payment. It is +noncontributory when the funds are provided either by the employers or +by the state without any payments from the insured. + +Insurance may be (a) in _private_ companies, carrying on the business +for profit; or (b) in _mutual_ companies of workingmen, or of +employers insuring themselves against the cost of compensation in case +of accident to their employees; or (c) in a _state_ bureau, or fund, +organized and conducted by government. + +Sec. 5. #Historical roots of accident insurance#. The different kinds +of social insurance had different origins, some knowledge of which is +necessary to an understanding of the present situation. These origins +still affect the nature of social insurance to-day, and have prevented +the development of a truly unified and logical system in accord with +present conceptions of needs and of justice. + +Accident insurance had its beginnings in the liability of employers +for accidents that happened as a result of the employer's negligence, +a principle found to some degree in all countries. Thus the earlier +payments to workers in cases of accidents were not insurance indemnity +but merely damages collected in court for the fault of the employer. +In Great Britain and the United States, indeed, by judicial +interpretation the law grew more strict as against the claims of the +workers, until about 1880 in Great Britain and 1910 in the United +States. To collect damages it was not enough for the workman to prove +the employer's negligence, for collection was made more difficult by +(1) the doctrine of contributory negligence, (2) the doctrine of the +assumption of risk, and (3) the fellow-servant doctrine. + +By the doctrine of contributory negligence, the workman's claim could +be defeated by showing that he had by his carelessness contributed +to the accident even when the employer had been negligent. By the +doctrine of assumption of risk the workman was presumed, in entering +upon employment, to have taken upon himself the risks usually incident +to the employment, including the chance of imperfections in the +machinery, of which he might by some care have known. By the +fellow-servant doctrine the employer was freed from responsibility for +accidents due to the negligence of other employees, "fellow servants," +even when it was impossible for him to know their character and +reputation as in the case of a large factory or of a great railroad. + +Sec. 6. #Development of compensation for accidents#. In some countries of +continental Europe, notably Germany and France, the law of employers' +liability was altered in favor of the worker early in the nineteenth +century, so as to make compensation more usual and adequate. Since +1885, especially, this liability has been much further extended in +many countries and in various directions, and yet the laws of accident +compensation still retain many features of the old liability laws and +remain in their legal character somewhat apart from the other branches +of social insurance. Even in the newer type of "compensation" laws the +indemnity paid by employers on account of accident is looked upon as +commuted damages, but the old employers' defenses, just named, are +abolished or made more difficult to plead. The new plan has the +advantages of granting compensation by a schedule fixed in the law, +insuring greater certainty, more adequate payments, greater ease of +securing redress, and abolishing the cost of law suits. Still, in most +countries and in most states in America, the worker has the option +of suing under the old law. In some forty countries the principle of +compensation by a prearranged schedule of rates has to some degree +replaced that of litigation, and determination by a jury of the +damages, in each separate case. The insurance spoken of in relation to +accidents is technically that which the employers may or must take to +protect themselves against loss, not that which the workman has. + +The situation as to compensation in a few leading countries is as + follows, the dates given being those of important legislation. + + ACCIDENT INSURANCE + + _Voluntary_ (as to employers insuring, but compulsory compensation). + + Great Britain, 1897, 1906, 1907. + + France, 1898, 1907, (compulsory for seamen, 1898, 1905). + + Denmark, 1898, 1908. + + Belgium, 1903, (voluntary except for miners). + + + _Compulsory insurance of their risks, by employers_. + + Belgium, for miners, 1868. + + Germany, 1884, (in employers' associations), 1887, 1900, + 1911 (voluntary for some classes). + + Austria, 1887 (as in Germany), 1894 (voluntary for some + classes). + + Norway, 1894 (in a state central insurance office), 1896. + + Italy, 1898, 1904. + + Holland, 1901 (in the Royal Bank or in private companies). + + Sweden, 1901 (as in Norway). + +Sec. 7. #The compensation plan in America#. Under the practical operation +of the law of employers' liability in force in any American state +until 1911, a very small proportion of the workers injured while +at work were legally entitled to any indemnity, and a still smaller +proportion could succeed in recovering any substantial amount. +Employers, and the accident companies with which employers insured, +either compromised the claims for small amounts or fought bitterly +in the courts the claims of those who refused to compromise. When the +courts awarded damages, large or small, a large part of the proceeds +went for legal expenses. But a small proportion of the total costs to +employers came as benefits to the victims of accidents. It appeared +in an extensive investigation of the business of the large industrial +insurance companies that but 28 per cent of the premiums paid by +employers were paid to workmen as indemnity. + +Between 1911 and 1916 the laws have been changed to some extent in +their application to selected occupations in at least 34 states and +territories of the United States, and covering nearly all but some of +the distinctly agricultural states. This remarkable development has +been largely actuated and guided by a comparatively small group +of socially minded nonworking class citizens rather than by either +employees or organized workers. It is an encouraging example of +what can be done by skilful methods, when conditions are ripe, in +furthering righteous social legislation without the use of money or of +corrupting influences. + +Sec. 8. #Standards for a compensation law#. The standards which, in +detail, in one jurisdiction or another, have already been attained, +and which are the provisional ideals now sought by reformers, may +be briefly stated as follows.[2] All employments should be included, +altho, as yet, there are various exceptions, such as farm labor +and domestic service, employers with but few employees (the +number excepted being one to five), and nonhazardous employments. +Compensation should be granted for all injuries, suffered in the +course of employment, that cause disability beyond a definite waiting +period of three to seven days. Compensation should include medical +attendance for a limited period, and two-thirds of the estimated +loss of wages for disability, either total or partial, during its +continuance; and, in case of death, funeral expenses, and from one to +two-thirds of the estimated wages, to the widow (or dependent widower) +and children, or to other dependent relatives. To secure the full +benefit of the plan it must be made the exclusive remedy, replacing +entirely the old remedy of suits for negligence. The employer should +be required to insure his risk, and general sentiment is moving +rapidly toward the plan of a state insurance bureau as the exclusive +agency.[3] For the administration of the system an accident and +insurance board should be created in each jurisdiction. Experience +shows the importance of careful attention to numerous other details, +and many amendments will be made as the needs become manifest in +practice. + +Sec. 9. #Historical roots of sick-insurance.# Sick-insurance had its +origin partly in trade unions and in fraternal societies voluntarily +organized by workers, and partly in the system of public poor +relief. The voluntary societies were first recognized, regulated, and +encouraged by law (in some cases being given state subsidies), and +later, in some cases, being made compulsory for some classes of +members (i.e., such as miners and seamen). On these institutions have +been built the later state systems of social sick-insurance. This +movement had made large headway by the end of the third quarter of the +nineteenth century in various European countries. The two systems that +are the most typical and influential examples are those of the German +Empire and of Great Britain, the former local and the latter national +in organization. The British plan of national health insurance +promises to be on the whole of the greatest influence upon American +opinion and policy. However, the best informed American students +favor in some features the more decentralized German rather than the +centralized British system. While it is impossible to describe the +various systems in detail, the situation in the leading industrial +countries of Europe may be indicated as follows. + + SICK-INSURANCE + + _Voluntary_. + + France, 1850, 1898 (voluntary except for miners). + Belgium, 1851, 1894. + Italy, 1886. + Sweden, 1891. + Denmark, 1892. + Holland (authorized private societies and poor relief). + + + _Compulsory_. + + Germany, 1883, 1911 (voluntary for others with earnings + of $500). + + Austria, 1888 (voluntary for some classes). + + France, for miners, 1894. + + Norway, 1909. + + Great Britain, national system 1911 (was voluntary 1875-1911). + +Sec. 10. #Need of sick-insurance in America#. Contrary to the usual +opinion in America, the sick-insurance in Germany is, both in amount +of contributions collected and in importance to the welfare of the +workers and their families, of more importance than is either accident +compensation or the system of invalidity pensions. Yet, thus far, our +interest and efforts in America have been directed almost entirely +toward the reform of accident compensation and almost everything +remains to be done in the matter of social insurance against sickness. +It is true that in recent years there has been a rapid development, +in some of the larger cities, of medical insurance clubs conducted by +private companies, with dues of ten cents weekly. They give medical +care in ordinary cases, but require extra payments for surgical +treatment and for medical supplies. They as yet touch only the +outer fringe of the problem, but they testify to the need and to the +increasing desire of the wage-workers for insurance of this kind. It +is believed that at least 4 per cent of the income of wage-workers +now is expended for the care of sickness and for burial insurance. The +losses of wages meantime remain unequalized by insurance indemnities. +A large proportion of the cases of temporary destitution in ordinarily +self-supporting families is due to sickness. The German experience +shows that 4 per cent of wages, collected in part from employers and +in part from wage-workers, is sufficient to give a far better medical +service than can be had through private effort, to give some indemnity +for loss of wages, and to carry on a very useful hygienic work for the +families and for the public health. + +Sec. 11. #Old-age and invalidity pensions#. Insurance to provide pensions +for old-age and permanent (partial or total) disability is in nature +but an extension of the insurance against accident and sickness. In +a relatively small number of cases accidents result in permanent +disability and it is both illogical and inhumane to limit, +arbitrarily, the compensation in such cases to a certain period, +as two or three years, as is done in many compensation laws. The +disability due to advancing years is in nature a chronic illness, +inevitable, sooner or later, to all who survive. The movement to +provide some indemnity in such cases has been rapid in European +countries, doubtless because the problem was a very pressing one where +the average earnings are low. In Germany and Austria this development +has been more in connection with other forms of insurance; in Denmark, +Great Britain, and France it has had more the aspect of an extension +of poor relief. In the United States little has been done to provide +for these great needs. Massachusetts in 1907 authorized savings +banks to sell insurance and old-age pensions to those who applied. An +increasing number of corporations, especially railroads, are adopting +a pension system for men growing old in their service, but nothing has +been done of a general public nature toward compulsory and universal +protection against these misfortunes. + +The following table shows the situation in some of the leading +countries: + + OLD AGE AND INVALIDITY PENSIONS + + _Voluntary_. + + Belgium, 1850, 1903 (voluntary except for miners). + + Italy, 1898, 1907 (all wage earners). + + + _Compulsory_. + + Belgium, for miners, 1868. + + Germany, 1889, 1899, 1911. + + Austria, 1889 (miners only); 1906 (office employees). + + Denmark, 1891, 1908 (noncontributory). + + France, for seamen 1850, 1881; for miners, 1894, 1905, + 1907 (noncontributory, all indigent citizens); 1910 (contributory, + all workmen and employees; was voluntary + by laws 1850, 1886). + + Great Britain, 1908 (noncontributory, old age pensions, + granted by the government). + + Sweden, 1913 (universal, contributory). + +Sec. 12. #Unemployment insurance#. The most difficult of all the problems +of insurance is that of unemployment. There the amount of the risk +in any case is so largely dependent on the personal qualities of the +worker. There are obvious objections to making the competent, steady, +sober members of any trade bear the burden of the infirmities of their +fellows. But, on the other hand, as we have seen,[4] a large part of +the problem of unemployment is chargeable to social maladjustments +rather than to individual faults. + +At present development in this field is along two lines, that +of subsidized trade-union relief (the Ghent system), and that of +compulsory state insurance in certain industries. The former has been +adopted by many cities and by some countries in western Europe, the +public paying a certain proportion (from one sixth to one third) of +the amounts of the benefits paid by the unions. Great Britain is +the only country as yet to adopt a compulsory state system. It began +operation in 1912, and applied to 2,500,000 persons, or one sixth of +all the wage-earners. The contributions are made 3/8 by employers, 3/8 +by wage-earners, and 2/8 by the state. There are several original and +interesting features of the act, such as rewarding, by the refunding +of dues, those employers that provide regular employment and older +workmen that have received benefits amounting to less than their +contributions. Its administration in close connection with the labor +exchanges will give valuable experience in this field. The working +out of the many minor problems of classification, assessment, and +administration, of unemployment insurance, will require many more +years of experimentation. + +Sec. 13. #Need of ideals in social insurance#. The world has had nearly +forty years of experimentation of a remarkably varied kind, in the +field of social insurance, since the German system was inaugurated in +the eighties of the nineteenth century. America stands almost at the +beginning of a development along those lines that is certain to be of +enormous extent and importance. It would be folly for us to repeat +the costly errors of other countries by failing to recognize certain +principles which have been clearly established by experience. If these +could be grasped and firmly kept in mind our progress in this field +in America would be faster, more certain, less costly, and farther +reaching than it promises otherwise to be. We can here attempt no more +than merely to outline these principles that must be embodied in an +ideal system of social insurance in America. + +Sec. 14. #Insurance rather than penalty#. The principle of social +insurance rather than that of legal penalty should be universally +recognized. At present, in all countries where the several kinds of +insurance are found side by side, accidents are indemnified on plans +that are still rooted in the notion of employers' liability for +negligence; whereas, necessarily, the indemnity in case of sickness +and of old age has no such explanation. The unfortunate result of +this difference of view is that whereas all cases of sickness and +invalidity entitle to benefits, only those accidents suffered "in +the course of employment" are indemnified, and the worker is left +unprotected in a large share of the accidents to which he is liable. +The worker's need and the social need are thus not adequately met. We +have started along the same line of development in America, and it +is to be feared that only through a long series of legal fictions and +contradictory judicial decisions shall we be able to work out toward +consistency in this matter. Another unfortunate result of this +difference is that accident compensation, being made peculiarly the +task of the employers, does not develop the spirit of responsibility +on the part of the workers and of cooeperation between them +and employers that other forms of insurance call forth, where +representatives of both parties sit together in the administration of +the system. + +Sec. 15. #The compulsory principle#. Insurance must be general in its +application to all the persons within broad wage-earning classes, +and in order to be general it must necessarily be compulsory, +not voluntary, in its application. To leave any form of insurance +optional, or elective, with either employers or wage-workers, is to +fail of the main purpose in a large proportion of the individual cases +where it is most needed, and to increase the expense to those that are +included. Within a compulsory system, however, there should be given +wide opportunity for the voluntary principle by admitting to the +system others that are not compelled to insure, and to enable any +insured person to increase his paid-up, nonforfeitable insurance at +any time by extra payments made at times of unusually high wages, from +legacies, or from any other exceptional income. + +Sec. 16. #State insurance and a unified system#. The state, through +the public insurance office, must ultimately be the sole agency for +insurance. Only in this way can the maximum of simplicity and economy +be attained. Of course, this calls for a better appreciation of expert +training, and a broader sentiment in favor of the merit system in the +public service than we yet have in America. + +There should be a unification of various kinds of insurance in one +general plan and under one general administration for the whole state. +This should be done with full regard to the actuarial differences in +costs as among various kinds of insurance, various trades, various +establishments, and, to some extent, even the various individuals, so +as to ascertain the costs and to distribute them equitably. + +Only in this way can provision be made for entire mobility of labor, +so that men may not be bound, as a condition for obtaining benefits, +to continue in the service of any one employer. To this end there +should be interstate comity and cooeperation, so that the insured could +at any time transfer his actuarial equity from one state to another. + +Sec. 17. #The contributory principle#. The contributory principle should +be adopted, and both employers and wage-earners contribute to the cost +in equal amounts. But further, the general public interests may +be recognized through the payments in aid of the funds (subsidies, +subventions). Both employers and employees usually seek to escape +the burden, by getting the state to bear the whole expense[5] or by +getting the other party to pay all or the larger part. But it is much +to be desired that in large part the finances of a system of social +insurance should be disassociated from the ordinary budgetary system +of taxation and public expenditures. The fundamental reason why the +premiums should be divided between employers and employees is that +this is most favorable to the equal participation and cooeperative +efforts toward reducing the risk, and developing right industrial +and political relations. Everywhere it is the practice to provide for +representation nearly in proportion to contributions. + +It is usually assumed by employers, by wage-workers, and by others in +the discussion of the subject, that the burden remains and is borne by +those who directly pay the premiums, and just in proportion to their +payments. This is an almost utterly mistaken view. There is, on the +contrary, every reason to believe that the general principles of +shifting and incidence of taxation apply fully here.[6] It cannot be +doubted that, if wages are not arbitrarily fixed, if they result, as +we must believe, from an adjustment and equilibrium of the various +classes of labor in a general economic situation, then after a +time the premiums become a part of that general situation. Payments +compulsorily made by employers (by all, without exception) will +ultimately be offset by a lower wage, and if transferred to the +workmen will ultimately be offset by a higher wage. Of course, there +is some delay and friction in making the adjustment, but, under any +settled policy, the adjustment once made will be maintained. The +benefit of social insurance to the workingmen is not mainly that their +wages are increased by the direct contributions of employers to the +premiums, tho there are doubtless some cases of "parasitic" industries +and parasitic employers that escape their due share of payments for +risk, now that there is no insurance system. The great benefits are +that total wages and losses are apportioned economically to the points +of maximum utility; that accumulation of capital by and for the wage +workers is made regular, automatic, safe, and in great amounts; and +that financial aid, physical care, and mental relief from, some of the +most tragic anxieties of life, are given effectively and economically +to the masses of the people. + +But, as has been indicated in another connection above, it is far +from being a matter of indifference, psychologically, where the first, +immediate burden of premium payment falls. The persons paying the +premiums, in whole or in part, are far more keenly aware of the cost, +and alive to reducing and removing the evil conditions. Moreover, +their interest is stimulated by the fact that they are the first +to gain by any temporary economies, and the more so because of the +illusory belief sure to persist, that they are the ultimate as well as +the immediate bearers of the costs. + +The development of a complete system of social insurance along these +lines promises to do more than any other single measure of practical +social reform now under consideration to change the conditions and the +outlook of the wage-earning class. + + +[Footnote 1: See above ch. 2, sec. 14; ch. 10, sec. 7; ch. 20, sec. 1; +ch. 22, secs. 11-18.] + +[Footnote 2: The American Association for Labor Legislation has issued +a pamphlet describing these features more in detail.] + +[Footnote 3: Thirteen states had, in 1916, state insurance funds, +and, in five states (Oregon, Nevada, Washington, West Virginia, and +Wyoming), they are the only insurance agencies allowed.] + +[Footnote 4: Ch. 22, secs. 14-18.] + +[Footnote 5: See examples in the lists of laws above cited, sec. 11.] + +[Footnote 6: See above, ch. 16, sec. 14.] + + + + +CHAPTER 24 + +POPULATION AND IMMIGRATION + + Sec. 1. Nature of the population problem. Sec. 2. Complexity of race problems. + Sec. 3. Economic aspects of the negro problem. Sec. 4. Favorable economic + aspects of early immigration. Sec. 5. Employers' gains from immigration. + Sec. 6. Pressure of immigration upon native wage-workers. Sec. 7. + Abnormal labor conditions resulting from immigration. Sec. 8. Popular + theory of immigrant competition. Sec. 9. Divergent views of effects on + population. Sec. 10. The displacement theory; its fundamental assumption. + Sec. 11. Magnitude of the inflow of immigrants. Sec. 12. Earlier and recent + effects of immigration upon wages. Sec. 13. _Laissez-faire_ policy of + immigration. Sec. 14. Social-protective policy of immigration. Sec. 15. + Population and militarism. Sec. 16. Problem of maximum military power. + + +Sec. 1. #Nature of the population problem.# No one of the problems of +labor thus far discussed is of so great importance in relation to +popular welfare as is "the problem of population." By this is meant +the problem of determining and maintaining the best relation between +the population and the area and resources of the land. What is to be +deemed "best" in this case depends, of course, on the various human +sympathies and points of view of those pronouncing judgment. Very +generally, until the nineteenth century, the only view that found +expression was that of a small ruling class which favored all increase +in population as magnifying the political power of the rulers and as +increasing the wealth of the landed aristocracy. This view still is +unconsciously taken by the members of a small but influential class, +and is echoed without independent thought by many other persons. +But more and more, in this and other labor problems, another more +democratic standard of judgment has come to be taken, that of the +abiding welfare of the masses of the people. This is the point of view +that must be taken by the political economist in a free republic. + +The problem of population presents two main aspects: one as to +composition, and the other as to numbers of the people. Changes in +either of these respects concern the welfare of the masses. Changes in +the kinds of people, or in their relative numbers, may greatly affect +the welfare of the people, in some cases touching special large +classes, and in others affecting the whole mass of the people. + +Sec. 2. #Complexity of race problems.# The questions of race composition +that we shall here consider are those of the negro and of the +immigrant.[1] Both of these questions are complex and go beyond +the limits of mere economic considerations, touching the most vital +political and social interests of the nation. Indeed they involve the +very soul and existence of peoples, for who can doubt that ultimately +racial survival and success are mainly to be determined by physical +and spiritual capacity? + +The negro in America is the gravest of our population problems. In +large portions of our land it overshadows every other public question. +Yet the negro is here because men of the seventeenth century ignored +the complexity of the labor problem and thought only of its economic +aspect. The landowners wished cheaper labor and, reckless of other +consequences, they imported slaves from Africa to get it. They gained +for themselves and a few generations of their descendants a measure +of comparative ease, but at a frightful cost to our national life--a +cost of which the Civil War now seems to have been merely a first +installment on account rather than a final payment. + +Sec. 3. #Economic aspects of the negro problem.# The negro as a wage +earner is found very little outside of the least skilled branches of +a limited range of occupations. Of these the principal ones, as is a +matter of common knowledge, are farm work, domestic service (including +janitor service in stores and factories and work in hotels), and crude +manual outdoor labor. Repeated attempts to operate factories with +a labor force of negroes have proved unsuccessful. In some of the +better-paying occupations in which large numbers of negroes were found +in the North soon after the Civil War, such as barbering, waiting +on table in the best hotels, and skilled manual work, they have been +largely displaced by European immigrants. Negroes are a disturbing and +unwelcome influence in labor organizations, and even when nominally +eligible to membership are in fact rarely accepted. They very +frequently are employed as strike-breakers and this fosters race +antagonism both immediately and permanently. + +The negro problem is, from our present outlook, insoluble. The most +laudable of present efforts, that for industrial training, represented +by Hampton and Tuskegee Institutes, and the work of Booker T. +Washington, leaves the dire fact of two races side by side and +yet unassimilated socially, politically, and, in large measure, +economically. Two other possibilities, race admixture and caste, +are both so repellent to white American thought, that they cannot be +looked upon as solutions. Segregation in a separate state, or separate +states, is a thorogoing proposal, but is practically impossible. +Finally there is the conceivable, but improbable, event of the +decrease and extinction of the negroes in America, Their relative +number has declined since 1800,[2] but their absolute number still +continues to increase. It seems probable that if European immigration +were to be stopped that a very large migration of negroes from the +South to the North and the West would occur to take places hitherto +filled by unskilled immigrant workers. In the year 1915, following the +check to immigration as a result of the European war, a very marked +movement of this kind set in. If this occurred on a much larger scale +it might result in greatly reducing the negro population in some +portions of the South, and as the "natural rate of increase" of the +negroes in the North is a negative quantity, it might cause the total +negro population of the country to begin absolutely decreasing. + +Sec. 4. #Favorable economic aspects of earlier immigration.# Regarding +the immigration problem we are not confined to futile expressions of +regret as in the last case. For by the "immigration problem" is +meant primarily and mainly the coming of immigrants, and we can by +legislation limit or stop their coming, if we will. The question at +issue is whether their coming really is an evil or, on the whole, a +blessing to the country. + +The historic American attitude toward immigration has been highly +favorable to it. The early settlers on these coasts were led by +various motives, some political, some religious, but far the largest +part economic, the motive of bettering their worldly condition. +Land was plentiful and all men of any capacity could easily become +landowners. An inflow of laborers was favorable to the interests +of all the influential elements of the population, especially to +landowners and active business men. Increase of numbers, favoring +division of labor and the economies of production in manufacturing, +and reducing the dangers from Indians and from foreign enemies, seemed +an unmixed blessing. Many of the newcomers soon became landowners and +employers, and in turn favored a continuance of the movement. Thus was +hastened the peopling of the wilderness. The interest of these classes +harmonized to a certain point with the public interest; but likewise +it was in some respects in conflict with the abiding welfare of the +whole nation. It led to the fateful introduction of slavery from +Africa, and it encouraged much defective immigration from Europe, the +heritage of which survives in many defective and vicious strains of +humanity, some of them notorious, such as the Jukes, the Kallikak +family, and the Tribe of Ishmael. + +Sec. 5. #Employers' gains from immigration.#. The immigration from Europe +has furnished an ever-changing group of workers, moderating the +rate of wages which employers otherwise would have had to pay. The +continual influx of cheap labor aided in imparting values to all +industrial opportunities. A large part of these gains have been in +trade, in manufacturers, and in real estate as the cities have taken +and retained an ever-growing share of the immigrants. Successive waves +of immigration, composed of different races, have ever been ready to +fill the ranks of the unskilled workers at wages somewhat lower than +the current American rate. + +The lower enterprisers' costs that resulted from immigration surely +did not accrue to the advantage of the employers alone. Bearing in +mind the fact that the employing-enterpriser is a middleman,[3] we +may see that the lower costs must, in most cases, be passed on to +the consumers in the form of lower prices of products. And often the +consumer, as the employer of domestic service at lower rates than +otherwise would be possible, gets this advantage directly. This +increases the number of those whose self-interest, at least when +narrowly judged, leads them to favor the policy of unrestricted +immigration, Tho perhaps less general than it once was, this sentiment +in favor of immigration is still potent. The continuous inflow +of immigrants has in many industries come to be looked upon as an +indispensable part of the labor supply. Conditions of trade, methods +of manufacturing, prices, profits, and the capital value of the +enterprises have become adjusted to the fact. Hence results one of +those illusions cherished by men whenever they identify their own +profits with the public welfare. Without immigration, it is said, "the +supply of labor would not be equal to the demand." It would not at the +wages prevailing. But supply and demand have reference to a certain +price. At a higher wage the amount of labor offered and the amount +demanded would come to an equality. This would temporarily curtail +profits, and other prices would, after readjustment, be in a different +ratio to wages. + +Sec. 6. #Pressure of immigration upon native wage-workers.# There +must always have been cases where the labor incomes of workers were +somewhat depressed by the incoming of immigrants. Indeed, that must to +some extent always be so when the natives continue to work alongside +of the immigrant at just the same job. But before the Civil War living +conditions were simple, wages comparatively high and (more important) +pretty steadily rising, and the wage-earning class not yet a large +share of the population. Moreover, this conflict of interest was +minimized and often quite avoided by the native changing to another +occupation. In the old days there was always the outlet of free +land on the frontier, now closed. Always there has been a better +opportunity for natives to move into higher positions of foremanship +or as employers of immigrant labor. + +As the wage-earners have become relatively more numerous, many of +them have felt more keenly the pressure of competition from immigrant +labor. Moreover, the immigration since 1890 has been increasingly +from southern and southeastern Europe, from countries with much lower +standards of living, and has been of enormous proportions. Here are +some significant figures as to immigration since 1820. + + -------------------------------------------------------------- + | | | Immigration, + | Immigration | Increase of | per cent of + Decade | in the period | population | population- + | | | increase + -----------------|---------------|-------------|-------------- + 1820-30 | 124,000 | 3,300,000 | 3.8 + 1830-40 | 528,000 | 4,200,000 | 12.3 + 1840-50 | 1,604,000 | 6,100,000 | 26.3 + 1850-60 | 2,648,000 | 8,200,000 | 32.3 + 1860-70 | 2,369,000 | 8,400,000 | 28.2 + 1870-80 | 2,812,000 | 10,400,000 | 27.0 + 1880-90 | 5,246,000 | 12,700,000 | 41.3 + 1890-1900 | 3,687,000 | 13,100,000 | 28.1 + 1900-1910 | 8,795,000 | 16,000,000 | 55.0 + Total, 90 yrs. | 27,800,000 | 82,400,000 | 33.7 + +Sec. 7. #Abnormal labor conditions resulting from immigration.# The +labor supply coming from countries of denser population and with low +standards of living creates, in some occupations, an abnormally low +level of wages and prices. Children cannot be born in American homes +and raised on the American standard of living cheaply enough to +maintain at such low wages a continuous supply of laborers. Many +industries and branches of industry in America are thus parasitical +A condition essentially pathological has come to be looked upon as +normal. The commercial ideal imposes itself upon the minds of men in +other circles. + +Statistics show that the prevailing wages for unskilled manual workers +in America have risen much less since the Civil War than have other +wages.[4] Wages in the great lower stratum of the unskilled and +slightly skilled workers are much lower in America relative to those +of more skilled and professional workers than they are in Europe. It +can hardly be doubted that the most important, tho not the sole, cause +of this situation has been the unceasing inflow of immigrants going +into these low-paid occupations. The "general economic situation" in +America, but for immigration, would compel higher wages to be paid to +the masses of the workers. If immigration were suddenly stopped in a +period of normal or of increasing business, wages in these occupations +would at once rise, and that, without the aid of organization, of +strikes, or of arbitration. This would affect most those occupations +which now present the most serious social problems, in mines, +factories, and city sweatshops. In some small measure the war in the +Balkan States, by recalling many men for service, had this influence +in 1912; and the great war beginning in 1914, by stopping a large +part of the usual immigration, gave a striking demonstration of +this principle. In employing circles the rise of wages was sometimes +referred to with an air of grievance as due to the "monopoly of +labor," as if the economic situation here, enabling the wage-earners +(millions of them immigrants), to get a higher competitive wage when +immigration temporarily was diminished, constituted a monopoly. + +Sec. 8. #Popular theory of immigrant competition.# The depressing effect +of the ever-present and ever-renewing supply of immigrant labor upon +wages appears most clearly at the time of wage contests, and often +seems to be the most important aspect of the question. Laws against +contract labor, passed to prevent this particular evil, have put +no check to the great stream of those guided by friends to a "job." +Organized labor thinks most of these immediate effects. Commonly +labor's protest is expressed in terms of the untenable "lump of labor" +theory of wages. "Every foreign workman who comes to America" is +believed to take "the place of some American workman." The error in +this too rigid conception of the influence exerted upon wages by new +supplies of labor is evident in the light of the principles of wages. +Yet it may be true that, both immediately and ultimately, the foreign +workman depresses the incomes of those already here with whom he +directly competes. On the other hand, those in occupations into +which few immigrants enter may, as consumers of cheaper products, +be immediately the gainers in real wages, by the very change +that depresses the wages in the lower strata.[5] The +manufacturing-employers advocate "protection" which enhances the price +of their products, while usually favoring "free trade" in immigration +to cheapen their costs. What more natural than that laborers should +favor a policy of protection to labor, to keep foreigners from coming +here to be their competitors. + +Sec. 9. #Divergent views of effects on population.# The foregoing views +of the effects of immigration upon wages, both of those favoring and +those opposing it, are short-time views, relating to immediate rather +than ultimate effects. If the immediate causes are continuously +repeated throughout the lives of successive generations the results +are for those mortal men as ultimate as anything that concerns them. +In this case it would make no difference to the millions of workers, +whose wages are depressed, if it could be shown that wages fifty or +a hundred years from now would be no lower as a result of continued +immigration than they otherwise would be; or to the employer that +wages would then be no higher. But to the social philosopher and to +the statesman, interested in the abiding general welfare, the ultimate +economic effects are of the greatest importance. + +The question is: What will be the far-reaching, long-time effects of +immigration upon the general economic situation, as that determines +the welfare of the mass of the people? We confine ourselves here to +the economic effects, leaving aside as far as possible the racial, +moral, religious, political, and general social aspects of the +subject. + +We are met at the outset by two divergent opinions as to the permanent +results of immigration upon the growth of population. The one is that +all immigrants coming to our shores are net additions, hastening by +so much the growth in density of population; the other opinion, the +displacement theory, is that immigration has the effect of checking +the natural increase of the native stock so much that it does not +materially change the total population, or actually causes it to be +less than it would have been had no immigration occurred. + +Sec. 10. #The displacement theory; its fundamental assumption.# The +latter opinion which still has many upholders[6] was first advanced by +a distinguished economist, Francis A. Walker, but his first statement +of it referred only to the period between 1830 and 1860. The main +argument in support of this opinion was that in the three decades from +1830 to 1860 during which a large immigration occurred, the decennial +rates of increase of the population were almost the same as in the +three decades from 1800 to 1830.[7] The conclusion drawn from these +figures is that the immigrants were the cause of the decline of the +average birthrate that occurred in the families of native stock. The +validity of this conclusion is absolutely dependent on the assumption +that no other forces were at work to produce this result. Must we +believe that, but for immigration, the native birthrate would not have +declined at all? This is incredible. The birthrate of the native stock +had already begun to decline before 1820 as is shown by many family +records, and by the fall of the decennial rate of increase from 35 and +36 in the decades ending 1800 and 1810, to 33.1 and 33.5 in the next +two decades. This occurred despite the enormous western settlement +then under way on the Louisiana Purchase. The decline of the birthrate +began at that time to appear as a world-wide phenomenon, accompanying +improved transportation (roads, steamboats, steam railways), the rapid +growth of cities, and the general industrial revolution. The general +birthrate has declined of recent years in Australia and New Zealand, +where there has been little immigration, more rapidly than it has in +the United States.[8] + +Sec. 11. #Magnitude of the inflow of immigrants.#In view of these facts +it seems necessary to modify the displacement theory greatly. To the +extent that the coming of immigrants caused a net addition to the +population, it doubtless hastened the growth of cities and the +development of industrialism, and thus helped to reduce the birthrate +in some classes. But this view admits the effect upon population which +the displacement theory denies. Probably, in a good many cases the +more rapid business advancement of the natives, because of the +coming of the immigrants, led to the decline of birthrate that is a +consequence of economic success.[9] But a large part of this change +would have inevitably occurred even if there had been no immigration +after 1820. Between 1820 and 1910 the population increased 82,400,000, +and the total number of immigrants was 27,800,000, or 33.7 per cent +of the total increase. In an urban environment the birthrate among +immigrants always has been very much higher than that of native +Americans. This fact alone might well be taken as sufficient to offset +whatever depressing effects the coming of the immigrants may have +had upon the native birthrate, leaving the immigration nearly a net +addition to population. It does not seem possible to believe that +if there had been no immigration, our native population, rapidly +advancing in average wealth, wages, and general education, would have +continued with an unchecked birthrate, and would have filled all the +places taken by immigrants. And no believer in the displacement +theory has ever ventured to claim, as the argument requires, that if +immigration were now stopped, the birthrate would again return to the +old standard of 1820, or would cease to decrease somewhat. Especially +of late, since the rate of increase of the native population has +become much less, is the effect of continuing immigration apparent. +In the decade of 1900-1910 the total population increased 16,000,000, +while nearly 9,000,000 immigrants arrived. Of the remaining increase, +3,000,000 consisted of children born of foreign parents. That leaves +three or at the most four million (4,000,000) increase attributable to +the native stock, white and negro combined. + +Sec. 12. #Earlier and recent effects of immigration upon wages.# Let us +now correlate the principle of decreasing returns and the facts as to +the exploitation of our natural resources[10] with the growth of +our population, on the assumption that immigration has been a net +contribution to our numbers. While the vast frontier was open to +settlement, the growth of population could not fail to be looked +upon as a blessing, even tho somewhat mixed with political evils, +immorality, and pauperism. Beginning in colonial times, the policy of +"the open door" to immigrants came thus to be deemed the traditional, +patriotic American policy. Yet there is grave reason to believe that +the rate of growth in the nineteenth century was wastefully rapid and +that a slower and sounder growth might have been better.[11] However, +this rapid growth was largely extensive, spreading over wider areas, +and was consistent with a pretty steady rise of real wages in America +until about 1895,[12] the level continuing higher than that of Europe +despite the contemporaneous rise of wages there. Much of this general +rise is undoubtedly attributable to the adoption of better tools, +machinery, and industrial processes, the more so as inventions and +new methods have rapidly become free goods.[13] The beneficial +improvements long cooperated with the rapid exploitation of rich +resources to raise real wages, and then undoubtedly continued to +offset for a time the unfavorable effects as the richer resources +began to show signs of exhaustion. Since the end of the last century, +however, the net trend upward seems to be checked, and "the rising +cost of living" (real cost) has come to be a serious actuality for +larger sections of the population.[14] + +Yet so long as wages are enough higher in America to pay the passage +of the low-paid workers of the industrially backward nations, they +will continue to come. The ease and cheapness of migration in these +days of steamships, the encouragement of immigration by the agencies +and advertisements of the steamship lines, and the increasing +readiness of the peasantry to migrate, have become well known through +recent discussions. Unless immigration is limited, it must continue to +depress the wages of American workingmen, through both its immediate +and its ultimate effects. + +Sec. 13. #Laissez-faire policy of immigration.# There are those who take +a fatalistic, or a _laissez-faire_, view of the subject, and declare +that the problem will solve itself as the level of American wages +comes to be nearly the same as that of the countries of Europe from +which our immigration is coming. True enough, if this can be called a +"solution." There are many who cherish the commercial ideal according +to which cheap labor is absolutely desirable and needful to produce +cheaper products. This ideal has spread to wider circles. Here, for +example, are the words of a man who combines wide knowledge of the +facts of immigration with keen sympathy for the working classes:[15] +"The past industrial development of America points unerringly to +Europe as the source whence our unskilled labor supply is to be drawn +. . . America is in the race for the markets of the world; its call +for workers will not cease." Yet a little further on he must say: "All +wage-earners in America agree that it is not as easy to make a living +to-day as it was twenty years ago, and the dollar does not go so far +now as it did then. The conflict for subsistence on the part of +the wage-earner is growing more stern as we increase in numbers and +industrial life becomes more complicated, and the fact must be faced +that the vast army of workers must live more economically if peace and +well-being are to prevail." + +Sec. 14. #Social-protective policy of immigration.# A different kind of +solution is offered by those who favor the strict limitation, if not +the complete prohibition, of immigration. + +The foregoing study indicates that the time has come, if it is not far +past, when the traditional policy of fostering immigration is opposed +to the welfare of the masses of the people. This belief can be based +solely on grounds of numbers, the relation of population to resources, +quite apart from a preference for particular races or the familiar +arguments regarding social and political evils and lack of +assimilation, however valid they may be. The limitation of immigration +would immediately improve working-class conditions where they are +worst in America,[16] and would check and probably reverse the +tendency to diminishing returns already manifest in many directions. +This opinion does not necessitate an absolute prohibition of +immigration; it is consistent with the continuance of immigration of a +strictly selected character, and in numbers so small that all European +immigrants now here could be rapidly and completely assimilated, +economically and racially. With a slow national increase of population +and with the continued progress of science and the arts, it should be +possible for real wages to continue indefinitely rising in America. +The selection of immigrants to be admitted should be a part of a +national policy of eugenics,[17] which aims to improve the racial +quality of the nation by checking the multiplication of the strains +defective in respect to mentality, nervous organization, and physical +health, and by encouraging the more capable elements of the population +to contribute in due proportion to the maintenance of a healthy, +moral, and efficient population. In such a view, a eugenic opportunity +is presented in the selection and admission of immigrants that are +distinctly above (not merely equal to) the average of our general +population. + +Sec. 15. #Population and militarism#. In view of the recrudescence of the +spirit of armed national aggression evident of late, and especially +in the outbreak of the Great War in 1914, the military aspect of the +population question deserves serious consideration. The growth of +savage and barbarian tribes in numbers, so that their customary +standards of living were threatened, frequently has led to the +invasion and conquest of their richer neighbors.[18] To-day nations +on a higher plane of living are probably repeating history. The nation +with an expanding population is tempted to seek an outlet for its +numbers and for its products by entering upon a policy of commercial +expansion, which in turn has to be supported by stronger military and +naval establishments. It is led by primitive impulses that to it +carry their own moral justification, to possess the territory of its +neighbors. The immediate occasion is probably some matter of internal +politics, such as growing discontent and democratic sentiment among +the people. Nations with slowly growing populations, and still +possessed of ample territories to maintain their accustomed standards +of life, naturally favor the _status quo_, and are pacifist or +nonmilitarist. If they arm it is for their own safety. In this view, +militarism is seen to consist not in having drilled soldiers and +stores of munitions, but in the national state of mind that would +use these for aggression, not merely for defense. When, therefore, +a powerful nation has reached a certain stage in the relation of its +population to resources, limitation of population not limitation +of armaments is the real pacifism; and increase of population, not +increased military training or a larger navy, is the real militarism. + +Sec. 16. #Problem of maximum military power.# It is a grave question, +however, whether a nation with a comparatively sparse population, +high wages, and great wealth can safely limit that population in the +presence of a capable, ambitious, and efficient rival that covets such +opportunities. On the one hand, a population may be so sparse that +it has not soldiers enough to defend its territory against a numerous +enemy; on the other hand, it may be so dense, and consequently average +incomes be so low, that it cannot properly train, arm, and support +its population of military age. The recent developments in the art +of warfare call for great use of the mechanical industries, for +great power to endure taxation, and for great financial resources, +conditions found only where the average of national income is high. +The point of maximum military power must be far short of the maximum +possible population. It would seem that a nation of 100,000,000 +inhabitants favorably situated to resist aggression, well supplied +with the natural materials for munitions, and well equipped to produce +them, might safely limit its numbers so as to ensure a high level of +popular income. This safety would be greatly increased by permanent +alliance with other peoples likewise limiting their numbers and, +therefore, interested in maintaining the peace of the world. In +this way it would be possible for them all to maintain a standard +of popular well-being even higher than is fully consistent with +the maximum military power, even in the presence of prolific and +aggressive rival nations. + + +[Footnote 1: Even more important than these is the relative decrease +of the successful strains of the population, briefly treated in Vol. +I, ch. 33. This is the problem of eugenics, the choice and biologic +breeding of capable men to be the citizens of the nation, and broadly +understood, it includes both the negro and the immigrant problems.] + +[Footnote 2: See Vol. I, p. 430, figure 58, showing the fall in the +decennial rate of increase of negroes compared with whites; and see +comment in accompanying note.] + +[Footnote 3: See above, ch. 20, sec. 11, and references in note.] + +[Footnote 4: See below, sec. 12.] + +[Footnote 5: See Vol. I, p. 221, on non-competing classes.] + +[Footnote 6: The latest and best statement is that of H.P. Fairchild, +"Immigration," pp. 215-225, citing various opinions, and accepting the +view of Walker. But he says (p. 216): "It must be admitted that +this is not a proposition which can be demonstrated in an absolutely +mathematical way, which will leave no further ground for argument."] + +[Footnote 7: See Vol. I, p. 429, for figures of population and of +decennial rates of increase.] + +[Footnote 8: The effect of the growth of cities is discussed in the +"American Journal of Sociology," Vol. 18, p. 342, in an article on +"Walker's Theory of Immigration," by E.A. Goldenweiser.] + +[Footnote 9: See Vol. I, p. 420.] + +[Footnote 10: See Vol. I, chs. 34 and 35.] + +[Footnote 11: E.g., see above ch. 14, sec. 11 on the prodigal land +policy.] + +[Footnote 12: See Vol. I, p. 436 ff.] + +[Footnote 13: See Vol. I, ch. 36, on machinery and wages.] + +[Footnote 14: For analysis of the available statistics bearing on the +subject, with conclusions that real wages are no longer rising, see +H.P. Fairchild, in "American Economic Review" (March, 1916), "The +standard of living-up or down?"] + +[Footnote 15: Peter Roberts, in "The New Immigration," 1912, preface, +p. viii, and p. 47.] + +[Footnote 16: See above, sec. 7; also ch. 21, sec. 9.] + +[Footnote 17: See above, sec. 2, note; also Vol. I, p. 422.] + +[Footnote 18: See Vol. I, p, 412, on war and the pressure of +population.] + + + + +PART VI + + +PROBLEMS OF INDUSTRIAL ORGANIZATION + + + + +CHAPTER 25 + +AGRICULTURAL AND RURAL POPULATION + + Sec. 1. Agriculture and farms in the United States. Sec. 2. Rural and + agricultural. Sec. 3. Lack of a social agricultural policy in America. Sec. 4. + Period of decaying agricultural prosperity. Sec. 5. Sociological effects of + agricultural decay. Sec. 6. Fewer, relatively, occupied in agriculture; use + of machinery. Sec. 7. Transfer of work from farm to factory. Sec. 8. The + rural exodus. Sec. 9. The farmer's income in monetary terms. Sec. 10. + Compensations of the farmer's life. Sec. 11. Ownership and tenancy. + + +Sec. 1. #Agriculture and farms in the United States#. There were +nearly 12,400,000 persons in the United States gainfully occupied in +agriculture in 1910, this being 32.5 per cent of all in occupations. +These, together with other family members not reported as engaged +in gainful occupations, constitute the agricultural population, and +comprize more than one third of the total population of the country. +"Agriculture" is here used in a broad sense, including floriculture, +animal husbandry (poultry, bee culture, stock raising), regular +fishing and oystering, forestry and lumbering. Agriculture thus +produces not only the food but (excepting minerals, including coal, +stone, natural gas, and oil) the raw or partly finished materials for +all the manufacturing and mechanical industries. + +With the exception of areas devoted to forestry on a large scale and +to fishing, the industry of agriculture is pursued on the 6,400,000 +farms, covering 46 per cent of the total land area of the country. Of +the land in farms, a little over half is classified as improved. The +estimated value of farm property, including buildings, implements, +machinery, and live stock, was, in 1910, about $41,000,000,000, +somewhere near one fourth of the estimated wealth of the country at +that date.[1] + +Sec. 2. #Rural and agricultural.# The adjectives rural and agricultural +are often used loosely as synonyms. Agricultural refers primarily to +the occupation of cultivating the soil, and is properly contrasted +with other occupations, as mechanical and professional; whereas rural +refers to place of residence outside of incorporated places of +a specified minimum population (of late, 2500), and is properly +contrasted with urban, applied to those living in larger population +groupings. In 1910 the rural population comprised 53.7 per cent of the +total population. It is true that the two groups of the agricultural +and the rural populations are largely composed of the same persons, +but to a considerable extent they are not. Many farm houses, together +with part or all of the farm lands, lie inside urban boundaries, and, +besides, some persons engaged in agriculture reside in urban places. +On the other hand, any one acquainted in the least with a rural +district (in the statistical sense) can at once think of many +persons living there that are not engaged in agriculture; they may +be merchants, warehousemen, railway employees, physicians, +handicraftsmen, teachers, artists, retired business men, and others. +The percentages given in this and in the preceding section indicate +that about two fifths of the rural families are not engaged in +agriculture. + +It is often important to make this distinction, tho it is difficult +to do; for some of the much-discussed rural questions are of a +broad social nature, are matters of rural sociology, relating pretty +generally to the rural population; while other questions of "rural +economics" are more strictly matters of agricultural economics and +relate to the farm as a unit of industry, or to agriculture as an +occupation. + +Sec. 3. #Lack of a social agricultural policy in America.# It is a common +remark that the farmer lives an independent life. This develops in him +a self-reliant spirit. He readily gives and takes simple neighborly +help in informal ways, but he does not readily turn to government +for aid. While every influential urban group, organized or +unorganized--manufacturers, merchants, wage-earners--has sought and +obtained special protective social legislation, the farmer has, from +choice or necessity, usually had to work out his economic problems +unaided. The exceptions are few and of small importance. For example, +the prodigal land-policy of the state and national governments +encouraging the settlement of the frontiers was not a farmers' +policy. It was originally inspired by the larger political purpose +of extending the bounds of the nation; later it was advocated and +fostered by a land-speculating element, linked with bad politics, in +the frontier states, and not by farmers as such. It in time greatly +injured the farmers of the eastern states. The "Granger legislation," +to regulate railroad rates, was so called by the East in a spirit of +derision because it began in the distinctively agricultural states +of the Northwest; but it had neither the aim, nor the result, of +obtaining especially for farmers any rates that were not open to +every one on the same terms. The tariff rates on American agricultural +products, placed in the acts as a matter of form, have, with minute +exceptions, been ineffective to favor farmers, as the shipments were +all outward and none inward, while heavy and effective rates were +placed on most things that the farmers had to buy.[2] + +In part the explanation of the lack of legislation favoring farmers +is to be found in their small part and influence, as a class, in +political affairs, outside of minor executive offices in township and +county governments. In the state legislatures farmers are few relative +to their numbers in the community, and still fewer in either House in +Washington. Among the real exceptions to the otherwise fair record of +the farming class in this respect is the tax on oleomargarine and the +special favor accorded to farmers' associations in the Clayton Act. It +might be cynically said that the farmer has not been "sharp" enough +to get his share of the "good" things" that the business classes were +passing around in protective legislation. But farmers have, as has +every economic group, interests which may legitimately be the subject +of social legislation; whereas they have limited their attention to +their private affairs at home and have been prone to vote patiently +and proudly the "straight ticket" to elect business men and lawyers to +office. + +Sec. 4. #Period of decaying agricultural prosperity#. Despite the facts +just stated, every campaign orator admits that there is no other +occupational class of the nation of greater importance to the nation +than the farmers, or more deserving of prosperity. Every other part +of the industrial organization of a nation is interrelated with +its agriculture. Great changes, in respect to growth of population, +immigration, exhaustion of natural resources, mechanical inventions, +scientific discovery, and many things more, have been occurring, +which have altered and, in some communities, have destroyed the very +foundations of agricultural enterprise in America since the close +of the Civil War in 1865. But the farmers have been left to struggle +individually with their individual difficulties, tho the outcome was +of the gravest portent to the whole social economy. Such was the case +in the period of agricultural depression from 1873 to about 1896.[3] +Multitudes of ancestral homesteads were then left behind by the last +farmer-descendant of the old line. No longer able to make a living on +the soil, he took up an urban occupation. + +Sec. 5. #Sociological effects of agricultural decay#. Such changes caused +a relative decline in the birthrate of the old American stock. The places +of many of these long-settled families remained unfilled as thousands of +abandoned farm houses testified. The places of others were taken by a +tenantry, white or black, lacking the thrift of ownership; the lands of +others passed to new owners of alien races. The populations of many rural +neighborhoods thus became heterogeneous, with results calamitous to the +social life. Once prosperous schools declined, once thronging country +churches were deserted, and much of the old neighborhood democracy +disappeared. When, about the year 1900, prosperity began slowly to return +to the American countrysides in the form of rising prices of farm produce, +it was in large part too late to remedy the evil, except as it may be +done by generations of effort under more favoring conditions. There +are merely suggested here some of the complex sociological effects of +past economic changes in American agriculture. It is certain that in +the future also the economic changes in this field will be related +closely to social and political changes of a fundamental character. + +Sec. 6. #Fewer, relatively, occupied in agriculture; use of machinery.# +Probably ever since the first census in 1790, the relative number of +agriculturists in this country has been decreasing. Beginning in +1880, the numbers of those occupied in agriculture for gain have +been reported at the census dates in a form that makes them fairly +comparable.[4] + +The explanation of this decrease in the proportion of the population +that is engaged in agriculture is twofold; the first is the real +increase in the productive output per person in agricultural industry. +In larger part this is due to the increasing use of machinery in place +of simple hand tools, and the substitution of horse-, hydraulic-, +windmill-, steam-, and gasoline-power for human labor. This change has +been made readily in the regions of level fields, but of late has been +made possible to a greater extent in hilly country, by rearranging +and combining the old irregular fields into regular fairly level +rectangular fields easily tillable, while turning the rougher lands +and hillsides into wood lots and pastures.[5] One man, thus, driving +three or four or more horses, can do the work formerly done by two +or more men and do it just as well. The farmers' incomes in different +parts of the country vary pretty nearly with the amount of horse-power +used per man. Economies equally great are made in the work done in the +barnyards and barns. In most parts of the country only a beginning +has been made in these ways, and in future the census will continue to +reflect the progress in these directions. + +Sec. 7. #Transfer of work from farm to factory#. The other part of the +explanation of the decrease in the proportion of the population that +is engaged in agriculture is that many operations are, step by step, +being transferred from the farm to the factory. "Agriculture," we have +observed, is a great complex of industries, in which many different +products are taken from the first simplest extractive stage, and then +put through successive processes to make them more nearly fitted for +their final uses. Not so long ago grain cut in the field was threshed, +winnowed, shelled, made into flour, and baked on the farm, as it still +is in many places. Logs were cut into boards, planed, and made into +houses or furniture by the farmer. The old-time farmer made by hand a +large number of his farm implements--rakes, ax handles, pumps, carts, +and even wagons. Until a generation ago all butter, cheese, and other +dairy products were made on the farm. Now these things are being done +in steadily increasing proportion by workers classified as in the +manufacturing industries, and agriculture contains fewer separate +industries and processes. Of course there is economy of labor in +nearly all of these changes, but the number occupied in agriculture is +greatly reduced. Many farmers and more farmers' sons are moving from +agriculture into occupations of manufacturing, trade, transportation, +and the professions, and are becoming more narrow specialists. + +Sec. 8. #The rural exodus#. The percentage of persons in the rural +population changes at about the same rate as does that of the persons +occupied in agriculture. In 1890 it was 64, in 1900 it was 60, and in +1910 it was 54 per cent. The percentage of the population in cities of +8000 or more has steadily increased. This phenomenon has been marked +in all of the countries that have been developing along industrial +lines. It has been variously described as "the rural exodus," "the +abandonment-of-the-farm-movement," and "the city-ward drift."[6] It +is only in part explained by the change from agriculture to other +occupations; perhaps even in greater part it is due to the decline +and disappearance in many rural places of small manufacturing and +mercantile businesses before the competition of large business in the +cities. In much of the long-settled area of the country every hillside +stream once turned a little mill to saw timber, grind corn, forge +iron, or weave cloth. Most of these mills are now deserted. In +countless villages the old blacksmith shop, once a center of business, +is abandoned. Here and there a patriarchal smith still serves a +dwindling group of customers and speaks with mingled pride and pathos +of his sons, now in the automobile business in the city. + +The movement away from the countryside has been but little +counteracted as yet, but may be more in future, by the growing +enjoyment of rural life, by the back-to-the-land movement, by +interurban railways, by improved roads, and by automobiles. + +Sec. 9. #The farmer's income in monetary terms#. Census figures and some +additional investigations have led to the estimate of the average +real income of the farmers of the United States in 1909, expressed in +monetary terms, as $724. The estimated value of all products, whether +sold or used by the farmer, plus the value of his house rent and fuel +consumed by family, was $1236, from which expenditures of $512 are +deducted for outside labor, and for materials used for operating and +maintaining the farm. Of the $724 the sum of $402 is estimated to +be the labor-income of the family and $322 is estimated to be the +wealth-income (at 5 per cent of the capitalization of the farm). This +was in a period of rising values in farm lands, averaging about $323 +per farm annually, and this to most farmers was equivalent to so much +monetary savings. The main items of net income, therefore, are as +follows: + + Rent $125 + Food from the farm 261 + Fuel 35 + Cash 303 + + Total $724 + Increase in value of farm 323 + + Total estimated monetary income $1047 + +Of the total, $422 is a labor-income, and $645 is a wealth income.[7] + +It would be difficult, even if the available statistics were much more +exact than they are, to compare exactly the farmer's income with those +of urban classes. Averages of such large numbers and over such a wide +area have a limited significance in the specific case; and living +conditions and the purchasing power of money are so different in +country and city and in different parts of the country.[8] + +Sec. 10. #Compensations of the farmer's life#. In bare monetary terms +the average farmer's family gets a labor-income less than that of the +ordinary wage-earner in a factory, and it is only by the aid of the +wealth-income that it appears to fare as well or better. Even the few +largest incomes made in farming are small in comparison with many of +those made in commerce, transportation, and manufacturing. The great +mass of farmers of the nation are hard-laboring men, poor in the eyes +of the city dwellers.[9] + +But this much is certain: the farmer's income in monetary terms has +on the average much larger power to purchase the main goods of life +(material and psychic goods) than it would have in town. Equally good +house usance would cost more in nearly all towns, and much more in +larger cities. Retail prices of the same food and fuel even in small +towns would be much greater. The necessary outlay for clothes to +maintain the class standard is much less for farmers than for city +dwellers. Moreover, in the use of horses and carriages, and now of +automobiles, and in the free control of his own time--in many elements +of psychic income--the farmer is on a parity with men in other +occupations of double or quadruple his income expressed in monetary +terms. + +Tho the farmer's working day in the busiest season of summer is very +long compared with that of factory or office workers, his working +day at other seasons is usually much shorter than the average urban +worker's day. The farmer's life is nearly always free from the +excessive pressure, haste, and competition of city life, and the +value, to many a man, of the more natural and wholesome conditions of +outdoor life and outdoor work are hardly to be measured in terms of +even the most untainted dollars. + +Sec. 11. #Ownership and tenancy.# Since 1880, when the first figures +on farm tenures were collected, the proportion of farms operated by +owners has steadily decreased. + + Percentage of farms operated by + Owners Cash tenants Share tenants + + 1880 ............ 74.5 8.0 17.5 + 1890 ............ 71.6 10.0 18.4 + 1900 ............ 64.7 13.1 22.2 + 1910 ............ 63.0 13.0 24.0 + +These statistics arouse fears that the class of independent farmers +operating their own farms is gradually giving way to a tenantry +in America. But in some respects the figures are misleading unless +carefully interpreted. The increasing proportion of tenants is due not +so much to owners falling into the class of tenants as to the +hired laborers rising into the class of tenants. The number of male +operating owners compared with all male workers (not merely with all +farms) has remained almost constant at about 42 per cent; while the +per cent of hired workers has decreased from 43.3 (in 1880) to 41.4 +(in 1890) and to 34.6 (in 1900). Most hired men on farms are farmers' +sons; the city boy does not adapt himself readily to farm work. Most +hired men of native stock become tenants, and finally owners. Only 11 +per cent of the hired workers in agriculture (in 1900) were over 35 +years of age. + +The landlord of a farm let to a tenant, especially to a share tenant, +is still to a large extent the general manager, controlling in a +large measure through the renting contract and by his oversight, the +operations of the farm. Older men find that letting the farm to +a share tenant is easier for them and gives better results than +continuing to operate the farm with hired labor. And it evidently +gives a man a somewhat higher status to become a tenant than to +continue to be a hired laborer. In the South this movement has taken +on large proportions in the breaking up of large plantations once +operated by the owner with hired labor, and now let in smaller lots +to operating tenants. Yet such a change appears, statistically, as a +decrease in the proportion of farms operated by owners. Despite these +somewhat reassuring facts, the problem of maintaining and increasing +operating ownership of farms in America is one deserving of the most +earnest thought and efforts. The best form of farm tenure is +not necessarily that giving the best immediate economic results. +Politically in a democratic nation, and sociologically in its effects +upon the size of families and the raising of healthy children, the +preservation of an independent American yeomanry is of fundamental +importance to the nation. + +The problem is as difficult as it is important, and becomes more +difficult with the rise in the acreage value of lands and with the +economical size of farms, both calling for a larger investment to +become an owner. Changes in the system of taxation should be made with +reference to this object; the system of agricultural credit should be +developed and administered to assist; special efforts in agricultural +education should be made and active administrative efforts should be +directed, toward this important end. + + +[Footnote 1: See above, ch. 1, secs. 7 and 8.] + +[Footnote 2: See ch. 14, sec. 5.] + +[Footnote 3: See Vol. I, p. 437.] + +[Footnote 4: It must be observed in studying these figures, that +farmers' wives and children, working at home, are not reported as +gainfully occupied. But a widow or a spinster owner, if herself acting +as the enterpriser, is reported as "occupied" in agriculture. The +increasing number of such cases in the past generation in part +explains the growing number and percentage of females in agriculture. + + Number occupied in agriculture Per cent of all persons occupied + Males Females Both sexes Males Females Both sexes + + 1880... 7,068,658 594,385 7,663,043 47.9 22.5 44.1 + 1890... 7,787,539 678,824 8,466,363 41.4 17.3 37.2 + 1900... 9,272,315 977,336 10,249,651 39.0 18.4 35.3 + 1910...10,582,039 1,806,584 12,388,623 35.2 22.4 32.5 +] + +[Footnote 5: See further, ch. 26, secs. 1 and 2 on the size of farms +as an economic factor.] + +[Footnote 6: See above, sec. 2, on the distinction between rural and +agricultural. In part the change here noted results from increases in +the population of towns and incorporated places from a little below +2500 to something about 2500. For example, if there were 2499 persons +in a town in 1900 they would all be classified as rural; if in 1910 +there were 2500 or more they would all be classified as urban.] + +[Footnote 7: Sec Vol. I, p. 225, and note 11.] + +[Footnote 8: See Vol. I, p. 206.] + +[Footnote 9: See Vol. I, p. 227, note, for figures on owners and farm +laborers.] + + + + +CHAPTER 26 + +PROBLEMS OF AGRICULTURAL ECONOMICS + + Sec. 1. Size of farms, and total farming area. Sec. 2. Influences acting + upon the size of farms. Sec. 3. Self-sufficing versus commercial farming. + Sec. 4. Farming viewed as a capitalistic enterprise. Sec. 5. Diversified versus + specialized farming. Sec. 6. Conditions favoring diversified farming. Sec. 7. + Intensive farming in Europe and America. Sec. 8. Prospect of more intensive + cultivation of land in America. Sec. 9. The new agriculture. Sec. 10. + Difficulty of cooeperation among farmers. Sec. 11. Rapid growth of farmers' + selling cooeperation. Sec. 12. Some economic features of farmers' selling + cooeperation. Sec. 13. Cooeperation in buying. Sec. 14. Need of agricultural + credit. Sec. 15. Recent provisions for farm loans. + + +Sec. 1. #Size of farms, and total farming area#. The average area of +farms has varied from a maximum of 203 acres, in 1850 (the first +figures), to a minimum of 134 acres in 1880, being 138 acres in 1910. +A better index, perhaps, is the average improved area per farm, which +has been more nearly stationary, varying from a maximum of 80 acres +in 1860 to a minimum of 71 acres in 1870 and 1880, being 75 acres in +1910. Here again the statistics require interpretation, for in the +spread of the frontier the addition of large farms in the arid and +semi-arid regions may raise the average, or the breaking up of large +plantations in the South may decrease the average, without this +indicating any essential change in the technical conditions of farming +in the country generally. Since about 1900 the total area in farms has +increased very slowly. Between 1900 and 1910 the increase was only 4.8 +per cent; whereas a larger increase occurred in the area of improved +land, 15.4 per cent, and the unimproved area in farms decreased +5.6. Future changes of farm areas may be expected to be of this same +nature, mainly in the improvement of rough pastures, swamps, partly +cleared woodlands, and desert lands awaiting irrigation. An increasing +population will have to be provided with food and other products of +agriculture on a farming area that henceforth will be increasing less +rapidly than it has in the past and than the population increases. + +Sec. 2. #Influences acting upon the size of farms#. In these averages +for the whole country many conflicting influences unite and neutralize +each other. Making for smaller farms is the breaking up of large +grazing areas in the West into smaller general purpose farms or +irrigated fruit districts, and of larger general farms in the North +and East into small poultry, flower, and fruit farms. Opposed to this +is a movement toward the merging of farms of 50 to 100 acres into +larger farms of 300 acres, more or less. The economic cause of this +movement is interesting and important. The typical and economic size +of farms when the Atlantic states were settled, was determined by the +use of hand tools, which permitted a man and his family to operate a +farm of about 75 acres of which about half was tilled and the rest was +in permanent pasture and woodland. The fields were small and were laid +out irregularly, which was no disadvantage for hand cultivation. But +for the most economic use of land in field crops and under more modern +conditions it is necessary to have pretty level fields, of regular +rectangular shape. The farm unit should be of such extent as to permit +of the proper use of the soil by rotation of crops, and to employ +fully the best modern labor-saving machinery for each purpose. +Numerous recent agricultural surveys point to the conclusion that for +general farming this unit is a comparatively large area of about 300 +acres. + +These conditions offer a reward to those agricultural enterprisers +who can purchase lands at a price based upon the high costs and lower +yields of the older methods and cultivate them at the lower costs and +with the larger yields of the newer methods. This movement, therefore, +toward the consolidation of smaller into larger farms is likely to +continue in many communities for several decades. This is likewise +an advantage to the community in increasing the production with less +labor. But the net effect upon the social life of the countryside is +more doubtful, and calls for careful consideration. + +Sec. 3. #Self-sufficing versus commercial farming. The typical American +farming family once produced nearly everything it used, and used +nearly everything it produced. It was very nearly a self-sufficing +economic unit, "a closed economy," as it sometimes called. Food, +clothing, fuel, lumber, houses, furniture, tools, were on the farm +carried through the various processes from the first gathering of the +raw materials to the finished product. They were then consumed by the +farm household. It is true that even in the first settlements there +were some craftsmen, cobblers, millers, weavers, blacksmiths--whose +services and wares were got by trading some of the surplus products +from the farms--butter, cheese, eggs, wool, hides, furs, live stock, +grain lumber. A few rare commodities of foreign make found their way +to the farm through peddlers and merchants; but altogether the goods +produced outside the farm were a small fraction of the family's +consumption, and were exchanged for but little of the farm's +production. Most farmers tried to produce for themselves, as far as +possible, everything their families needed, when the soil and +situation were poorly suited to the purposes. True, there were early +some exceptions to the general rule, where only one kind of crop was +taken from the land. Such was the forest product of masts, shingles, +lumber, and turpentine, and the great southern staple, tobacco, and +later, cotton. The exceptions have been tending to become the rule +in more and more communities. Farmers have been specializing more +and more in the kinds of products to which their farms are adapted in +respect to soil, relation to market, and otherwise. These products are +taken to market and sold for money with which are bought the things +needed for use on the farm. + +Sec. 4. #Farming viewed as a capitalistic enterprise#. Thus the farm +comes to be looked upon more and more, not just as a home, but much as +if it were a commercial enterprise or a factory, by which products are +made for sale. This change, to be sure, is far from complete, as the +figures for the average farmer's income show that a large share of the +family living still comes from the farm. It has gone on much further +in some districts than in others, as is indicated in the types of +farming discussed below. But just to the extent that the farmer grows +crops to sell, his outlook on his work undergoes a change. He is +less exclusively a farmer, concerned with the technical processes of +farming; he must be more largely a business man. Like a manufacturing +enterpriser, he buys the factors of production, combines them into +new products, and sells them again. He becomes interested in market +conditions and prices. He grows more commercially-minded. He views +the farm no longer as a fixed area, but one that may be enlarged by +purchase or by rental, and that may be reduced by selling or letting +the less needed parts. One-fifth of farm owners now rent additional +land. In commercial farming the land is not contrasted with capital as +something apart, consisting of the value of the equipment and stock; +but the whole complex of land and other goods is thought of as a +capital-investment. The greater ease of transferring landed-property +in America and the greater mobility of our population have always made +it more natural here than in Europe to look upon land as a capital +investment. This view is now becoming more general as a result of the +commercializing of farming enterprise. + +This change has been favored by other influences. Particularly has +the use of machinery and of other equipment, calling for a larger +investment per man and per acre, been making agriculture, in its +form of enterprise, more and more like manufacturing and commercial +undertakings. + +Sec. 5. #Diversified versus specialized farming#. To be self-sufficing a +farming family must carry on general farming, that is, must produce +a diversity of products. As farming becomes more commercialized it +necessarily becomes somewhat more specialized, and produces a smaller +variety of products. In some parts of the country and on particular +farms this specialization is extreme: in California, citrus fruits, or +prunes, or beans, may be the only crop raised; wheat in Kansas and +the Dakotas, and dairy products in thousands of farms surrounding +the great cities, are the main, tho not the exclusive products. Many +farmers in these districts have no gardens or orchards, keep no cow, +and buy much or all of the grain for their horses, as well as milk, +butter, vegetables and fruits for their own use. Poultry and eggs +are shipped in trainloads two thousand miles from the Middle West to +California to be consumed by orange growers. Many farmers in the East +no longer keep sheep, pigs, or beef cattle, and they buy out of the +butcher's wagon all the meat except fowls used by their families. This +partly explains the decrease of live stock in the whole country in +recent years and the increase in the price of meat. + +Sec. 6. #Conditions favoring diversified farming#. There are, however, +limits to the net advantage of specialization in crops, and competent +authorities on agriculture question whether in many cases that limit +has not been readied and passed. Most farms have a variety of soils +and of conditions--hilltops, slopes, bottom lands--which are suitable +for different purposes. A rotation of crops is necessary to get good +yields. Live stock must be kept to maintain the fertility of the land, +which deteriorates fast if hay and grain are continually sold. Some +live stock can be kept on every farm very cheaply with the food that +would go to waste otherwise. The specialization in stock raising in +the prairie states ceased to be profitable when lands became more +valuable. Specialization in wheat production in the states just west +of the Mississippi is possible only so long as wheat will grow on +the virgin soil without costly fertilizers. The cotton farmers of +the South, especially the negro farmers, have been forced by debt and +thriftlessness into a one-crop policy that is now seen to be wasteful +in the long run. A variety of production is necessary to employ labor +somewhat regularly on a farm throughout the year. These and other +conditions will make most farming always an industry of comparatively +diversified products. Only 1 per cent of the farms get as much as 40 +per cent of their receipts from fruit; 2 per cent get that much from +tobacco; 3 per cent from vegetables; 6 per cent from dairy products; +and 19 per cent from cotton. The remaining 60 per cent of receipts +were in most cases from various sources, and these figures did not +include the value of produce consumed by the farmer's family. + +Sec. 7. #Intensive farming in Europe and America#. No other farm problem +interests the city man so much as that of increasing the production +of the land. To most city men farming hardly seems to be an occupation +giving livelihood and life to the farmer; it seems rather to exist +for the sole purpose of feeding men living in cities. The city man, +therefore, measures the success of farming not by the farmer's income, +by the level of countryside prosperity, but by the number of bushels +per acre raised to ship to town. Every city newspaper and magazine +contains articles pointing to the fact that larger crops per acre +are raised in Europe than in America, and broadly suggesting that the +American farmer could do as well, if only he would. Foreign travelers +comment in like vein on the wasteful use of land in America as +compared with farming methods in Europe. + +Land is used most extensively, with respect to labor, when it is in +forests; somewhat less so when in pasture as care must be given to the +live stock; and still less when used for hay, grain, and other crops. +But the use of machinery in large fields is far more extensive than +the patient work of peasants with their hand tools. The more labor or +the more equipment (or both together) that is put upon an acre, the +larger the product, but the larger the cost per unit. It is a familiar +economic principle.[1] It would bankrupt any farmer, excepting the +millionaire amateur, to farm in America by European methods. American +farmers, at least many of them, could raise as many bushels per +acre and keep their farms as thoroly cultivated as do the European +peasants, if wages were as low here as are the peasants' incomes. + +Sec. 8. #Prospect of more intensive cultivation of land in America#. As +the aggregate need for food increases in America there must come a +steady pressure upon our stock of land uses, resulting in decreasing +returns to labor in agriculture, unless this movement can be +counteracted by the spread of better methods in agriculture--not +European peasant methods, but new American methods consistent with +high labor-incomes. A good deal of our farm land is undoubtedly too +intensively used now in view of present and prospective commodity +prices and wages. Maladjustment of land uses has resulted +from mistaken judgment, from changing conditions as to prices, +transportation, and markets, and from loss of soil fertility. There +are thus, on nearly every old farm, some fields that would better be +in pasture and much hillside pasture that would better be woodland. It +is often declared extravagantly that our country could support easily +the total population of China, or as great a population per square +mile as that of Italy. If it did so it would be only on the penalty +of lowering wages toward, if not quite to, the level of the Chinese +coolie or of the Italian peasant. Great metropolitan dailies gravely +present as an argument in favor of unrestricted immigration, the +proposition that "if" the cheaper immigrants would but go upon our +"waste" land (which they refuse to do), and raise food by European +methods the problem of the rising cost of food in the cities would be +solved. This urban ideal of a frugal, low-paid agricultural peasantry +can hardly be adopted in America as the national ideal. Rather, +it would seem, any movement toward more intensive agriculture that +necessitates a lowering of the standard of living of the masses of the +American people will, when it is recognized, be condemned and opposed. + +Sec. 9. #The new agriculture#. Agricultural method, the technic of +farming, has been constantly progressing for two hundred years in +Europe and in America, Were it not for this, the great growth of +population on this combined area would have been quite impossible. +But the betterments since about 1890 in America have been especially +great. They are mostly the first large fruits of the scientific study +made possible by the land-grant colleges and agricultural experiment +stations fostered by state and national, legislation. These many +diverse improvements are grouped under the general title of "the +new agriculture." Its chief features are: new machinery and other +labor-saving methods; better methods of cultivation of the soil; +better selection of seed; introduction of new plants and trees from +abroad to utilize low-grade lands; plant-breeding to develop new +varieties of better quality, heavier bearing, or immune to disease; +more efficient and economical ways of maintaining soil fertility; +better methods of marketing; and better technical education of the +individual farmer. Each of these topics, and a number of other minor +ones, would require a chapter in a complete treatise on agricultural +economics. Here this mere enumeration must be allowed to convey its +own suggestion of far-reaching results for the whole political economy +of the nation and of the world. + +Indeed, so much has been written in a Barnumesque way of the +wonders of the new agriculture, that its actual results and further +possibilities are in many minds absurdly exaggerated. It has not as +yet been potent enough to prevent diminishing returns in respect to +the great staple foods and raw materials obtained by agriculture. +It apparently has barely kept pace with the needs of the growing +population of Christendom. It has enabled a larger population to exist +in about the same, if not in a worse condition, on the same area, +while progress in cheapness of goods has come almost entirely from the +side of the chemical and the mechanical industries. It does not +give the promise of an indefinite amelioration of the lot of an +indefinitely multiplying population. But to a population slowly +increasing, a new and ever newer agriculture, utilizing constantly the +achievements of the natural sciences and the mechanic arts, ensures +the possibility of a steady betterment of the popular welfare in city +and in open country alike. + +Sec. 10. #Difficulty of cooeperation among farmers#. Rural communities +are proverbially conservative; the American farmer is proverbially +an individualist. No wonder, then, that the new ideas and plans of +cooeperation in business matters have made headway in agriculture +slowly and with difficulty. The need of mutual aid among American +farmers is especially great, for, as has often been, said, isolation +is the problem of the farm as congestion is that of the city. On the +frontier a cooeperative spirit manifested itself frequently in mutual +helpfulness, in house raising bees, husking bees, threshing bees, and +other similar gatherings. + +But this spirit seems to have almost disappeared in the older +communities, the more rapidly doubtless in the period of decaying +agricultural prosperity.[2] To-day, for example, it is impossible on +a certain Pennsylvania road for one more progressive farmer to get +his neighbors to cooeperate in so simple a matter as hauling their +milk cans to the creamery, and so every day in the year ten horses are +hitched to ten delivery wagons carrying two or three milk cans apiece, +and driven by ten drivers along the same road to and from the railroad +station. One driver and two horses could easily carry as much or +more, as is done now in many other dairy districts. Even of successful +cooeperation among farmers sympathetic critics are forced to say: "Many +students of rural economics assert that cooeperation as applied to the +distribution and marketing of farm products is not very successful +unless it is founded upon dire necessity. When the records of the +organizations of the country are analyzed it becomes almost necessary +to accept that statement. So long as farmers do fairly well in their +own way they are not inclined to cooeperate." + +Sec. 11. #Rapid growth of farmers' selling cooeperation#. Despite what has +just been said, cooeperation among farmers now is more developed and is +growing faster than all other kinds of cooeperation in America. This +is most marked in farming communities in the West, especially in +California and in the Middle Western or Northwestern states (e.g., +Minnesota and Wisconsin). There the farmers are younger, and many have +been educated in the state agricultural colleges. They all produce +nearly the same kinds of crops of staple produce which must be shipped +to distant markets. The need of uniting to get what they thought +would be fair treatment from the railroads, and to protect themselves +against the abuses of the competitive commission salesagents, seems to +have given the first impetus to farmers' cooeperation. + +The most notable developments were those of the California Fruit +Exchange and of cooeperative societies of the Northwest for marketing +grain. The membership of the former is made up entirely of the +local citrus growers' associations in California. It has a complete +organization of selling agents in the Eastern cities and a remarkably +efficient, tho simple, system of equalizing and expediting shipments. +Now the agricultural cooeperative associations of various kinds are +multiplying all over the country, for shipping live stock, fruits, +butter, cheese, and other farm products. Cooeperation for these +purposes called forth new activities; packing houses were built, and +grain elevators and creameries and dairies, and now a goodly number of +the simple manufacturing processes are undertaken by these societies, +now numbering thousands. + +Sec. 12. #Some economic features of farmers' selling cooeperation#. This +type of producers' selling cooeperation is proving in America to be far +more successful than producers' cooeperation among workingmen;[3] and +certain important economic features in it should be noted. The local +producers' selling cooeperative society is composed of farmers who as +enterprisers own and carry on their own separate businesses; they +are not, as in the other case, wage workers. Any productive processes +undertaken by this kind of society are subordinate to the main +business, being such as picking, packing, drying, preserving, and +making boxes for packing. This form of cooeperation with the related +form of consumers' cooeperation that is fostered by it, promises to +have a wide extension. + +Some of these societies, as those dealing in citrus fruits, regulate +with some success the picking and the marketing so as to distribute +them more evenly throughout the year. They watch the markets and +direct their agents by telegraph to divert cars _en route_ away from +markets that are glutted with products and into markets where prices +are higher. They take some of the products, as eggs in the spring at +the period of low prices, and pack or refrigerate them, to be sold +when prices are higher. For thus withholding the supply they are said +by some to exercise a monopolistic power. But this is a more than +doubtful view. So long as only the seasonal variations are equalized +and the total supply of the year is not reduced it is, on the marginal +principle, an economic service to the consumers, comparable to +insurance in its utility. Any reduction of the area planted or of the +entrance of others into the industry would be a monopolistic act but +this as yet has not occurred. + +Sec. 13. #Cooeperation in buying.# Cooeperative buying (called also +consumers' cooeperation or distributive cooeperation) has had a large +growth in the British Isles, since 1844, when the society called the +Rochdale Pioneers was founded by a group of factory workingmen. The +cooeperative stores, both in Great Britain and on the Continent, have +continued to develop mainly among the industrial classes in urban +centers. However, this has not been exclusively the case, and +particularly in Denmark and Ireland cooeperative buying has increased +in agriculture in connection with selling associations. Since 1890 +the growth of consumers' cooeperation among European industrial +wage-earners has been phenomenal, especially in Belgium, Germany, and +Switzerland. American wage-workers, however, have made few and feeble +efforts in this direction. + +In the period beginning 1867 many cooeperative stores were founded in +America by farmers in the Grange movement, who operated also grain +elevators, warehouses, and steamboat lines. But the movement failed +about 1877. This result is easily explained by lack of commercial +knowledge and lack of harmony among the members, selling on credit, +and inefficient management. A new era in consumers' cooeperation for +farmers began about 1900 and now in several widely separated parts +of the country--Minnesota, Kansas, California, Washington, and +elsewhere--the movement is spreading rapidly, supported in large part +by the same persons who are members of the selling associations. + +Sec. 14. #Need of agricultural credit.# Banking originated in cities and +for the use of the merchant-class. It still retains pretty faithfully +its commercial character. The change of farming toward a more +commercial form[4] has been little aided by banking credit. National +banks and many others were forbidden in their charters to lend on the +security of real-estate, the farmer's one business asset.[5] A great +number of farms are always in course of being purchased, the balance +of purchase money being borrowed by the purchaser. A group of private +agencies such as life insurance and mortgage loan companies and local +money lenders has supplied in somewhat costly ways the need of farm +credits. Tho rates of interest have become more equalized throughout +the whole country, they still range between 7 and 10 per cent in the +Southern and Western states, averaging 7 per cent in the whole country +for interest and commission. The need of better opportunities for +credit in the agricultural districts has long been recognized. The +high rate of interest for borrowed money necessarily placed a limit on +improvements in equipment and methods of farming.[6] + +Sec. 15. #Recent provisions for farm loans#. The Federal Reserve Act +made two important changes to improve agricultural credit.[7] Soon +afterward some of the states took more vigorous action to provide +a special system of agricultural credit, especially New York and +Missouri. In the latter state, on the initiative of a public-spirited +citizen of St. Louis, was passed in 1915 a notable act of legislation +known as the Gardner State Land Bank Act (effective December 1, 1916, +provided a constitutional amendment is adopted in November, 1916). +This authorizes the establishment of a land bank, with power to lend +on the security of farming lands, for buying farms and for productive +improvements, and to issue bonds to be sold to investors. + +Following this general plan the Federal Farm Loan Act became law +July 17, 1916. It authorized the establishment of twelve Federal Land +Banks, each with a capital of not less than $750,000 to make loans +through national farm loan associations organized somewhat after the +model of the building and loan associations. The bonds issued by these +banks are to bear not to exceed 5 per cent interest. It is hoped that +they will have the high credit of municipal bonds so that they may +be sold at parity, bearing interest at 4 or 4.5 per cent. The loan +is repaid by the farmers under a regular plan of amortization. The +practical results of these measures are yet to appear. They are +expected to give to loans that are made on the security of farms as +wide a market and as high credit as state and municipal bonds now +have. They bid fair to bring the rate of interest on long-time loans +to farmers down to 5 per cent or less in the remotest parts of the +land. This will stimulate agricultural improvement, and facilitate +the purchase of land by tenants. Where the interest rate has been +the highest it should raise the value of farm lands as it brings them +within the circle of a lower-interest-rate economy. This may hasten +the transfer of the lands from less provident to more provident +owners, who are willing to take the land at a higher capitalization. +But the system of loans will probably help to develop greater thrift +in the younger farming population. + + +[Footnote 1: See Vol. I, chs. 12 and 13 on proportionality and +usance.] + +[Footnote 2: See ch. 25, secs. 4 and 5.] + +[Footnote 3: See above, ch. 19, secs. 13, 14, 15.] + +[Footnote 4: See above, sec. 3.] + +[Footnote 5: See ch. 8, sec. 8.] + +[Footnote 6: See Vol. I, pp. 495-497, on the relation between lower +interest rates and productive processes.] + +[Footnote 7: See ch. 9, sec. 7 on time deposits, and sec. 9 on farm +loans.] + + + + +CHAPTER 27 + +THE RAILROAD PROBLEM + + Sec. 1. Rise of the corporation concept. Sec. 2. The modern era of + corporations. Sec. 3. Beginning of corporation problems. Sec. 4. The era of + canals. Sec. 5. Rapid building of American railroads. Sec. 6. Reasons for + governmental aid. Sec. 7. Kinds of governmental aid. Sec. 8. Emergence of + the railroad problem. Sec. 9. Discrimination as to goods. Sec. 10. Local + discrimination. Sec. 11. Personal discrimination. Sec. 12. Economic power + of railroad managers. Sec. 13. Political power of railroad managers, + Sec. 14. Consolidation of railroads. Sec. 15. State railroad commissions. Sec. 16. + Passage of the Interstate Commerce Act. Sec. 17. Working of the Act. + Sec. 18. Public nature of the railroad franchise. Sec. 19. Other peculiar + privileges of railroads. Sec. 20. Private and public interests to be + harmonized. + + +Sec. 1. #Rise of the corporation concept#. In the legal systems of +primitive people and long afterward, only natural persons had legal +rights, could make contracts, have property, and carry on a business. +But in a number of cases, very early, groups of men came to have +certain interests in common and certain possessions. Gradually some +such groups gained more or less of legal recognition, with certain +political and economic rights as a body and not as individuals. +Thus evolved the conception of a "corporation" (body) having men as +"members," an artificial person, yet not the same as any one or as all +the individuals together, and legally distinct from the individuals. +A group of burghers obtaining a charter from the lord of the realm +became a municipal corporation; a group of teachers, a _collegium_, +became the corporation of the college or a university (a number of +persons united into one association); a group of craftsman became a +gild-corporation. Each corporation had certain rights, privileges, and +immunities, and used a corporate seal as a signature. All of the early +corporations had some economic features that were incidental to the +main purposes, which were political, ecclesiastical, educational, +and fraternal. Toward the end of the Middle Ages groups of traders +obtained charters to act as corporations permanently for business +purposes, such as foreign trade, colonization, and banking. These +increased in the sixteenth and seventeenth centuries, and in the +eighteenth century this form of organization was adopted also and +parliamentary charters obtained, by groups of men for building +turnpikes and canals and for carrying on other kinds of business. + +Sec. 2. #The modern era of corporations#. The great era of the +corporations did not begin, however, until well on in the second +quarter of the nineteenth century. Then, both in Europe and in +America, the corporate form of organization was extended to a greater +number, and to other kinds, of enterprises. It proved itself to be +well adapted to enterprises for the construction and operation of +canals and railroads, requiring a larger amount of capital than +usually could or would be risked by one person. The investor in a +corporation bought shares, and his liability for debts and losses +was limited by charter to his share capital. It is an advantage that +permanent enterprises of that kind are owned by corporations +with charters perpetual or for long periods. It is possible for +corporations to make investments running for longer periods than would +be safe for individuals. The corporation with an unlimited charter +has legally an immortal life. Sale and change of management are not +necessary on the death or failure in health of any one owner. As the +factory system and large production developed, the corporate form of +organization was found to have these same advantages in manufacturing. +It appeared in textile, iron, mercantile, and other industries. After +1865 the corporate form of organization increased at a cumulative +rate, until now it is applied to many enterprises of small extent and +local in operation. There are 300,000 corporations making returns +to the United States Commissioner of Internal Revenue.[1] There were +70,000 manufacturing corporations, which were 26 per cent of the whole +number of manufacturing establishments, but which employed 76 per cent +of all wage earners and turned out 79 per cent of the whole product. + +Sec. 3. #Beginning of corporation problems.# With the corporations +came "the corporation problem," a single name for a complex of +problems--legal, political, moral, and economic--which arise out of +the relations of corporations to their individual stockholders, to +their employees, to the state, to the general public, and to their +competitors in business. The problems differ also in corporations of +different sizes and in different businesses. We shall discuss in +this and succeeding chapters but a few of the larger aspects of the +corporation problem, the railroad, the industrial trust, and certain +other kinds of monopolistic industry. + +Of the various forms of corporations, banks first presented problems +calling for economic legislation and regulation. This is explained by +the fact that it was the first kind of business corporation to become +important, and further by the fact that its work was in various ways +closely connected with the coinage and regulation of money, which had +already become a governmental function. The railroad was the form +of corporation next in point of time to become a great problem; this +because of the peculiarly vital and far-reaching effects that such +railroad transportation has upon all other kinds of business in the +community, as appears in what follows. + +Sec. 4. #The era of canals.# Canals were used in the ancient empires +for irrigating, for the supplying of cities with water, and for +navigation. In the late eighteenth and the early nineteenth centuries +they were rapidly built in England and America. Six canals had been +built in the United States before 1807, but the "canal-era" in America +dated from the beginning of work on the Erie canal in 1817, and +continued until about 1840, when nearly all new work ceased; over 4000 +miles of canals had been built at a cost of $200,000,000. + +The great advantage of canals is cheapness of operation due to the +simplicity of the machinery needed and to the great loads that can be +moved with small power. A cent a ton-mile proved to be a paying rate +on a small canal. For heavy, slow-moving freight, a railroad can even +now barely rival a parallel canal at its best. As canals, however, can +be built only along pretty level routes and where the water supply is +at high level, their construction is limited to a small portion of the +country. The principle of diminishing returns applies strongly to +the construction of canals; the first canals in favored locations +are easily constructed and economically operated, but it is only +with greater cost and difficulty that the system can be successively +extended. In temperate climates the use of canals is limited by ice +to a part of the year, and by the summer's drought sometimes still +further. At its best, therefore, the small land-locked canal is fitted +only to be a supplementary agent in the system of transportation +wherever another transportation agency of higher speed and greater +regularity is possible. Far different is the case of the oceanic canal +in a tropical climate. + +Canals do not appear to have developed any serious problems calling +for public regulation of rates. A first simple legislative act fixing +the rate of tolls for boats was sufficient. Charges were made by +distance as on a toll road and the boats were owned by different +private shippers or by common carriers among whom competition +prevailed. + +Sec. 5. #Rapid building of American railroads#. The canal was just +reaching the peak of popular favor when the railroad in 1830, after a +half-century of slowly accumulating technical improvements, burst into +view as a demonstrated success as a means of transportation.[2] The +railroad excels in adaptability any other agent of transportation; it +can go over mountains or tunnel through them. It is markedly superior +in certainty; it may be blocked for a day or two by floods and snows, +but it suffers no seasonal stoppage of traffic. In speed, even the +early railroad so far excelled that the canal could survive only by +dividing the traffic, taking the lower grades of freight, and leaving +to the railroad the passenger traffic and fast freight. Even in +respect to cheapness, the unique virtue of waterways in favored +localities, the railroad made rapid gains. Improvements in roadbed, +rails, cars, engines, and other equipment soon reduced greatly the +cost of conducting traffic on the main lines of roads. Because of +these qualities railroads soon surpassed in importance every other +agency of internal transportation. The miles constructed and miles in +operation in the United States, by decades since 1830 were as follows +(route mileage, not counting double tracks and sidings): + + Miles constructed Total route miles + in decade. in operation. + + 1830 ........................ 23 23 + 1840 ........................ 2,795 2,818 + 1850 ........................ 6,203 9,021 + 1800 ........................ 21,605 30,626 + 1870 ........................ 22,296 52,922 + 1880 ........................ 40,345 93,267 + 1890 ........................ 73,924 167,191 + 1900 ........................ 31,773 198,964 + 1910 ........................ 51,028 249,992 + 1915 (5 yrs.) ............... 13,555 263,547 + +The extension of railroads was so rapid that there was not time for +a gradual adjustment of industrial conditions. In many places the +resulting changes were revolutionary. The building of railroads in +the Mississippi valley in the seventies lowered the value of eastern +farms, ruined many English farmers, and depressed the condition of +the peasantry in all western Europe.[3] With the lower prices that +resulted when the fertile lands of the western prairies were opened +to the world's markets, the less fertile lands of the older districts +could not compete. Many other changes, of no less moment in +limited districts, resulted from the building of railroads. Local +trading-centers decreased in importance. Villages and towns, hoping +to be enriched by the railroads, saw their trade going to the cities. +Commerce became centralized. Enormous increases of value at a few +points were offset by losses in other localities. + +Sec. 6. #Reasons for governmental aid#. The growth of railroads in +America was more rapid than in any other part of the world, but it +did not occur without much help to private capital from governmental +agencies. The railroad enterprise was uncertain, the possibilities of +its growth could not be foreseen, and private capital would not invest +without great inducements. In European countries the railways were +built through comparatively densely populated districts to connect +cities already of large size. Yet railroad extension was very slow +there, even tho the states in many ways aided the enterprises. America +was comparatively sparsely populated, and most of the railroads were +built in advance of and to attract population, business, and traffic. +In many cases railroad building in America was part of a gigantic +real-estate speculation undertaken collectively by the taxpayers of +the communities. + +Sec. 7. #Kinds of governmental aid#. American states recklessly abandoned +the policy of non-interference, and vied with each other in giving +railroad enterprises lands, money, and privileges, in loaning bonds, +in subscribing for stock, and in releasing from taxation. These +fostering measures were expected to increase wealth and to diffuse a +greater welfare through the community. Many states were forced to +the point of bankruptcy by their reckless generosity, and some states +repudiated the debts thus incurred. + +The national government then took up the same policy and granted lands +to the states to be used for this purpose. The first case of this kind +was the grant to the Illinois Central road, in 1850, of a great strip +of land through the state from north to south. Grants were made in +fourteen states, covering tens of millions of acres of land. Then the +national government, between 1863 and 1869, aided the building of the +Pacific railroads by granting outright twenty square miles of land for +every mile of track and by loaning the credit of the government to +the extent of fifty million dollars,--a debt which was settled by +compromise only after thirty years. + +Counties, townships, cities, and villages then entered into keen +competition to secure the building of railroads, projected by +private enterprise. Bonds, bonuses, tax-exemptions, and many special +privileges were granted. To obtain this new Aladdin's lamp, this great +wealth-bringer, localities mortgaged their prosperity for years to +come. The promoters bargained skilfully for these grants, playing off +town against town, cultivating the speculative spirit, punishing the +obdurate. Not the civil engineer, but the railroad promoter determined +the devious lines of many a railroad on the level prairies of America. +The effects of these grants were in many cases disastrous, and after +1870 they were forbidden in a number of states by legislation and by +constitutional amendments. But before this era of generosity ended, +probably the railroads in America had received more public aid than +has ever been given to any other form of industry in private hands. + +Sec. 8. #Emergence of the railroad problem#. In most charters and laws +authorizing the building of railroads, either nothing was specified +regarding rates, or maximum rates were fixed which proved to be so +high that they were of little, if any, practical effect. But very soon +began to appear some serious evils in the policy of railroads toward +the shipping and traveling public in matters of rates and of service. + +As the ownership of the wagons, ships, and canal-boats of a country +is usually divided, ocean ports and points along the lines of +turnpikes and canals enjoy competition between carriers. In the early +days of the railroads it was believed that a company or the government +would own the rails and charge toll to the different carriers, who +would own cars and conduct the traffic as was done on the canals. +Experience soon showed the impracticability of this scheme and the +need of unified management. An operating railroad company, therefore, +has a monopoly at all points on its line not touched by other +carriers. This, like any other monopoly, is limited, for the railroad, +to secure traffic, is led to meet competition of whatever kind--that +of wagons, canals, rivers, or of other railroads--wherever it occurs. +The railroads in private hands early began to "charge what the traffic +would bear," high where they could, and low where they must, to get +the business. Thus developed the various forms of discrimination which +are now to be described. + +Sec. 9. #Discrimination as to goods#. Discrimination as to goods is +charging more for transporting one kind of goods than for another +without a corresponding difference in the cost. When reasonably +understood, this proposition does not apply to a higher charge for +goods of greater bulk, as more per pound for feathers than for iron, +the "dead weight" of car being much greater in one case than in the +other. It does not apply where there is a difference in risk, as +between bricks and powder, or coal and crockery; nor where there is a +difference in trouble, as between live stock and wheat. Any difference +that can reasonably be explained as due to a difference in cost is +not discrimination; on the other hand a difference in cost without a +difference in rate is discrimination. Discrimination as to goods may +be by value, as low rates for heavy, cheap goods, and high rates for +lighter, valuable ones. Coal always goes at a low rate as compared +with dry goods, and sometimes more is charged for coal to be used for +gas than for coal to be used for heating purposes. + +Railroad discrimination so frequently has resulted in injustice to the +shipping public that the term has taken on an evil significance. But +it is well to observe that the word discrimination is not derived from +_crimen_ (crime), but from _discernere_ (to discern). There are +both reasonable and unreasonable forms of discrimination. In +general discrimination as to goods more often appears, under certain +conditions and made with due regard to the public interest, to +be reasonable; less often to be justified is the form of local +discrimination, next to be described; and least often of all to be +justified is the last named form of personal discrimination. + +Sec. 10. #Local discrimination#. Discrimination between places (called +also local discrimination) is charging different rates to two +localities for substantially the same service. This occurs when local +rates are high and through rates are low; when rates at local points +are high and at competing points are low; when less is charged for +shipments consigned to foreign ports than for domestic shipments; +when, more is charged for goods going east than for goods going west. +The causes of local discrimination are: first, water-competition, +found at great trade centers such as New York and San Francisco; +second, differences in terminal facilities, making some places better +shipping-points than others; third, competition by other railroads, +which is concentrated at certain points, only one tenth of the +stations of the United States being junctions; fourth, the influence +of powerful individuals or large corporations and the personal +favoritism shown by railroad officials. + +The effects of local discrimination are to develop some districts and +depress others; to stimulate cities and blight villages; to destroy +established industries; to foster monopolies at favored points; and to +sacrifice the future revenues of the road by forcing industry to move +in the competing points to get the low rates. The power of railroad +officials arbitrarily to cause rates to rise or fall is happily +limited in practice by the need of earning as large and as regular +an income as possible, but even as exercised it has been at times as +great as that possessed by many political rulers. + +Sec. 11. #Personal discrimination#. Discrimination between shippers +(personal discrimination) is charging one person more than another for +substantially the same service. This most odious of railroad vices, +rarely practised openly, is done by false billing of weight, by +wrong descriptions or false classification to reduce the charge below +published rate-sheets, by carrying some goods free, by issuing passes +to some and not to all patrons under the same conditions, or by +donations or rebates after the regular rate has been paid. In some +cases a subordinate agent shares his commission with the shipper, and +the transaction does not appear on the books of the company. In other +cases favored shippers are given secret information that the rate is +to be changed, so that they are enabled to regulate their shipments to +secure the lower rate. + +One group of reasons for personal discrimination is connected with the +interests of the road. It is to build up new business; it is to +make competition with rival roads more effective by favoring certain +agents, as was very commonly done in the Western grain business; it +is to exclude competition, as by refusing to make a rate from a +connecting line or to receive materials for a new railroad which is +to be a competitor; and it is to satisfy large shippers whose power, +skill, and persistence make the concession necessary. Another group of +reasons has to do with the interests of the corporate officials. It is +to enable them to grant special favors to friends; or it is to build +up a business in which they are interested; or it is to earn a bribe +that has been given them. + +The evils of personal discrimination are great. It introduces +uncertainty, fear, and danger into all business; it causes business +men to waste, socially viewed, an enormous fund of energy to get good +rates and to guard against surprises; it grants unearned fortunes and +destroys those honestly made; it gives enormous power and presents +strong temptations to railroad officials to injure the interests of +the stockholders on the one hand and of the public on the other. + +Sec. 12. #Economic power of railroad managers.# Other evils of +unregulated private management of railroads appeared. When the +railroad was a young industry, it was thought to be simply an +iron-track turnpike to which the old English law of common carriers +would apply. This and similar notions soon, however, proved illusory. +It was seen that the higher railroad officials had, in the granting +of transportation service and the fixing of rates, a great economic +power. They had complex and sometimes conflicting duties to +the stockholders and to the shipping public. They wore their +conscience-burdens lightly, before the days of effective regulation, +and frequently made little attempt to meet the one and no attempt +whatever to meet the other obligation. The opportunities for private +speculation brought to many railroad managers great private fortunes. +There were no precedents, no ripened public opinion, no established +code of ethics, to govern. It was a betrayal of the interests of +the stockholders when directors formed "construction companies" and +granted contracts to themselves at outrageously high prices. It was +an injury not only to shippers, but also to the stockholders, when +special rates were granted to friends and to industries in which the +directors were interested. In general, however, the interests and +rights of the stockholders were more readily recognized than +were those of the public. A railroad manager is engaged by the +stockholders, is responsible to them, and looks to them for his +promotion. Hence their interests are uppermost whenever the welfare +of the public is not in harmony with the earning of liberal dividends. +The managers long felt bound to defend the principle of "charging what +the traffic will bear" in the case of each individual, locality, and +kind of goods, even if this ruined some men and enriched others, and +if it destroyed the prosperity of cities to increase the earnings of +the road. + +Sec. 13. #Political power of railroad managers.# Likewise in various ways +railroad managers may exercise great political influence and power. +Some writers maintain that the power to make rates on railroads is +a power of taxation. They point out that if rates are not subject to +fixed rules imposed by the state, the private managers of railroads +wield the power of the lawmaker. By changing the rates on foreign +exports or imports, the railroads frequently have made or nullified +tariff rates and have defeated the intention of the legislature. +High rates on state-owned roads in Europe have been used in lieu of +protective duties. These facts go to show that a change of railroad +rates between two places within the country is similar in effect to +the imposing or repeal of tariff duties between them. + +The wealth and industrial importance of the railroads soon began to +give them widespread political power in other ways. It was commonly +charged in some states that the legislature and the courts were +"owned" by the railroads. The railroads, in part because they were +the victims at times of attempts at blackmail by dishonest public +officials, declared that they were compelled, in self-defense to +maintain a lobby. The railroad lobby, defensive and offensive, was, in +many states, the all-powerful "third house." Railroads even had their +agents in the primaries, entered political conventions, dictated +nominations from the lowest office up to that of governor, and elected +judges and legislators. The extent to which this was done differed +according as the railroads had large or small interests within the +state. These statements can with approximate truth now be made in +the past tense, as was not possible a few years ago. A better code +of business morality has developed, and the railroad management's +relationship of private trusteeship toward the shareholders and of +public trusteeship toward the patrons of the road is now much more +fully recognized. The change was not brought about without long and +strenuous agitation and effort, educational and legislative, as is in +part described below. + +Sec. 14. #Consolidation of railroads#. Gradually the consolidation of the +railroad mileage into larger units put into fewer hands greater and +greater economic power. The early railroads, many of which were built +in sections of a few miles in length, have been slowly welded into +continuous trunk lines with many branches. The New York Central +between Albany and Buffalo was a consolidation, by Commodore +Vanderbilt, of sixteen short lines. The Pennsylvania system was formed +link by link from scores of small roads. In the decade of the nineties +the growth of consolidation went on more rapidly than ever before. In +1903 it could be said that 60 per cent of the mileage of the United +States was under the control of five interests; 75 per cent was +controlled by a group of men who could sit about one table. The +country was being divided territorially into great railroad domains, +within each of which one financial interest was dominant. Since that +time the policy of the leading roads has been still further unified +by great financial alliances and by the method known as "community of +interests." + +Toward this result strong economic forces have been working. +Consolidation has many technical advantages: it saves time, reduces +the unit cost of administration and of handling goods, gives better +use of the rolling stock and of the terminal facilities of the +railroads, and insures continuous train service. It has the advantage +of other large production and the possible economies of the trusts. +Most important, however, from the point of view of the railroads, is +the prevention of competition and the making possible of higher +rates and larger dividends. The statement that competition is not an +effective regulator of railroads often is misunderstood to mean that +it in no way acts on rates. It is true that competition between roads +does not prevent discrimination and excessive charges between stations +on one line only; but competition usually has acted powerfully at +well-recognized "competing points." The larger the area controlled +by one management, the fewer are the competing points; the larger, +therefore, is the power over the rate and the more completely +the monopoly principle applies. It is a grim jest to say that +consolidation does not change the railroad situation as regards the +question of rates. + +Sec. 15. #State railroad commissions.# When it became evident that public +and private interests in the railroads were so divergent, it still was +not easy to determine how the public was to be safeguarded. At first, +some general conditions such as maximum rates were inserted in the +laws and charters; but these were not adaptable to changing conditions +and, for lack of administrative agents, could not be enforced. Some +early efforts at state ownership were disastrous. The old law of +common carriers gave to individual shippers an uncertain redress in +the courts for unreasonable rates; but the remedy was costly because +the aggrieved shipper had to employ counsel, to gather evidence, and +to risk the penalty of failure; it was slow, for, while delay was +death to the shipper's business, cases hung for months or years in +the courts; it was ineffectual, for, even when the case was won, the +shipper was not repaid for all his losses, and the same discrimination +could be immediately repeated against him and other shippers. + +In the older Eastern states, attempts to remedy these and other evils +by creating some kind of a state railroad commission date back to the +fifties of the last century. Massachusetts developed in the seventies +a commission of "the advisory type" which investigated and made public +the conditions, leaving to public opinion the correction of the evils. +A number of the Western states, notably Illinois and Iowa, developed +in the seventies commissions of "the strong type," with power to fix +rates and to enforce their rulings. The commission principle, strongly +opposed at first by the railroads, was upheld by the courts and became +established public policy. By 1915 every state and the District of +Columbia had a state commission. In Wisconsin and in New York, in +1907, in New Jersey, in 1911, and in many other states since, the +"railroad" commissions were replaced by "public utilities" or "public +service" commissions, having control not only over the railroads but +over street railway, gas, electric light, telephone, and some other +corporations. The state commissions have found their chief field +in the regulation of local utilities, and they fall far short of a +solution of the railroad problem. Altho they from the first did much +to make the accounts of the railroads intelligible, something to make +the local rates reasonable and subject to rule, and much to educate +public sentiment, on the whole their results have been disappointing. +It was difficult to get commissioners at once strong, able, and +honest; the public did not know its own mind well enough to +support the commissions properly; and the courts decided that state +commissions could regulate only the traffic originating and ending +within the state. + +Sec. 16. #Passage of the Interstate Commerce Act.# Public hostility to +private railroad management was greatest in the regions where the +most rapid building of roads occurred from 1866 to 1873. One center of +grievances was in "the granger states' of Illinois, Wisconsin, Kansas, +Nebraska, Iowa, and Minnesota; another center was in the oil regions +of Ohio and Pennsylvania. The Eastern states were not without their +troubles, for the report of the Hepburn Committee of the New York +legislature in 1879 showed that discrimination between shippers +prevailed to an almost incredible degree in every portion of New York +state. When the courts, in 1886, decided that the greater portion of +the railroad rates could not be treated by state commissions, national +control was loudly demanded. Scores of bills were presented to +Congress between 1870 and 1886, and, despite much opposition, the +Interstate Commerce Act was passed in 1887. + +The act laid down some general rules: that rates should be just and +reasonable; that railroads should not pool, or agree to divide, +their earnings to avoid competition; that they should, under similar +conditions, and, unless expressly excused, fix rates in accordance +with the long- and short-haul principle (to charge no more for a +shorter distance than for a longer one on the same line and in the +same direction, the shorter being included within the longer). The +act provided for a commission of five men, to be appointed by the +President, which might require uniform accounts from the railroads, +and which should enforce the provisions of the act. + +Sec. 17. #Working of the Act.# The commission in its earlier years +gave promise of effectiveness, but its powers, as interpreted by the +courts, proved inadequate to its assigned task. The railroads in many +cases refused to obey its orders, and court decisions paralyzed its +activity. Competent authorities declared in 1901, after fourteen years +of the commission's operation, that discrimination never had been +worse, and a series of exposures of abuses strengthened the popular +demand for stricter legislation. The result was first the Elkins' Act +of 1903, aimed at discrimination and rebates, and then the Hepburn +Act Of 1906, which marked a new era in railroad regulation in this +country. The commission was increased to seven members, its authority +was extended to include express, sleeping car, and other agencies of +transportation, and it was given the power to fix maximum rates, +not to be suspended by the courts without a hearing. It became thus +unquestionably a commission of "the strong type." It began to exercise +its new powers with vigor, and the carriers reluctantly accepted its +authority. Responsive to a calmer but insistent popular demand +further amendments were made by the Mann-Elkins Act of 1910, +which strengthened the long-and-short-haul clause, and gave to the +commission, among other new powers, that of suspending new rates +proposed by carriers. A special Commerce Court of five judges was +created with exclusive jurisdiction in certain classes of railroad +cases, but this was abolished after a short trial. + +It cannot be said that a final satisfactory solution of the railroad +problem has been attained; indeed, in most human affairs such a thing +is unattainable. But it can be said that there is no considerable +sentiment anywhere in favor of reversing the railroad policy that has +been developed, as here briefly outlined. Certainly the public has no +such sentiment, and the railroads, which for many years opposed the +progress of strong federal control, are now foremost in advocacy of +a policy of exclusive national regulation, to remedy the evil of +"forty-nine masters." + +Sec. 18. #Public nature of the railroad franchise.# A pretty definite +public opinion regarding the nature of the problem has emerged from +the nearly half-century of experience and discussion, since the +first vigorous agitation of the subject in the seventies of the last +century. Railroads in our country are owned by private corporations +and are managed by private citizens, not, as in some countries, by +public officials. They have been built by private enterprise, in +the interest of the investors, not as a charity or as a public +benefaction. Railroad-building appears thus at first glance to be +a case of free competition where public interests are served in the +following of private interests. But, looked at more closely, it may +be seen to be in many ways different from the ordinary competitive +business. Competition would make the building of railroads a matter of +bargain with proprietors along the line, and an obdurate farmer could +compel a long detour or could block the whole undertaking. But the +public says: a public enterprise is of more importance than the +interests of a single farmer. By charter or by franchise the railroad +is granted the power of eminent domain, whereby the property of +private citizens may be taken from them at an appraised valuation. +The manufacturer, enjoying no such privilege, can only by ordinary +purchase obtain a site urgently needed for his business. Why may the +railway exercise the sovereign power of government as against the +private property rights of others? Because the railway is peculiarly +"affected with a public interest." The primary object is not to +favor the railroads, but to benefit the community. These charters and +franchises are granted sparingly in most European countries. In this +country they have been granted recklessly, often in general laws, by +states keen in their rivalry for railroad extension. When thus +great public privileges had been granted without reserve to private +corporations, it was realized, too late in many cases, that a mistake +had been made and that an impossible situation had been created. + +Sec. 19. #Other peculiar privileges of railroads.# Further, do the +various grants of lands and money to the railroads make them other +than mere private enterprises? One answer, that of those financially +interested in the railroads, was No. They said that the bargain was +a fair one, and was then closed. The public gave because it expected +benefit; the corporation fulfilled its agreement by building the road. +The terms of the charter, as granted, determined the rights of the +public; but no new terms could later be read into it, even tho the +public came to see the question in a new light. Similar grants, tho +not so large, have been made to other industries. Sugar-factories were +given bounties; iron-forges and woolen-mills were favored by tariffs; +factories have been given, by competing cities, land and exemption +from taxation; yet these enterprises have not on that account, been +treated, thereafter, in any exceptional way. So, it was said, the +railroad was still merely a private business. + +But the social answer is stronger than this. The privileges of +railroads are greater in amount and more important in character than +those granted to any ordinary private enterprise. The legislatures +recognize constantly the peculiar public functions of the railroads. +In other private enterprises, investors take all the risk; +legislatures and courts recognize the duty of guarding, where +possible, the investment of capital in railroads. Laws have +been passed in several states to protect the railroads against +ticket-scalping. Whenever the question comes before them, the courts +maintain the right of the railroads to earn a fair dividend. Private +enterprise has been invited to undertake a public work, yet public +interests are paramount. + +Sec. 20. #Private and public interests to be harmonized.# If an extremely +abstract view is taken there is danger of losing sight of the real +problem, which is that of harmonizing these two interests in thought +and in public policy. Yet the extreme advocates of the private +control of railroads for a long time resented indignantly any public +interference with railroad rates and with railroad management as +an infringement of individual liberty. Before the passage of the +Interstate Commerce Act, in 1887, this position was inconsistently +taken by those in whose interests free competition had been violently +set aside at the very outset of railroad construction, and for whom +governmental interference had made possible great fortunes. It has +become generally recognized that the railroads ought not to be allowed +to change from a public to a private character just as it suits +their convenience. True, they are private enterprises as regards the +character of the investment, but they are public enterprises as to +their privileges, functions, and obligations. + +Finally, it might be said that if there were none of these special +reasons for the public control of railways, there is an all-sufficient +general reason in the fact that a railroad is always, in some respects +and to some degree, a monopoly. Therefore, the railroad problem may be +viewed as but one aspect of the general problem of monopoly. To other +aspects of this problem we are now to turn our attention. + + +[Footnote 1: Returns for 1915. The following figures are from the +census taken in 1909.] + +[Footnote 2: See A.T. Hadley, "Railroad Transportation," pp. 10, 32.] + +[Footnote 3: See Vol. I, pp. 437, 438, 443.] + + + + +CHAPTER 28 + +THE PROBLEM OF INDUSTRIAL MONOPOLY + + Sec. 1. Kinds of monopoly. Sec. 2. Political sources of monopoly. Sec. 3. + Natural agents as sources of monopoly. Sec. 4. Capitalistic monopoly; + aspects of the problem. Sec. 5. Industrial monopoly and fostering + conditions. Sec. 6. Growth of large industry in the nineteenth century. Sec. 7. + Methods of forming combinations. Sec. 8. Growth of combinations after + 1880. Sec. 9. The great period of trust formation. Sec. 10. Height of the + movement toward combinations. Sec. 11. Motive to avoid competition. + Sec. 12. Motive to effect economies. Sec. 13. Profits from monopoly and + gains of promoters. Sec. 14. Monopoly's power to raise prices. + + +Sec. 1. #Kinds of monopoly.# Monopolies may, for special purposes, be +classified as selling or buying, producing or trading, lasting or +temporary, general or local, monopolies. The terms selling or buying +monopoly explain themselves, tho the latter conflicts with the +etymology.[1] Under conditions of barter the selling and the buying +monopoly would be the same thing in two aspects. A selling monopoly +is by far the more common, but a buying monopoly may be connected with +it. A large oil-refining corporation that sells most of the product +may by various methods succeed in driving out the competitors who +would buy the crude oil. It thus becomes practically the only outlet +for the oil product, and the owners of the land thus must share +their ownership with the buying monopoly by accepting, within certain +limits, the price it fixes. The Hudson Bay Company, dealing in furs, +had practically this sort of power in North America. Many instances +can be found, yet, relatively to the selling monopolies, those of the +buying kind are rare. + +A producing monopoly is one controlling the manufacture or the source +of supply of an article; a trading monopoly is one controlling the +avenues of commerce between the source and the consumers. + +Monopolies are lasting or temporary, according to the duration of +control. By far the larger number are of the temporary sort, because +high prices strongly stimulate efforts to develop other sources of +supply. Yet the average profits of a monopoly may be large throughout +a succession of periods of high and low prices. + +Monopolies are general or local, according to the extent of territory +where their power is felt. At its maximum where transportation and +other costs most effectually shut out competition, monopoly power +shades off to zero on the border-line of competitive territory. The +frequent use of the adjectives partial, limited, and virtual are +implied but usually superfluous recognitions of the relative character +of monopoly. + +Sec. 2. #Political sources of monopoly.# Monopoly gets its power from +various sources. A political monopoly derives its power of control +from a special grant from the government, forbidding others to engage +in that business. The typical political monopoly is that conferred +by a crown patent bestowing the exclusive right to carry on a certain +business. A second kind is that conferred by a patent for invention, +or the copyright on books, the object of which is to stimulate +invention, research, and writing by giving the full control and +protection of the government to the inventor and the writer or their +assignees. In this case the privilege is socially earned by the +monopolist; it is not gotten for nothing. Moreover, the patent, being +limited in time, expires and becomes a social possession. A third +kind is a governmental monopoly for purposes of revenue. In France and +Japan the governments control the tobacco trade, and the high price +charged for tobacco makes this monopoly yield large revenues. A fourth +kind is that derived from franchises for public service corporations, +such as those supplying electricity, gas and water. These franchises +are granted to private capitalists to induce them to invest capital in +enterprises that are helpful to the community. + +Sec. 3. #Natural agents as sources of monopoly.# "Economic" monopoly, +so-called, arises when the ownership of scarce natural agents, as +mines, land, water-power, comes under the control of one man or one +group of men who agree on a price. Economic monopoly is a result of +private property that is undesigned by the government or by society. +It is exceptional, considering the whole range of private property, +but it is important. The oil-wells embracing the main sources of the +world's supply have largely come under one control. One corporation +may control so many of the richest iron mines of the country as to +be able to fix a price different from that which would result under +competition. Coal mines, especially those of some peculiar and +limited kind, such as anthracite, appear to become easily an object +of monopolization. Economic monopoly merges into political monopolies, +such as patents and franchises. Private property is a political +institution designed to further social welfare, and only rarely is +property in any particular business a monopoly. Private control of +great natural resources might have been prevented in many cases had it +been foreseen. + +Sec. 4. #Capitalistic monopoly; aspects of the problem.# Capitalistic +monopoly, variously called contractual, organized, commercial or +industrial monopoly, arises when men unite their wealth to control +a market, to overpower or intimidate opposition, and to keep out or +limit competition by the mere magnitude of their wealth. These +various kinds so merge into each other that they cannot always be +distinguished in practice. A patent may help a capitalistic monopoly +in getting control of a market; great wealth may enable a company to +get control of rare natural resources. + +In the discussion of industrial monopoly, the problem now before us, +there is a good deal of vagueness and misunderstanding because of +lack of definiteness in the use of words which have rapidly shifted in +meaning. The word "trust" originally applied, and still in legal usage +applies, to a particular form of organization, that of a board of +trustees holding the stock, and thus unifying the control, of two or +more formerly separate enterprises. The Standard Oil Company at one +time had this form of organization, which was declared by the courts +to be illegal _(ultra vires)_ for corporations. Now "trust" often +is used in the sense of a corporation having monopoly power in some +degree; either broadly, of any monopolistic corporation (including +railways and local public utilities), or, oftener, limited to +manufacturing and commercial monopolies, otherwise called "industrial +trusts" in contrast with franchise trusts and railroads.[2] The word +"combination" referred originally to a more or less thoro "merger," +with a view to attaining monopolistic power, of a number of formerly +separate organizations, as in the case of the United States Steel +Corporation. But the word is often used as if it were a synonym for +trust (in a narrower or wider sense) even as applied to a single +enterprise that has grown to be monopolistic. A "trust" in the legal +sense of a form of organization, and "combinations" as above defined, +might have no monopoly power whatever; whereas a monopoly may be +possessed by an individual owner (e.g., of a patent right, railroad, +waterworks plant), or by a single corporation that has simply grown +monopolistic without the trust form of organization or without +combination. + +Now it is evident that the real problem is that of monopoly, however +attained. Monopoly may be defined as such a degree of control over +the supply of goods in a given market that a net gain will result if a +portion is withheld.[3] In accord with growing and now dominant +usage it is well to observe the following meanings in our discussion. +"_Combination"_ is a term referring particularly to one method by +which monopolies are formed. "_Trust,"_ in the now popular sense, is +best limited to an industrial, primarily manufacturing, enterprise or +group of enterprises, with some degree of monopoly power due not to +a "special franchise" giving the use of streets and highways and the +right of eminent domain, nor to a single patent, but to a group of +favoring technical, financial, and economic conditions. The trust may +consist of a single establishment; or of a group of establishments +separately operated but united in a "pool" to divide output, +territory, or earnings; or of such a group held together by a holding +company, or combined into one corporation. Public utility is the +name of special franchise enterprises of the kind just mentioned, +including, in the broad sense, railroads and local utilities such as +street railways, gas, water, and electric light-plants. + +Sec. 5. #Industrial monopoly and fostering conditions.# The problem of +monopoly is probably as old as markets. From the first coming together +of groups of men to trade there were doubtless efforts made by some +individuals and groups of traders to manipulate conditions so as to +get higher prices than they could get in a free and open market.[4] +There are traces of these practices in ancient times, and the history +of the Middle Ages is full of evidences both of monopolistic practices +and of the efforts to prevent or control them. + +If this fact is borne in mind it may help us to distinguish in thought +four features of enterprise that are readily and constantly +confused, viz: large individual capital, large production, corporate +organization, and monopoly.[5] Evidently any one of these features may +appear without the other; e.g., a person of large aggregate capital +may have his investments distributed among a large number of small +enterprises, such as farms, without a trace of corporate organization +or monopoly, and numerous examples could be given of large production, +or of corporate organization, or of monopoly without one or more of +the other features. + +But the presence of any one of these features is a favoring condition +for the development of the others. Hence they are frequently found +together, and of late this occurs increasingly. It is difficult to say +in every, indeed in any, case which feature has been cause and which +effect in this development, but, on the whole, large production seems +to have been primary. Itself made possible by inventions, by better +transportation, and by the widening of markets, it in turn helped to +build up large individual fortunes, and then to create a need for the +corporate form of organization. And monopoly power no doubt is more +easily gained by large aggregations of capital in a corporation having +the advantages of large production. + +Sec. 6. #Growth of large industry in the nineteenth century.# The great +recent growth of the monopoly problem is in part to be explained as +the result of the growth of large industry, not as the sole cause, +but as a favoring condition. Before the middle of the last century a +tool-using household industry, on farms and in homes where the greater +part of the things used were produced in the family, was still the +typical organization in the United States.[6] A family produced +somewhat more than it needed of food and cloth and exchanged with its +neighbors; so with shoes, candles, soap, and cured meats. The early +factories growing out of the household industry were small. Since +that time two counter forces have been at work to affect the ratio +of manufacturing establishments to population. The number of small +establishments has been increased by the many industries producing the +things once made on farms, and by increasing demands for comforts and +luxuries. Many establishments producing the staple products that can +be transported have been consolidated or have been enlarged, so +that the unit of production now averages much larger. The number of +cotton-weaving factories was about the same in 1900 as it had been +seventy years earlier, while population has grown six fold. Iron- +and steel-mills were fewer in 1900 than in 1880. In industries having +local markets or local sources of materials, such as grist mills +and saw mills, the change in numbers was less, for many small +establishments were started in outlying districts at the same time +that the mills became larger in the great population centers. But the +average number of employees and the average capital per establishment +increased in every period between census enumerations. + +Sec. 7. #Methods of forming combinations.# Combinations of previously +independent enterprises may be more or less complete and are made by +different methods. Four major methods are: + +(1) The pool, by which the enterprises continue to be separately +operated, but divide the traffic (or output), or the earnings, or the +territory, in prearranged proportions. + +(2) The trust, in a legal sense (as defined above in section 5). + +(3) The holding company, a corporation with the sole purpose of +holding the shares of stock, or a controlling number of them, in +various corporations otherwise nominally independent. + +(4) Consolidation into one company. + +At least five minor methods may be distinguished; these are here +numbered continuously with the preceding four. + +(5) Lease by one company of the plants of one or more other companies. + +(6) Ownership of stock by one corporation in another corporation, +sufficient to give substantial influence over its policy, if not +absolute control. + +(7) Ownership of stock in two or more competing companies, by the same +individual or group of individuals, to such an extent as appreciably +to unify the policies of the competing companies. + +(8) Interlocking directorates, that is, boards of competing companies +containing one or more of the same persons as directors. + +(9) Gentlemen's agreements, mere friendly informal conferences and +understandings as to common policies. + +Sec. 8. #Growth of combinations after 1880.# Undoubtedly industry before +1860 had some elements of monopoly. Monopoly constituted part of the +banking problem; it began to be evident in the railroads almost at +once, and it rapidly increased as street railways and other public +utilities were constructed. But after 1880 occurred the formation in +larger numbers of industrial enterprises which appeared to exercise +some monopoly power. In the years between 1890 and 1900 this movement +was still more rapid. Consolidation took place on a great scale in +railroads and in manufactures. Much of this has been of such a kind +that it does not appear at all in the figures showing the number of +establishments and of employees. In the data regarding this movement +given by different authorities, many discrepancies appear, as there is +no generally accepted rule by which to determine the selection of the +companies to be included in the lists. One financial authority +gave the following figures[7] regarding the industrial companies +reorganized into larger units in the United States between 1860 +and 1899, not including combinations in such businesses as banking, +shipping, and railroad transportation. Some of the enterprises here +included have much and others probably have little or no monopolistic +power. + + _Decade Number Organized Total Nominal Capital_ + + 1860-60 ............... 2 $ 13,000,000 + 1870-79 ............... 4 135,000,000 + 1880-89 ............... 18 288,000,000 + 1890-99 ............... 157 3,150,000,000 + --------------- ------ --------------- + Total, 40 years ........ 181 $3,586,000,000 + +Sec. 9. #The great period of trust formation.# The number of trusts +organized and the capital represented by this movement in the last +of these decades were seven times as great as in the thirty years +preceding. The figures by years for the decade 1890-1899 are as +follows: + + Decade Number Organized Total Nominal Capital + + 1890 ................... 6 $82,000,000 + 1891 ................... 13 168,000,000 + 1892 ................... 13 140,000,000 + 1893 ................... 5 226,000,000 + 1894 ................... 2 35,000,000 + 1895 ................... 7 104,000,000 + 1896 ................... 3 40,000,000 + 1897 ................... 6 93,000,000 + 1898 ................... 22 574,000,000 + 1899 ................... 80 1,688,000,000 + ---------------- ---- -------------- + Total, 10 years ......... 157 $3,150,000,000 + +The influence of great prosperity shows in the large number of +combinations; but in 1893, the number was less, altho the total +nominal capital (stocks and bonds) was still the greatest it had ever +been in any year. Then came the period of depression, 1894-97, when +both the numbers and the capital were comparatively small. Then from +1898 to 1901 followed the period of the greatest formation of trusts +the world has ever seen. + +The list of these four years contains the names of the most widely +known American combinations, a few of which are here given with the +years of their formation: 1898, American Thread, National Biscuit; +1899, Amalgamated Copper, American Woolen, Royal Baking Powder, +Standard Oil of N.J., American Hide and Leather, United Shoe +Machinery, American Window Glass; 1900, Crucible Steel, American +Bridge; 1901, United States Steel Corporation, Consolidated Tobacco, +Eastman Kodak, American Locomotive. + +Sec. 10. #Height of the movement toward combinations.# In a list by +another authority[8] it appears that the data for all industrial +trusts are in round numbers as follows: + + Number of + Plants Acquired Total + Date Number or Controlled Nominal Capital + + Jan. 1, 1904 318 5288 $7,246,000,000 + +These figures compared with those given above would indicate that the +industrial trusts had about doubled in the years 1900-1903 inclusive. +Probably most of this growth was in the years 1900 and 1901; then the +movement became very slow, because, as is generally believed, of +the aroused public opinion, of more vigorous prosecution by the +government, and of additional legislation against trusts. The +authority last cited gives in a more comprehensive list, in six +groups, all the monopolistic combinations in the United States, at +the date of January 1, 1904, as follows (the figures just given above +being the totals of the first three groups): + + No. of Plants Total Nominal + Groups Number Acquired or Controlled Capital + + 1. Greater industrial + trusts 7 1528 $2,260,000,000 + 2. Lesser industrial + trusts 298 3426 4,055,000,000 + 3. Other industrial + trusts in process + of reorganization + or readjustment 13 334 528,000,000 + 4. Franchise trusts 111 1336 3,735,000,000 + 5. Great steam + railroad groups 6 790 9,017,000,000 + 6. Allied independent 10 250 380,000,000 + --- ----- -------------- + Total, 445 8664 $20,000,000,000 + +Sec. 11. #Motive to avoid competition.# This remarkable movement toward +the formation of united corporations from formerly independent +enterprises called forth a variety of explanations. The organizers of +trusts gave as the first explanation of their action that it was the +necessary result of excessive competition. It is not to be denied +that a hard fight and lower prices often preceded the formation of +the trusts. But as this excessive competition usually is begun for the +very purpose of forcing others into a combination, this explanation +is a begging of the question. It is fallacious also in that it ignores +the marginal principle in the problem of profits. Profits are never +the same in all factories, and to those manufacturers that are on the +margin competition may appear excessive. It generally has been the +largest and strongest factories, in the more favored situations, +that, in order to get rid of troublesome competitors, have forced the +smaller, weaker, industries to come into the trust. In other cases the +smaller enterprises have been eager to be taken in at a good price, +altho they might have continued to operate independently with moderate +profits. When, therefore, it is said that competition is destructive, +it may be a partial truth, but more likely it is a pleasantry +reflecting the happy humor of the prosperous promoters of the +combination. + +Sec. 12. #Motive to effect economies.# Another advantage of the +combination of competing plants that was strongly emphasized was the +economy of large production.[9] The economies that are possible within +a single factory may be still greater in a number of combined or +federated industries. The cost of management, amount of stock carried, +advertising, cost of selling the product, may all be smaller per unit +of product. Each independent factory must send its drummers into every +part of the country to seek business. In combination they can divide +the territory, visit every merchant and get larger orders at smaller +cost. A large aggregation can control credit better and escape +losses from bad debts. By regulating and equalizing the output in +the different localities, it can run more nearly full time. Being +acquainted with the entire situation, it can reduce the friction. A +combination has advantages in shipment. It can have a clearing-house +for orders and ship from the nearest source of supply. The least +efficient factories can be first closed when demand falls off. +Factories can be specialized to produce that for which each is best +fitted. The magnitude of the industry and its presence in different +localities often, in the period of trust formation, served to +strengthen its influence with the railroads, and to increase its +political as well as its economic power. + +Another phase of corporate growth is the "integration of industry," +that is, the grouping under one control of a whole series of +industries. One company may carry the iron ore through all the +processes from the mine to the finished product. A railroad line +across the continent owns its own steamers for shipping goods to Asia +or Europe. Large wholesale houses own or control the output of entire +factories. + +Sec. 13. #Profits from monopoly and gains of promoters.# There are, +however, well-recognized limitations to the economy of large +production in the single establishment,[10] and of late there has been +ever-increasing skepticism as to the net economy actually attributable +to combinations. Undoubtedly the merging of a number of old plants has +sometimes effected an immediate improvement in the weaker ones. A new +broom sweeps clean. This movement chanced to be contemporaneous with +the development of "efficiency engineering," and of "scientific +cost-accounting," and these better methods, already developed and +applied in comparatively small plants, could be more quickly extended +to the other plants brought into the combination. Moreover, the +personal organizations in the separate enterprises had been brought to +a high state of efficiency by the stimulus of competition, and there +is reason to fear that, after some years of centralized bureaucratic +organization, much of this efficiency may be lost. + +There seems no doubt that the strong motive for forming combinations +is the profit to the organizers.[11] Whatever was the more generous +motive or more fundamental economic reason assigned by the promoters, +the investing public confidently expected that higher prices would be +the chief result. There are indirect as well as direct gains to the +promoters of a combination. There is the gain from the production and +sale of goods to consumers, and there is the gain from the financial +management, from the rise and fall in the value of stock. The +promoters of a combination often expect to make from sales to the +investing public far more than from sales to the consumer of the +product. A season of prosperity and confidence, when trusts and their +enormous profits are constantly discussed, has an effect on the +public mind like that of the gold discoveries in California and in the +Klondike. Then is the time for the promoter to offer shares without +limit to investors. + +Sec. 14. #Monopoly's power to raise prices#. There is no doubt that the +formation of a combination from competing plants can and does give a +control over prices, a monopoly power, not possessed by the separate +competing establishments. The same kind of power might be attained by +the growth of one establishment outstripping all its competitors, +or by a new enterprise coming into the field backed by powerful +capitalists. But this would work slower and less extensive results +than does the formation of a combination. + +Of course, the fundamental principles of price cannot be changed by a +trust; a selling monopoly can affect price only as it affects supply +or demand.[12] The strongest trust yet seen has not been omnipotent. +Many careless expressions on the subject are heard even from +ordinarily careful writers and speakers: "The trust can fix its own +prices," "has unlimited control," "can determine what it will pay +and for what it will sell." This implies that trusts are benevolent, +seeing that the prices they charge are usually not far in excess of +competitive prices in the past. Such a view overlooks the forces that +limit the price a monopoly can charge. If the supply remains the same, +no trust can make the price go higher. The monopoly usually directs +its efforts to affecting the supply, leaving the price to adjust +itself. It can affect the supply either by lessening its own output or +by intimidating and forcing out its competitors. It is true that this +logical order is not always the order of events. The trust may not +first limit the supply, and then wait for prices to adjust themselves; +it may first raise its prices, but unless it is prepared to limit the +supply in accordance with the new resulting conditions of demand, +such action would be vain. The control of the sources of supply is the +logical explanation of the higher price, even tho the limitation +of supply is effected later by successive acts found necessary to +maintain the higher price. + +The report of the Federal Industrial Commission, which, from 1898 +to 1901, investigated the trusts, showed that immediately upon their +formation, the industrial combinations had raised their prices.[13] +Prices might be lowered again but only when and where competition +became troublesome, thus causing either "price-wars" or +discrimination. + + +[Footnote 1: See Vol. I, p. 76.] + +[Footnote 2: As in the list in sec. 8, below.] + +[Footnote 3: See Vol. I, chs. 8 and 31.] + +[Footnote 4: See Vol. I, ch. 8, on competition and monopoly, and ch. +31, on monopoly prices and large production. An understanding of the +definitions and of the general principles distinguishing competition +and monopoly is a necessary prerequisite to a profitable discussion of +the practical problem of monopoly.] + +[Footnote 5: See Vol. I, p. 267, on capital; pp. 388-393, on large +production. See also references in preceding note on monopoly; and ch. +27, secs. 1 and 2, on corporate organization.] + +[Footnote 6: See above, ch. 26, sec. 3; and ch. 25, secs. 6 and 7.] + +[Footnote 7: Compiled from data given by "The Journal of Commerce and +Commercial Bulletin," reprinted in "The Commercial Year Book," Vol. V, +1900, pp. 564-569.] + +[Footnote 8: John Moody, "The Truth About the Trusts," 1904] + +[Footnote 9: See Vol. I, pp. 388-393.] + +[Footnote 10: See Vol. I, pp. 391-392.] + +[Footnote 11: See Vol. I, p. 334, on the function of the promoter.] + +[Footnote 12: See Vol. I, pp. 80-85, 382-387, 394-396.] + +[Footnote 13: A summary of this evidence is given in the author's +"Principles of Economics" (1904), pp. 327-330. A fuller outline of +the results of the Commission's conclusions may be found in "The Trust +Problem," by J.W. Jenks, who acted as expert in the investigation.] + + + + +CHAPTER 29 + +PUBLIC POLICY IN RESPECT TO MONOPOLY + + Sec. 1. Moral judgments of competition and monopoly. Sec. 2. Public character + of private trade. Sec. 3. Evil economic effects of monopolistic price. + Sec. 4. Common law on restraint of trade. Sec. 5. Growing disapproval of + combination. Sec. 6. Competition sometimes favored regardless of results. + Sec. 7. Increasing regard for results of competition. Sec. 8. Common law remedy + for monopoly ineffective. Sec. 9. First federal legislation against + monopoly. Sec. 10. Policy of the Sherman anti-trust law. Sec. 11. Policy of + monopoly-accepted-and-regulated. Sec. 12. Field of its application. Sec. 13. + Industrial trusts,--a natural evolution? Sec. 14. Artificial versus natural + growth. Sec. 15. Kinds of unfair practices. Sec. 16. Growing conception of + fair competition. Sec. 17. The trust issues in 1912. Sec. 18. Anti-trust + legislation in 1914. + + +Sec. 1. #Moral judgments of competition and monopoly.# What should be the +attitude of society toward monopoly? Is it good or bad as compared +with competition? Some very strong ethical judgments bearing on +practical problems are found in the popular mind connected with the +ideas of competition and monopoly. Competition usually is pronounced +bad when viewed from the standpoint of the competitors who are losing +by it, and as good when viewed from the standpoint of the traders on +the other side of the market who gain by that competition. Competition +among buyers thus appears to sellers to be a good thing; that among +sellers appears to themselves to be a bad thing (and _vice versa_). +Many persons are moved by sympathy to pronounce competition among +low-paid and underfed workers to be bad, and each worker is convinced +that it is so in his own trade. Yet nearly all men are of one mind +that competition is a good thing in most industries, those that are +thought of as supplying "the general public." Monopoly is believed by +the public to be wrong in such cases, and competition to be the normal +and right condition of trade. Yet there are some men interested in +"large business" who look upon competition as bad, and upon monopoly +as having essentially the nature of friendly cooeperation. The roots +of these opinions, or prejudices, are easily discoverable in the +theoretical study of the nature of monopoly.[1] Yet often different +men or groups of men feel so strongly on this matter, viewing it from +their own standpoints, that they are quite unable to understand +how any one else can feel otherwise. There is thus a great deal of +controversy to no purpose. + +Sec. 2. #Public character of private trade.# Any such general judgment as +that of the public, tho it may be mistaken in some details, is likely +to be a resultant of broad experience. There is in competitive trade a +public, a social character, which monopoly destroys. Even in a simple +auction, when the bidding is really competitive, price depends far +less on shrewd bargaining, on bluff, or on stubbornness, than is the +case in isolated trade. Each bidder is compelled by self-interest to +outbid his less eager competitors, and thus the limits within which +the price must fall are narrowly fixed. The auction-sale is less a +purely personal matter, takes on a more public aspect, has a more +socialized character than isolated trade, depends more on forces +outside the control of any one man, and results in a price fixed with +greater definiteness. The price in a more developed market results +from the play of impersonal forces, or at least from the play of +personal forces which have come under the rules of the market.[2] This +price men are ready to accept as fair. It has a democratic character, +whereas the gains of monopoly price arouse resentment as being the +work of personal, and felt to be despotic, power. Monopoly price is a +bad price to the one who pays it, not only because it is a high price +but because it bears the character of personal extortion. + +The medieval notion of _justum pretium_, the just price, may have +been often misapplied, and it was often criticized and ridiculed by +economists in the period of idealized competition (from Adam Smith +to John Stuart Mill). But at the heart of the notion was the judgment +that general uniform prices fixed in the open market are the proper +norms for prices when one of the traders is caught at an exceptional +disadvantage. The modern world has been compelled to reexamine the +conception of the just price. + +Sec. 3. #Evil economic effects of monopolistic price.# Theoretical +analysis confirms this view. Any exercise of monopolistic power over +price keeps some, the weaker bidders, from getting any of the desired +goods, or limits them to their most urgently desired units. What +may be called "the theoretically correct price"[3] with two-sided +competition is the one that permits the maximum number of trades +with a margin of gain to each trader. In narrowing the possibility of +substitution of goods by trade, the sum of values of goods for most +men is diminished. All citizens thus that are the victims of an +artificially created scarcity look upon monopoly as "bad," just +as they do upon the evils of nature--drought, locusts, fires, and +pestilence. A monopoly has an indirect and more distant effect upon +the spirit of all those trading with it. If they are producers selling +at prices depressed by monopoly, their money incomes are reduced; if +they are consumers buying at monopoly prices, their real-incomes are +reduced; in either case their psychic incomes, the motives of all +industry, are diminished, and their industrial energies are relaxed. + +Sec. 4. #Common law on restraint of trade.# The first recorded case in +English law, wherein the courts sought to prevent the limiting of +competition by agreement, runs back to the year 1415, in the reign +of Henry V. This was a very simple case of a contract in restraint of +trade, whereby a dyer agreed not to practise his craft within the town +for half a year. The court declared the contract illegal (and hence +unenforceable in a court) and administered a severe reproof to the +craftsman who made it. Thus was set forth the doctrine of the moral +and legal obligation of each economic agent to compete fully, freely, +and without restraint upon his action, even restraint imposed upon +himself by a contract voluntarily entered into for his own advantage. + +Not until the eighteenth century was this rigid doctrine somewhat +relaxed so as to permit the sale of the "good will" of a business +under limited conditions, and some "reasonable" contracts in restraint +of trade. Later the emphasis was somewhat further shifted, by judicial +interpretations, from the notion of free competition to that of "fair" +competition, so as to permit contracts involving moderate restraint of +trade, if the essential element of competition was retained. Thus +it was said that a piano manufacturer might by contract grant an +exclusive agency to a dealer in a certain territory, there being many +other competing makes of pianos, and such a contract "does not operate +to suppress competition nor to regulate the production or sale of any +commodity."[4] But with such moderate limitations the courts in cases +under the common law have steadily disapproved contracts in restraint +of trade that would appear to be to the disadvantage of third parties, +whether producers or consumers. + +Sec. 5. #Growing disapproval of combination.# The attitude of the courts +became in one respect stricter. Some earlier cases involved the +doctrine that what is lawful for an individual to do alone is lawful +if done in combination with others. Indeed, a comparatively recent +case[5] declared regarding a group of dealers, agreeing not to deal +with another, that "desire to free themselves from competition was a +sufficient excuse" for such action. But the general trend has been +to the doctrine that a combination of men "has hurtful powers +and influences not possessed by the individual." Hence threats of +associations of traders (retailers or wholesalers) not to deal with +another if he continued to deal with some third party have been +declared acts in restraint of trade.[6] Yet in the case cited the +court seemed to have been more concerned with protecting "the +individual against encroachment upon his rights by a greater power," +"one of the most sacred duties of the courts," than with rights and +interests of the general public, endangered by such restraint of +trade. + +Sec. 6. #Competition sometimes favored regardless of results.# In another +respect the courts have wavered in their attitude toward competition, +the general doctrine being that competition, particularly the cutting +of prices, is absolutely justifiable, regardless of circumstances. In +the leading English case[7] the facts were that the larger steamship +companies sent to Hankow additional ships, now called, figuratively, +"fighting ships," to "smash" freights in order to ruin tramp steamship +owners and drive them out of the field. The court held that this +constituted no legal wrong to the tramp steamship owners, and scouted +the idea of the court's looking at the motives in price cutting, +or taking into consideration in any way what the court called "some +imaginary normal standard of freights and prices." And of this case +the lawyer is forced to say: "Undoubtedly the excellent opinion just +quoted represents the law everywhere," even tho there are other cases +difficult to harmonize with it.[8] + +To the economist, not bound in like manner by legal precedent, such +a verdict was from the first impossible. The court appears to have +considered that only the rights of the private litigants, the tramp +steamship owners, were involved, not the rights and interests of the +shipping public; it considered the immediate and not the ultimate +effects of the "smashing" of rates; it allowed itself to be deceived +by the appearance of acts that in outer form were competition, +but that had as their purpose the strengthening and maintenance of +monopoly. These acts are forms of the "unfair" practices that will be +mentioned later.[9] + + +Sec. 7. #Increasing regard for results of competition.# Despite the +binding precedents, the courts in some later decisions have refused +to look upon competition as good regardless of its motives and of its +consequences. In a federal case[10] the judge, in a brief and acute +dictum, recognized the evil of a rate war that would result from +threats of definite cuts. They impair "the usefulness of the railroads +themselves, and cause great public and private loss." The court's +opinion was no doubt largely influenced by the fact that railroad +rates were already subject to regulation: "Every precaution has been +taken by state legislatures and by the congress to keep them just and +reasonable,--just and reasonable for the public and for the carriers." + +In a state case[11] the facts were that a man of wealth started a +barber shop and employed a barber to injure the plaintiff and drive +him out of business. The court recognized that while, as a general +proposition, "competition in trade and business is desirable," it +may in certain cases result in "grievous and manifold wrongs to +individuals"; and in this case the "malevolent" man of wealth was +declared to be "guilty of a wanton wrong and an actionable tort." +The economists can but pronounce this judgment admirable so far as it +goes, but it is remarkably confined to a consideration of the private +legal rights of the injured competitor, and gives hardly a hint of +a higher criterion for judging competitive acts, that of the general +welfare. + +Sec. 8. #Common law remedy for monopoly ineffective.# The common law +contained prohibitions enough, both broad and specific, against +contracts and acts in restraint of trade. The common law contained +likewise a closely related body of doctrine by which the railroads, +as common carriers, ought to have given equitable and undiscriminating +rates to all shippers. There was a strong body of influential opinion +that long maintained that the case was sufficiently covered, that the +only thing needed was to enforce the common law. Even now, after all +that has elapsed, there are some in railroad and business circles +who still appear to hold that opinion. But the evils of railroad +discrimination and of other monopolistic practices continued, and for +some cause the common law was not enforced, excepting occasionally, +disconnectedly, and without important results. + +Why? The answer may be ventured that in the common law the whole +question of restraint of trade was treated primarily as one of private +rights and only incidentally as one involving general public policy. +Cases came before the courts only on complaint of some individual +that felt injured. Now the injury of higher prices due to contracts in +restraint of trade is usually diffused among many customers, and +the loss of any one is less than the expense of bringing suit. +Consequently, it rarely happened that cases were brought before the +courts except by one of the two equally guilty parties to a contract +in restraint of trade, when the other party had failed in some way to +do his part. When such an illegal contract in restraint of trade was +proved before a court by a defendant in a civil suit the contract was +declared unenforceable, and the only penalty in practice was that the +plaintiff could not collect his debt or secure performance from the +defendant.[12] A very similar situation existed in the case of the +individual's grievances against railroad charges and services. + +Sec. 9. #Federal legislation against monopoly.# The passage of the +Interstate Commerce Act in 1887[13] prohibiting discrimination and +railway pooling, and that of the Act of 1890 "to protect trade and +commerce against unlawful restraints and monopolies," popularly known +as the "Sherman Anti-trust Law," were part of one public movement to +remedy monopoly. From one point of view it seems true, as has often +been said, that in essence these statutes were simply enactments +of long established principles of the common law. Section 1 of the +Sherman law declared illegal "every contract, combination in the +form of trust or otherwise, or conspiracy, in restraint of trade or +commerce among the several states, or with foreign nations." Section 2 +made it a misdemeanor "to monopolize, or attempt to monopolize." + +But from another point of view, these new laws showed a marked change +both in the conception of the interests involved and in the means of +preventing the evils. The evil was at last conceived of as a general +public evil; the laws are not merely to protect individuals,[14] +but "to regulate commerce," "to protect trade and commerce." +More important still, it was made the duty of public officers +(district-attorneys of the United States) to institute proceedings in +equity "to prevent and restrain" violation of the Sherman Act, and a +special Commission was instituted to deal with railroad cases. It was +this undertaking of the initiative by the government, the treatment of +the problem as one of the general welfare, that marked a new epoch +in this field. The methods and agencies provided might be at first +inadequate and ineffective, but time and experience could remedy those +defects. + +Sec. 10. #Policy of the Sherman anti-trust law.# But in important +respects opinion and policies were not yet clear and consistent. They +wavered from one to another conception of the method for dealing with +the problem. It was clear only that _laissez-faire_ had been laid +aside. There are three other possible policies reflecting as +many different conceptions of the problem of monopoly: (1) +monopoly-prosecuted, (2) monopoly-accepted-and-regulated, +(3) competition-maintained-and-regulated. The policy of +monopoly-prosecuted is merely negative. This is the policy of +the Sherman law. It opposed no positive action to the making of +monopolistic contracts and to the formation of combinations, but +declared them to be illegal and provided for their prosecution and +punishment after the mischief had been done. The great epoch of the +formation of combinations[15] followed the enactment of this law. +True, lack of experience by the department of justice, and lack of +vigorous effort to enforce the law, and the slow action of the courts +were largely to blame for this result. The law has proved to be more +effective to prevent new combinations since it has been successfully +enforced in a few notable cases. But once large combinations have +been formed and complex individual financial interests have become +involved, the courts have proved to be incapable of undoing the deeds. +In practice the most sweeping remedy attempted under the law has been +the dissolution of enormous combinations formed years after the law +went into effect. This has been called the job of unscrambling the +eggs. The most notable cases were those of the Standard Oil Company +and of the Tobacco Company, decided in 1911, the results being +absurdly futile. + +Sec. 11. #Policy of monopoly-accepted-and-regulated.# A second policy may +be called that of monopoly-accepted-and-regulated. This is represented +by the Interstate Commerce Act (at first weakly, and more vigorously +after its amendment), and by the great mass of state legislation +putting the local and interurban public utilities under the control +of regulative commissions. For some decades after these industries +developed, the public faith was in competition as the effective +regulator. If monopolistic prices were too high, another company was +chartered to build a parallel railroad or another horse-car line on +the next street, or to lay down another set of gas pipes in the same +block. Almost from the first some students of the subject saw the +wastefulness and futility of this kind of competition, and nearly a +half century later the public reluctantly came to this view. Still, +sad to relate, the same history had to be repeated in regard to the +telegraph and telephone industry, and in some quarters the ultimate +outcome is not yet recognized. The Interstate Commerce Act itself, +with odd inconsistency, contains an anti-pooling provision (section +5) the purpose of which seems to have been to compel competition as to +rates which is now practically impossible under the other provisions +of the law. The policy of "monopoly-accepted" was seen to involve as +a necessary feature, public regulation of rates, to the point, if +necessary, of absolutely fixing them. The principle has come to be +accepted that wherever competition ends there public regulation of +prices and service begins. Monopolistic enterprises are _ipso facto_ +quasi-public institutions. + +Sec. 12. #Field of its application#. This policy, gradually extending +in practice, came to be applied to the class of industries which, +for lack of a better name, are called local utilities. The one +characteristic that they all have in common is that the service, +or product, which is sold requires for its delivery an expensive, +permanent, physical plant, and some special use of public highways. +Thus gas pipes, water pipes, poles and wires for telegraph, telephones +and electric light, street railways, regular steam railroads and some +other minor industries all answer to this test.[16] + +Beginning about the year 1900 one state after another enlarged the +powers of its state railroad commission or created a new corporation +commission to regulate these "local" or "public utilities."[17] They +have accomplished much, but the development of this kind of regulation +has not proceeded in many cases beyond the adjustment of relative +rates and the abolition of discrimination among the different +individuals and classes of customers. Experience has shown the great +difficulty of determining what is a fair absolute level of charges. +A new science of accounting has been developing to assist in the +solution of a problem, the complexity of which transcends the agencies +at hand to deal with it. With this policy applied to the local utility +(and railroad) phase of monopoly, there remains still the problem of +the industrial trusts in the manufacturing enterprises. + +Sec. 13. #The industrial trust,--a natural evolution?# The policy that +one is inclined to favor regarding industrial trusts depends very +much on one's answer to the question: Are or are not industrial trusts +natural growths? In this bare form the question is somewhat vague, but +the thought of those who answer it in the affirmative is positive if +not always entirely clear. They (at least the extreme representatives +of this view) declare that trusts have been, are, and will continue +to be, the results of a "natural evolution" of business conditions, as +inevitable as the great changes in the physical world. If this is so +man and society must recognize the facts, must waste no efforts vainly +in fighting against fate, but should accept the trusts and realize +their possibilities for good. And these are declared to be great, for +it is assumed that without the trusts all of the economies of large +production must be sacrificed. Irresistible economic forces, it is +said, are creating larger and larger units of business; friendly +cooeperation and unified action must take the place of competition in +business. + +The outcome must be monopoly in every important line of manufacturing +industry and perhaps of commerce. In view of public opinion toward +monopoly, its acceptance necessitates its regulation. This argument +is supported by appeal to the experience in the field of railroads +and other local utilities, where public opinion has, after long +hesitation, recognized competition to be impracticable and the +acceptance of monopoly as inevitable. As extremes often meet, the view +of the industrial trust as a natural evolution is most favored on the +one hand by men of "big business," already interested financially +in trusts, and on the other hand by the most radical communists (or +socialists) whose ideal is the complete monopolization of industry +under the government. + +Sec. 14. #Artificial versus natural growth.# Opposed to this view is a +deep and widespread popular opinion or prejudice, against the trust +and in favor of competition. General opinion in this case (as not +always) finds much support in special economic studies of the methods +by which the existing industrial trusts came into being. First the +question properly is raised; just what is meant by "natural"? In a +sense everything has been the natural outcome of evolution,--the steam +engine, the submarine, the boycott, militarism. In an equally good, +if not better sense, every mechanical invention and every method of +industrial organization is artificial, has been the result of man's +choice and effort. In any case men may choose as good or reject as +unsuitable or bad, any particular mechanical device, and society +may decide to adopt any particular policy toward a certain form of +business organization and certain business practices (unless, indeed, +our philosophy be that of automatism, crude determination or fatalism, +regarding all human affairs). + +Now when one examines the methods which the notable trusts actually +did employ, and apparently had to employ, even when they were already +powerful single enterprises, in order to destroy their competitors and +to attain their monopolistic power, the word "natural" seems hardly to +describe the process. The evidence is not a matter of hearsay but is +embodied in a long line of judicial decisions, and in numerous special +inquiries by governmental commissions and officials.[18] + +Sec. 15. #Kinds of unfair practices#. This evidence is a startling +array of "unfair practices" and "unfair" forms of competition, which, +however novel in appearance, are essentially of the kind that has been +illegal under the common law for the past five hundred years. Many of +these practices were baldly dishonest, many of them were contemptibly +mean. The manifold varieties of unfair competition may be roughly +grouped under three headings according as they are connected with (1) +Illegal favors received from public or quasi-public officials; (2) +Discrimination against, or control of, customers; (3) Foul tactics +against competitors. + +(1) Among the practices in the first group are discriminatory rates +and rebates from railroads, favoritism in matters of taxation, undue +influence in legislatures, special manipulation of tariff rates +through powerful lobbies, or paid agents, undue influence in the +courts through the employment of lawyers of the highest talent, who +often later became judges. + +(2) Among the unfair practices toward customers are discriminations +among them by the various forms of price cutting, grants of credit, +and kinds of service. The liberty of retail dealers is limited in +a variety of ways, such as fixing resale prices, requirement of +exclusive dealing, and full-line forcing. + +(3) All the methods just mentioned as employed in dealings with +customers are likewise unfair toward competitors. Many other methods +are used to the same end, such as: enticing away their employees, +or corrupting and bribing them to act as spies, paying secret +commissions, false advertising, misrepresenting competitors, imitating +their patterns in goods of defective workmanship, shutting off their +credit or their supplies of materials, acquiring stock in competing +companies, malicious suits, infringement of patents, intimidation by +threats of business injury or of scandalous exposures, operation of +bogus independent companies. + +Sec. 16. #Growing conception of fair competition.# Any industrial trust +that was able to gain domination and monopoly power only by the use of +such practices, or any part of them, can hardly be deemed the result +of a "natural evolution." If "artificial" means the use of artifices +surely this development deserves the adjective. Yet even if not +natural, this development may be thought to be "inevitable," human +nature being as it is. But the bald fact is that while the great trust +movement was in progress no effort worthy of the name was being made +to enforce even the then existing laws and to oppose this artificial +development. The same allegation of inevitableness was once commonly +made of discriminatory railroad rates and rebates, evils which have +been in large part remedied only since the period 1903-1906, when at +last intelligent action was taken. + +To those that came to see the problem in this light, acceptance +of industrial monopoly with its complex task of fixing by public +commission the prices on innumerable kinds and qualities of goods +seemed at least premature. Rather, the first step toward a solution +seemed to be the vigorous prevention of unfair practices, and the +next step a positive regularizing of "fair competition."[19] The +fundamental idea in this is the enforcement of a common market price +(plus freights) at any one time to all the customers of an enterprise. +By this plan potential competition would become actual, and small +enterprises that were efficient might compete successfully within +their own fields with large enterprises that maintained prices above +a true competitive level. Even general lowering of prices by a large +enterprise with evident purpose of killing off smaller competitors is +unfair competition under this conception. It was for years recognized +that the realization of this policy required legislation regarding +uniform prices and the creation of a commission for the administration +of the law. + +Sec. 17. #The trust issues in 1912#. The campaign of 1912 presented in an +interesting manner the three policies above outlined. The +Republican party led by President Taft stood for the policy of +monopoly-prosecuted; its program was the vigorous enforcement of the +Sherman law. The Progressive party, led by Mr. Roosevelt, stood in the +main for the policy of "monopoly-accepted-and-regulated"; its program +called for minimizing prosecution and for developing a system of +regulation of trust-prices. The Democratic party, led by Mr. Wilson, +stood for the policy of competition-maintained-and-regulated, and the +problem was to find means to strengthen and regularize the forces of +competition. + +In practice these programs doubtless would be less divergent than they +appear. All alike proposed the retention of the Sherman law. The +two proposals to go further were presented as mutually exclusive +alternatives, whereas they necessarily must supplement each other in +some degree. The Progressives did not expect all industries to become +monopolies, and the Democrats tacitly conceded to monopoly-accepted +the large field of transportation and local utilities it already had +occupied. But there was a real difference in the angle of approach and +a real difference in emphasis. The Democratic program (the somewhat +unclearly) showed greater distrust of monopoly and greater faith in +the possibilities of creating fair conditions of competition (which +never had fully prevailed) in which efficiency would be able to prove +its merits and monopoly would work its own undoing. It was the more +logical for the country to give this policy at least a trial before +adopting irrevocably the policy of general industrial monopoly. +In either case competition actual or potential is the fundamental +principle by which prices have to be regulated. Where competition is +enforced it is by applying some general rules that create a general +market price instead of discriminatory prices, but the fixing of the +price is left to the competitors. Where monopoly is accepted prices +must be fixed with reference to an estimated competitive standard, +that which under hypothetically free conditions would just suffice to +attract and retain private enterprise and capital. + +Sec. 18. #Anti-trust legislation of 1914#. The anti-trust legislation +of 1914, passed by the Democratic party to carry out its program, is +embodied in two acts: the Clayton Act, laying down new rules; and +the Federal Trade Commission Act, mainly to provide an agency with +administrative and quasi-judicial functions to deal with unfair +practices. This displaced the Bureau of Corporations, established in +1903. The Clayton Act forbids discrimination where the effect may be +to lessen competition, or tend to create a monopoly. Due allowance may +be made for difference in the cost of selling or transportation, but +a difference is not required in such cases. It forbids contracts +to prevent dealers from handling other brands. It forbids corporate +ownership of stock in a competing corporation, forbids interlocking +directorates in large banks and in other competing corporations, +with capital, surplus and undivided profits aggregating more than +$1,000,000. The Trade Commission Act in addition to its administrative +provisions for investigation, reports, and readjustment of the +business of companies upon request of the courts, declares that +"unfair methods of competition in commerce" are unlawful, and both +empowers and directs the Commission to prevent their use (banks and +common carriers subject to other acts being excepted). + +These acts are too new to have been given a fair test. They have, +however, given evidence of exercising at once an influence upon +the situation. They are imperfect in some details that will require +amendment; but they mark the beginning of a new policy toward +industrial monopoly, the results of which will be watched with the +deepest interest. + + +[Footnote 1: See Vol. I, especially pp. 74 and 75.] + +[Footnote 2: See Vol. I, pp 59, 68, 70-71] + +[Footnote 3: See Vol. I, pp. 66, 67.] + +[Footnote 4: 77 Miss., 476. Cited by Bruce Wyman, "Control of the +Market," p. 137.] + +[Footnote 5: 19 R.I., 255.] + +[Footnote 6: 115 Ga., 429.] + +[Footnote 7: Mogul Steamship Company v. McGregor (L.R. 23 Q.B.D. +598).] + +[Footnote 8: Bruce Wyman, "Control of the Market," p. 22. In 1914 (216 +Fed. 971), a federal court granted an injunction restraining the use +of fighting ships by a combination, and in 1915 (220 Fed 235), +the court indicated a willingness to grant a similar injunction if +necessary. Similarly "fighting brands" of goods have been recently +prohibited.] + +[Footnote 9: See below, sec. 15.] + +[Footnote 10: Averrill v. Southern Railway (75 Fed. Rep. 736).] + +[Footnote 11: 107 Minn. 145.] + +[Footnote 12: Arnott v. Pittston and Elmira Coal Co., 68 N.Y. 558 +(1877).] + +[Footnote 13: See ch. 27, sec. 16.] + +[Footnote 14: At the same time the rights of injured individuals +are better safeguarded by sec. 7 of the Sherman law, permitting the +recovery of threefold damages and attorney's fees.] + +[Footnote 15: See ch. 28, sec. 9.] + +[Footnote 16: See further, ch. 30, secs. 5-9.] + +[Footnote 17: See ch. 27, sec. 15, on state commissions.] + +[Footnote 18: A few among the most important sources are the Report +of the Industrial Commission, 1898-1901, 19 volumes; reports of the +Bureau of Corporations on the petroleum and tobacco industries; U.S. +Supreme Court decisions, e.g., the Addystone Pipe case (175 U.S. 211), +given in Ripley, Trusts, Pools, and Corporations, p. 86; the Standard +Oil case (221 U.S. 1), and the Tobacco Trust case (221 U.S. 106); and +the very comprehensive volume on "Trust Laws and Unfair Competition," +by Joseph E. Davies, Commissioner of Corporations, Washington, 1916.] + +[Footnote 19: John B. Clark, the distinguished professor of economics +in Columbia University, has been the foremost and clearest exponent of +this idea, in his "The Control of Trusts," 1901, 2d ed., 1912, and in +other works.] + + + + +CHAPTER 30 + +PUBLIC OWNERSHIP + + Sec. 1. Waves of opinion as to public ownership. Sec. 2. Primary functions + of government favoring public ownership. Sec. 3. Economic influences + favoring public ownership. Sec. 4. Forms of municipal ownership. Sec. 5. + Localized production favoring monopoly. Sec. 6. Economies of large + production favoring monopoly, Sec. 7. Uniformity of products favoring + monopoly. Sec. 8. Franchises favoring monopoly. Sec. 9. Various policies + toward local public service industries. Sec. 10. State ownership of various + kinds. Sec. 11. National ownership. Sec. 12. Economic basis of public + ownership. + + +Sec. 1. #Waves of opinion as to public ownership.# Opinion and practice +in the matter of the public ownership of wealth and the direct +management of enterprises has moved in waves. In feudal times, when +government was practically identical with the personal ruler, and +the private "domains" of the lord or king were the sole source of +his public revenues,[1] holdings of this kind were very large. Their +public nature came to be more fully recognized, but they did not yield +large revenues, and gradually were in large part sold or given away to +private owners. This was particularly true in England, and in a less +degree on the continent of Europe. The conviction grew that the state, +or government, was an inefficient enterpriser, and that the sound +public policy was to foster private industry and obtain public +revenues by taxation. The ideal was embodied in the _laissez-faire_ +philosophy that government should confine itself exclusively to the +most essential political functions, leaving the economic functions +absolutely alone. It should keep the peace, prevent men from beating +and robbing each other, and preserve the personal liberty of the +citizen.[2] Thus, it was believed, all of the economic needs would be +provided for by competition, in the best way humanly possible, in the +quantities and at the rate needed. This policy attained its maximum +influence in the first half of the nineteenth century in England, and +in America probably just before the Civil War, in the decade of the +fifties. + +Sec. 2. #Primary functions of government favoring public ownership#. Some +public ownership, however, is necessary for the exercise even of +the primary political functions of the state. Civilized government +requires the use of numerous material agents. Buildings for +legislative and executive offices, custom-houses, post-offices, +lighthouses, can be rented of private citizens, as post-offices +usually are in small places; but it is obviously economical and +convenient in large cities for the government to own the public +buildings. Government can reduce to a minimum its direct employment +of officials by "farming out" the taxes, as all countries once did +to some extent, and as France continued to do up to the French +Revolution. It is now the general policy for government to own or +control its essential agencies, but this does not involve in every +case the employment of day-labor direct as in cleaning the streets or +collecting garbage. The more simple political functions shade off into +the economic. To coinage usually are added the issue of legal-tender +notes and certain banking functions: the post carries packages, +transmits money, and in most countries now performs the function of +a savings-bank for small amounts. The social and industrial functions +undertaken by public agencies have steadily increased since the +middle of the nineteenth century, and the sphere of the state has been +enlarging.[3] The question ever open is as to the proper limits to +this development. + +Sec. 3. #Economic influences favoring public ownership#. In some cases +private ownership is difficult because of the excessive cost of +collecting for the service. The cost of maintaining toll houses on a +turnpike sometimes exceeds the amount collected. Collection in +other cases, as for the service of lighthouses to passing ships, is +impossible. Public industry may secure, through the economy of large +production, a cheaper and more efficient service, the benefits and +costs being diffused throughout the community. The benefits of the +work of experiment-stations for agriculture are felt immediately by +the farmers, but are diffused to all citizens. A manufacturer able to +keep his method secret, or to retain his advantages for a time, can +afford to undertake experiments in his factory, but the farmer seldom +can. The public ownership of parks for the use of all gives a maximum +of economy in the production of the most essential goods,--fresh air, +sunshine, natural beauty, and playgrounds in the midst of crowded +populations. Municipal ownership of waterworks is an extension of the +same idea. Not only because large amounts of water are used by the +public, but because cheap, pure, abundant water is an essential +condition to good citizenship, speculation should in every possible +way be eliminated from this industry. + +The assumption is made in the _laissez-faire_ doctrine that the +interest of the public harmonizes with that of the individual. But +this proves often not to be the case. For example, the forest has an +immediate value to its owners and to the consumers of lumber, and it +has also a diffused utility in its influence on industry, on climate, +on navigation, on water-power and on floods. Yet, as the private +owner, unless a great land monopolist, does not control enough of the +forest to appreciably affect any of these things, and could rarely +sell them even if he could affect them, he will cut down the +tree whenever he can gain by doing so. In this situation either +governmental control or governmental ownership of forests is +essential. + +Each kind of political unit, or subdivision of government, develops +characteristic kinds of public ownership and industry. Federal states +consist of three main groups of political units: national, provincial, +and local. Provincial units are the largest subdivisions, as the +American "states," or commonwealths, the German states, and the +provinces in other countries. The term local political unit is more +complex and may mean county, township, village, city, or school or +sanitary district; but most of what is to be said of local ownership +refers to cities or to incorporated villages. + +Sec. 4. #Forms of municipal ownership#. Local political units acquire +ownership only in local industries and in wealth used locally by the +citizens. Nearly all parks and recreation grounds are owned by cities. +As population has become more dense, private yards of any extent +have become impossible, in cities, for all but the wealthy. Public +ownership of parks insures a "breathing place" and recreation grounds +to the common man in the most economical way. Of late the movement for +large and small public parks and playgrounds has gone on rapidly in +American cities. Related to parks are public baths, public libraries, +art collections, museums, zoological gardens, etc. Some have seen +danger in this policy, but the public sees no such danger so long +as the things supplied gratify the higher tastes--as art, music, +literature, and social recreation. These give no encouragement to +the increase of improvident families and to the breaking down of +independent character. The means of local communication--streets, +roads, bridges--were once owned largely by private citizens. Here and +there still are found toll roads and toll bridges built under charters +granted a century ago, but tolls on public thoroughfares are for the +most part abolished. A public market, where the producer from the +farm and the city consumer can meet, is an old institution. About two +thirds of the cities of 30,000 population or more have public markets +or scales, and fully one third have public markets of importance. New +York City has six large retail and wholesale markets, for selling meat +and farm produce, in which rents or fees are charged, and several open +markets. There has recently been a large movement in this direction. + +The providing of apparatus for extinguishing fires is always a public +duty; the conveyance of waste water is increasingly a public function. +The supply of pure water for domestic and business uses, for fire +protection and for street cleaning, while often a private enterprise +in villages, and sometimes in large cities, is increasingly undertaken +by public agencies. Most of the largest cities now own their own water +supply systems. Public ownership of gas and electric lighting is less +common, as the utility supplied is not so essential and the industry +is somewhat less subject to monopoly; but the difference is one of +degree only. Street railroads are often under public ownership in +Europe; but there have thus far been few cases of the kind in the +United States and Canada.[4] + +Sec. 5. #Localized production favoring monopoly#. A number of these +enterprises have characteristics in common which appear to make +inevitable their drift into monopolistic control. Waterworks, gas, +electric lighting, street railways, telephone systems, are among +these. However fierce may be the competition for a time, sooner or +later either one company drives out the other or buys it up, or both +come to an agreement by which the public is made to pay higher prices. + +A feature favoring the growth of monopoly when such industries are +left to private enterprise is the need to produce and supply the +commodity or service at a given locality. While two street railways +can compete on neighboring streets, it is physically impossible for +two or more to compete on the same street. Two systems of water-mains +or gas-mains can be put down, as sometimes is done, but this is not +only a great economic waste, but the tearing up of the streets is an +intolerable public nuisance. This difficulty is less marked in the +case of telephones and electric lighting, and some persons still cling +to faith in competition to regulate the rates in those industries; but +faith in competition between water companies and between gas companies +has been given up by nearly all persons now, as it was long since by +students of the subject. + +Sec. 6. #Economies of large production favoring monopoly#. A second +feature favoring monopoly in such industries is the marked advantage +of large production in them. These industries are usually spoken of as +"industries of increasing returns." This advantage is enjoyed in +some degree by every enterprise, but it is gradually neutralized and +limited. The need to extend an expensive physical plant to every point +where customers are to be served, and the very much smaller cost +per unit of delivering large amounts of water, gas, electricity, and +transportation, on the same street, offers a greater inducement +for one competitor to crowd out or buy out the other at a more than +liberal price. Even then, larger net dividends and correspondingly +larger capitalization are secured than were before possible to both +companies combined. + +Sec. 7. #Uniformity of products favoring monopoly#. A third feature +favoring monopoly is uniformity in the quality of the furnished. It is +a general truth that competition is most persistent where there is the +greatest range of choice open to the customer, and consequently the +most individual treatment required of the enterpriser. An artist, +even a storekeeper, attracts about him a body of patrons who like his +product (for the merchant's manner and method of dealing are a part +of the quality of his goods), and who cannot be tempted away by slight +differences in price. Rival companies in the stage of competition are +seen to claim superiority for their particular goods and to improve +their service in every way possible. A new telephone company, entering +where a monopoly has held the field, works at once a wonderful +betterment in rates, courtesy, and service. But as the product of all +competitors attains the highest technical standard possible at the +time, the rivalry is reduced to one of price, and it is usually a +"fight to the finish." + +Sec. 8. #Franchises favoring monopoly#. A fourth feature favoring +monopoly in these enterprises is the necessity of making permanent and +exceptional use of the public streets and alleys. If this right were +granted by a general law to every citizen, this feature would be +sufficiently implied in the foregoing discussion. As it would be +intolerable to allow private interests to use public property in +whatever way they wished, the legislative body makes special grants in +such cases in view of the circumstances. Not only is the legislature +(or council, or county board of commissioners, etc.) led by the +economic difficulties to withhold a charter from a second company, but +it may be corruptly influenced by the company already established. The +knowledge of the opposition to be encountered in getting a franchise +must keep competitors out, even tho monopoly prices are maintained. + +In view of these several features, which are so closely related that +they form a common character, more or less fully shared by various +industries, and especially in view of the necessity for the formal +granting to them of peculiar privileges in the form of a public +franchise, the public, in order to protect the general interest, is +forced to undertake an exceptional control of these industries. + +Sec. 9. #Various policies toward local public service industries#. +Several courses are open to the public, acting in its political +capacity, to retain those monopolistic advantages for the general +welfare. (a) It may do nothing, trusting vainly to competition to +regulate the rate, or consciously leaving the result to be worked out +by the monopoly principle; this is what in most cases has been done in +the past in America. (b) It may attempt, in granting the franchise, +to fix near cost the charge for the service or product, so that the +franchise will be worth little as private property. (c) It may leave +the rate to be fixed by the monopoly principle, but charge for the +franchise so much that the value of the monopoly is appropriated into +the public treasury. (d) It may have public officials carry on the +business, either selling the product at cost or making monopoly +profits that go into the public treasury. Various combinations of +these plans are followed in practice, the most common plan being the +fixing of maximum rates which, with improved methods, generally become +ineffective. It is difficult to fix a uniform rate that is equitable, +because conditions change, and, further, because a uniform rate must +be applied to all parts of the town, altho the cost of service varies +greatly. It is difficult because of the limited number of competent +bidders, to sell the franchise for what it is worth. There remains the +policy of public ownership to secure the profits of monopoly to the +public, either directly or in a diffused manner. There is no doubt +that the general trend of municipal policy everywhere is toward public +ownership of this type of local public service industries. + +Sec. 10. #State ownership of various kinds#. The movement toward public +ownership by the American states has been much less marked than that +by the municipalities. The commonwealths have retired from some fields +where once they were engaged in industry. Students of American history +know that between the years 1830 and 1840 some states engaged largely, +even wildly, in canal building, railroad construction, banking and in +other enterprises. The undertaking of these industries was determined +often by political and by selfish local interests, and their operation +often was wasteful. A few enterprises succeeded, the most notable of +these being the Erie Canal in New York. The unsuccessful ones remained +worthless property in the hands of the state or were sold to private +companies, as in the case of the Pennsylvania Railroad. This reckless +state enterprise was a bitter lesson in public ownership, and +continued for three quarters of a century to have such an effect on +public opinion, that few proposals for public ownership could have a +fair hearing in America, But railroads and canals are publicly owned, +and more or less successfully operated, by many foreign states, as in +Prussia and other German states, in Switzerland, and in the new states +of Australia, and this policy is rapidly extending to other countries +and to varied industries. + +There has been recently a greatly increased interest in forestry +shown by the American states. This is especially likely to be a state +enterprise wherever the forest tracts are entirely within the limits +of the state, as is the case in New York and Pennsylvania which +have been foremost in this work. At present at least 32 states have +forestry departments. Most of the forests in Germany are either +communal or state-owned. The schools, a great industry for turning +out a product of public utility, are largely conducted by the American +states and by local units rather than by the nation or by private +enterprise. The state encourages researches in the arts and sciences, +and gives technical training. A variety of minor enterprises have been +undertaken by states to supply salt, phosphate, banking facilities, +even some manufactures. One after another the states are adopting the +"state use" system of labor in the prisons and public institutions, +engaging in agriculture and manufacturing on a large scale, and +using the products, amounting to millions of dollars annually, almost +entirely for public purposes. + +Sec. 11. #National ownership#. The national governments everywhere appear +to be enlarging the field of their ownership. This policy has its +roots far in the past. Some industries grow out of the political needs +of government. Established as a means of communication with military +outposts, the post became a convenient means of communication +for merchants and other citizens and grew into a great economic +institution. In most countries the telegraph is publicly owned and +has been annexed to the post, to which it is very closely related in +purpose. National ownership of railroads is the rule, and our policy +of private ownership the great exception in the world to-day. +Many persons, even some in railroad circles, believe that national +ownership of railroads is sure to develop out of our present policy of +regulation. + +The national improvements connected with rivers and harbors were first +political--that is, they were for the use of the government's navy; +they became, secondly, commercial--for the free use of all citizens +engaged in trade; and they continue to unite these two characters. +Forestry is most largely undertaken in this country by the national +government, partly because some forest areas in the West extend over +state boundaries, and largely because large tracts of public forest +lands were still unsold at the time public attention was attracted +to the subject. Since 1890, the policy of reserving great areas for +forests, and picturesque districts for national parks, has developed +greatly in the United States. The national forest area contained +in the various forests in 20 states (not including Alaska and Porto +Rico), now covers about 225,000 square miles, equal in area to five +states of the size of Pennsylvania. There are, besides, fourteen large +national parks, ranging in size from a few hundred acres up to over +2,140,000 acres (the area of the Yellowstone National Park), and +aggregating 4,600,000 acres, nearly the size of Massachusetts or of +New Jersey, besides numerous other national reservations for monuments +and antiquities. + +In some countries mines are thought to be peculiarly fitted for +national ownership and control. In the German Empire the several +states own coal, salt, and other mines. Coinage and banking are +everywhere looked upon as functions of sovereignty, and yet it is no +more necessary for a nation to own its own mint in order to control +the monetary system than for it to print the banknotes in order to +regulate their issue. The American government has its own printing +office. The fish commission, and the various branches of the +department, cooeperate with private industry in many ways. This brief +survey suggests that the industries undertaken by government are both +varied in nature and large in extent, altho small in proportion to the +mass of private industry. + +Sec. 12. #Economic basis of public ownership#. The question as to the +proper limits of public ownership is one most actively debated. The +movement is progressing in accordance with the principle that public +ownership is economically justified wherever it secures a product +or service of widespread use that would otherwise be impossible, or +insures the public a better quality or a lower price. The question of +public ownership is not exclusively an economic question. There +are incidental problems, such as its effects on enterprise and on +political integrity, with which it is not possible here to deal. In +the main, however, public ownership is simply a business policy which +must be justified by its economic results. In the case of a general +social benefit not to be secured without public ownership (as popular +education or the climatic effect of forests), the only question +to answer is whether the utility is worth the cost. In the case of +industries already in private hands, as waterworks, gas and electric +lighting, there is needed, to make a wise decision possible, a +knowledge of the effect a change to public ownership will have upon +cost and service. If public officials can furnish some goods cheaper +than they are furnished by private enterprise, it is because of the +wide margin of monopoly profit, not because there is any magic in +public ownership. The same general items of cost must be met. The +first cost of the plant and the annual interest payments are much the +same. Experience shows that, because of political influence and of +public opinion, wages are likely to be higher under public ownership, +but salaries for management lower. Public collection of dues along +with taxes is an advantage not enjoyed by private companies. Several +public officials sometimes share the same office and thus reduce +expenses. In small towns the public electric lighting and waterworks +have been operated more economically under one roof. Some items of +cost may be less under public management, but on the whole, public +industry probably has no advantage in these respects. Public industry +does not have to meet the costs of lobbying and blackmail which are +often forced upon private companies. But the greatest source of saving +in public ownership is the value of monopoly privileges that, under +private management, go into private pockets. + +The temptation of political corruption may be more insistent when a +large force of men is constantly employed, and when large supplies are +constantly purchased, by public officials, but the temptation is not +so strong or so centralized as it is in the granting of franchises to +wealthy corporations. Public industry is weakened by the absence of +certain motives to excellence that are present in private business. +The income of public officials not being dependent on the economy of +management, the spur and motives of competitive industry are lacking. +No social discovery has made individual honesty and civic virtue +useless to good government. + +The decision in any specific case is one dependent on local +conditions, and the exact limits of public ownership are not fixed. +Industry is changing so rapidly that new adjustments are made every +year. The main outlines of public ownership, however, are now in large +part determined. Some industries do well, others ill, under public +management, and between these lie many debatable cases. Waterworks and +probably electric lighting, because of the comparative simplicity of +their operation, are more suitable for public ownership than are gas +works. No absolute line divides the one group from the other. But +whatever the changes, the fact can not be ignored that the increase +of public ownership is altering in manifold ways the organization +of industry, and is reacting upon the production of wealth, and the +distribution of incomes. + + +[Footnote 1: See above, ch. 16, sec. 5.] + +[Footnote 2: See above, ch. 16, sec. 2, on the police function.] + +[Footnote 3: See ch. 16, secs. 3 and 4.] + +[Footnote 4: See above, ch. 16, sec. 5, statistics of receipts from +public service enterprises.] + + + + +CHAPTER 31 + +SOME ASPECTS OF SOCIALISM + + Sec. 1. The distribution of incomes. Sec. 2. Distribution by force and by + status. Sec. 3. Social effects of the right to transmit property. Sec. 4. + Effects of the right to inherit property. Sec. 5. Broader social effects + of inheritance. Sec. 6. Limitations upon intestate inheritance. Sec. 7. Some + merits of competition. Sec. 8. Wide acceptance of competition. Sec. 9. + "Economic harmonies" and discords. Sec. 10. Competition modified by + charitable distribution. Sec. 11. Competition modified by authoritative + distribution. Sec. 12. Meanings of socialism. Sec. 13. Philosophic socialism. + Sec. 14. Socialism in action. Sec. 15. Origin of the radical socialist party. + Sec. 16. The two pillars of "scientific" socialism. Sec. 17. Aspects of the + materialistic philosophy of history. Sec. 18. Utopian nature of "scientific" + socialism. Sec. 19. Its unreal and negative character. Sec. 20. Revisionism and + opportunism in the socialist party. Sec. 21. Alluring claims of + party-socialism. Sec. 22. Growth and nature of the socialist vote. Sec. 23. + Economic legislation and the political parties. + + +Sec. 1. #The distribution of incomes#. The great economic progress of the +past two centuries has been mainly in lines of technical production. +The developing natural sciences and mechanic arts have given men a +marvelously increased control over forces and materials. This has +multiplied the quantities of goods of most kinds at the disposal of +men, collectively considered. All men, with rare exceptions, have +been gainers; but the increased production has been very unequally +distributed among the members of the community. More and more +insistently the plea and the demand have been made for better methods +of distribution that will give to the masses of the people a larger +share of the goods produced. Production is largely a problem of the +technical arts; distribution is a problem of social economy. + +Two aspects of distribution may be distinguished: functional +distribution is the attribution of value (yields) to wealth and labor +considered impersonally, as groups of productive agents; and personal +distribution is the actual movement of incomes into the control of +persons.[1] Personal incomes, whether monetary, real, or psychic, +are the sum of a number of elements. Some parts are due to services +performed by the person himself. When one combs his own hair he +is performing for himself a service that is a part of his income. +Benjamin Franklin said it was better to teach a boy to shave himself +than to give him a thousand dollars with which to pay barbers for a +life-time. Other parts of income are the uses and fruits of legally +controlled wealth; chance finds, as gifts of value or lost and +abandoned goods; goods assigned to one by authority; wealth inherited; +illegal gains by robbery; goods secured on credit; gifts either +of things or of services. The many methods by which incomes are +distributed to the persons making up a society may be grouped in the +following five general classes: force, status, charity, competition, +and authority. These will be discussed in due order. + +Sec. 2. #Distribution by force and by status.# Distribution by force is +the most primitive mode of distribution. The stronger takes from the +weaker. Forceful distribution still persists in the form of crime, +and if we include fraud within the term it still affects an enormous +amount of income. The lawless take whatever they can, and the +supporters and officers of the law do what they can to check the acts. +Slavery is distribution by force, as is the levying of war indemnities +from a conquered people. + +Distribution may be by status, or set rules and customs. In this case +men receive incomes that are independent of their efforts and outside +of their control. Distribution by status is guided neither by the +personal merit of the recipients nor by the value of their direct +services, but the merits and acts of men not living. Feudal society +was built on status. Men were born to certain privileges and +positions; they inherited property which could neither be bought +nor sold; they followed trades which could rarely be entered by any +outside of favored families. Caste in India and in other Oriental +countries regulates a large part of the life of the people. + +This method still prevails to a greater extent in our society than is +usually recognized.[2] By public opinion and by prejudice, status is +still maintained in respect to the choice of occupations even where +the law has formally abolished it, as is seen in modern race problems, +in western countries to-day inheritance of property is the main legal +form of status and it shades off into other forms of distribution. +Private property must find its justification in social expediency.[3] +There is no feature of it that is more questioned than is the right of +inheritance. + +Sec. 3. #Social effects of the right to transmit property.# The right +to transmit property by inheritance or by bequest may be judged with +reference to its effects upon the giver, upon the receiver, and upon +society at large. It is well to take these three points of view. +The right to dispose of property either during life or at death has +undoubtedly in many ways a good effect upon the character of men. +It stimulates the husband and father to provide for his wife and +children, and spurs others to continued economic activity. There is +a joy in giving, a joy in the power to bestow one's wealth upon those +one loves, or as one pleases. Much of the existing wealth probably +never would have been created if men had not had this right. But there +is a limit to the working of this motive, and other motives often are +more effective. Many a man after gaining a competence continues to +work for love of wealth and power in his own lifetime, as the miser +continues to toil for love of gold. When men without families die +wealthy, when men not having the slightest interest in their nearest +relatives labor till their dying days to amass wealth, it is evident +that the right to bequeath property has little to do with their +efforts. Love of accumulation and love of power in these cases supply +the motives. A more limited liberty to dispose of property at death +might still suffice, therefore, to call out the greater part of the +efforts now made to accumulate property. + +Sec. 4. #Effects of the right to inherit property#. That the effects upon +the receiver of the property are good is somewhat more doubtful. It is +true that children reared in families of large incomes would be great +sufferers if plunged into poverty at the death of their parents. There +is much social justification for permitting families to maintain +an accustomed standard of comfort. Few would deny that provision by +parents to provide education and opportunity for their children is +commendable and desirable. But the evil effects of waiting for dead +men's shoes are proverbial. Many a boy's greatest curse has been his +father's fortune. Many a man of native ability waits idly for fortune +to come and lets opportunities for self-help slip by unheeded. The +world often exclaims over the failure of the sons of noted men to +achieve great things, for, despite confusing evidence, men still +have faith in biologic heredity. A too easy fortune saps ambition and +relaxes energy; and thus rich men's sons, if not most carefully and +wisely trained, are often made paupers in spirit, while the self-made +fathers think their boys have better opportunities than they +themselves enjoyed. The greater social loss is not the dissipated +fortunes, but the ruined characters. Andrew Carnegie said that it +would be a good thing if every boy had to start in poverty and make +his own way. Cecil Rhodes recorded in his will his contempt for the +idle, expectant heir. + +Sec. 5. #Broader social effects of inheritance#. Inheritance has good +effects for the community insofar as it helps to secure efficient +management of wealth. If the son or relative has been in business with +the deceased, there is a reason that he should inherit the property, +and his succession to it makes the least disturbance to existing +business conditions. This consideration, however, has less weight as +the corporate form of organization becomes well nigh universal in +"big business." Every profligate son, every incompetent heir, is +an argument against the inheritance of property. It is to society's +interest that no able-bodied member should stand idle. Every child +should have presented to him the motive to use his powers in useful +ways. Moreover, many feel that the great fortunes now accumulating +through successive generations in the hands of a few families are a +danger to our free society, even if these fortunes should continue to +be well administered. There is a widespread feeling that the heredity +of great wealth is, like the heredity of political power, out of +harmony with the democratic spirit. Democracy wishes to see men and +individuals put to the test, not profiting forever by the deeds of +their forebears. This feeling is shared by those who cannot be charged +with radical prejudices. It was startling when a conservative body +of lawyers meeting in their state association in Illinois, passed +a resolution favoring moderate limits to inherited fortunes. Almost +every year sees bills of this purport introduced in the legislatures +and in Congress. Probably no one of many current radical proposals +is more widely favored than this, among men of otherwise conservative +social views. Tho sum most often mentioned as the proper limit is +$1,000,000, but in every case it is a sum larger than the fortune of +the person speaking.[4] + +Sec. 6. #Limitations upon intestate inheritance#. A proposal less crude +and with strong reasons of social expediency in its favor is to +limit the right of intestate inheritance to persons that have been +in essential economic and social relations with the deceased. The +foregoing considerations show that the case for the right of gift in +the lifetime of the giver is strongest; that for the right of bequest +comes next. The man who has acquired wealth may usually be trusted to +decide who bear to him close social or personal relations, and to say +whose lives have in a measure furnished the motives of his activity. +But the right of intestate inheritance by distant relatives is one +that stands on weak social foundations. It is a survival from more +patriarchal conditions when, in the large family, or clan, the bond +of unity was very strong. A truer test to-day of the proper limits for +intestate inheritance is whether the wish to provide for these heirs +has furnished the motive for the producing and preserving of the +wealth. The claims of those nearest in blood and closest in personal +relations are strongest. Family affection and friendship form the +strongest of social ties, and it is socially expedient to cultivate +them. Motives for abstinence and industry must be strengthened. But +the same test shows that the zealous regard of the American law for +the rights of distant kinsmen in foreign lands, or in distant quarters +of this country, is irrational, and is unjust to the community where +the fortune was made. Public opinion tends strongly toward this idea. + +Property rights as they exist are clearly seen not to be a product of +pure reason. They are the result of social evolution, of historical +accidents, of class legislation, and in many cases, of selfish +interests. Changing social conditions and ideas are bringing many +changes in law, and further changes must be expected to come, which +will reduce the influence of inheritance of property in fostering +status in distribution. Especially important are the increasing +application of the progressive principle to incomes and +inheritance,[5] and the development of insurance to put family savings +into the form of terminable annuities instead of capital sums.[6] + +Sec. 7. #Some merits of competition#. The dominant method of distribution +to-day is that of competition.[7] This is not a mere accident, but +is a resultant of unending experimentation with different methods of +distribution carried on since the beginning of human society. A method +of distribution had to be found and retained that would work under +the conditions of human nature at each stage of social progress; and +competition, however imperfectly, has worked. It is evident from the +voices of praise and of blame that competition has its good and its +bad aspects. Let us observe first the good ones. Competition acts to +distribute the working force over the field of industry wherever it +is most needed. The remarkable (tho far from perfect) adjustment +of industry to the needs of each neighborhood is brought about by +individual motives, not by centralized authority. Wherever consumers +settle, stores are started and factories are built. Wherever work is +to be done, men come in about the right number to do it. It is not +mere chance that produces this result. The available skill is adjusted +to varying needs by the delicate measurement of the market rate of +wages. Two-sided competition gives a definite rule of price--the only +definite impersonal rule. The theoretical competitive price is the +standard to which things tend constantly to adjust themselves in an +open market.[8] + +Competition is an essentially economic method as contrasted with the +legal and personal methods above and later described, because it +is impersonal and reducible to a rule of value. Distribution under +competition is made, not with reference to abstract ethical principles +or to personal affection, but to the value of the product. Each worker +strives to do what will bring him the largest return, and the price +others pay expresses their estimates of the service in that market. +Each seeking his own interest is led to make himself more valuable to +others. In most cases and in large measure, competition stimulates men +to sacrifice, to invention, to preparation; thus is zeal animated and +are efforts sustained. In the economic realm, as is now seen to be the +case in the biologic realm, competition of some effective kind is +an indispensable condition not only of progress but of life without +degeneration. Monopoly, as we have noted, never has ceased to +rest under the ban of Anglo-Saxon law, and therefore to exemplify +compulsory, as opposed to competitive distribution. A striking feature +of the competitive method is its decentralization. Each helps to value +the economic services of each. If one pays more for the services of +the singer than for those of the cook, it is not because one would +rather listen to the singing than to eat when starving, but because by +apportioning one's income one can get the singing and the eating too. +In the existing circumstances, the singer's services seem to the music +lover to be worth paying for, and he backs his opinion with his money. +So each is measuring the services of all others, and all are valuing +the services of each. It is distribution by valuation, and it is +valuation by democracy. + +Sec. 8. #Wide acceptance of competition.# On purely abstract and _a +priori_ grounds competition cannot be accorded an ethical sanction, as +is sometimes assumed. But because of the qualities above outlined, and +because it meets in large measure the pragmatic tests, the competitive +rule of distribution appeals to all men (even to those who denounce +it) as having in many of its applications a moral character, as +compared with the other possible methods of distribution. Indeed, +the competitive rule is the only rule that does not involve either +personal and arbitrary judgment (force, charity, and authority) or +status. Even such measure of justification as is found in status (as +in property and inheritance laws) is traceable, in the long run, to +competition. The case for a limited application of status is based +upon its results in stimulating motives of effort and accumulation.[9] +When the rule of authority is applied to-day in the large field of +public regulation where _actual_ competition has become impossible, +almost the only guiding rule is _hypothetical_ competition. The +just rate is felt to be that which in the long run _would be_ just +sufficient to afford "normal" incomes to labor and to capital, to +call forth the necessary effort, skill, judgment, and forethought, +if competition _were_ at work, as it is not.[10] Only this rule +of hypothetical competition redeems these public rates from +arbitrariness, favoritism, and force. + +Sec. 9. #"Economic harmonies" and discords.# Every truth in political +philosophy finds some exaggerated expression. Competition, as +compared with status and custom, has some notable merits; and when the +eighteenth century was throwing off some of the burdens inherited from +the more static Middle Ages, competition appeared to be a panacea for +all the ills of society.[11] The belief in the benefits of competition +and the virtues of economic freedom found its extremist expression +in the first half of the nineteenth century in the doctrine of "the +economic harmonies." According to this, if men are left entirely free +to do as their interests dictate, the highest efficiency and best +results for all will follow; the economic interests of all men are in +harmony. Corresponding with this doctrine is the economic policy of +extreme _laissez faire._ + +But experience has shown that the economic interests of the +individuals in a community are only partly very rarely are they +wholly, in harmony. There are three species of competition in every +market: that between sellers, that between buyers, and that between +sellers on the one hand and buyers on the other.[12] If at any point +free competition is hindered, even the disciple of economic harmony +must, from the very nature of his doctrine, expect a discordant +result. In reality competition is rarely quite complete on both sides, +and when it is not the weak usually suffer. Men do not start with fair +opportunities. All that they may be entitled to have under competition +may be so little that social sympathy seeks to better the results; +hence poor relief, public and private. Society as a whole has an +interest in the outcome of the individual's economic struggle. +It cannot see men starving or driven into crime. Moreover, when +competition is the rule of valuation, it, like all valuations, +partakes of the quality of those choosing--wise or foolish, good or +evil.[13] And tho competition is the rule of democracy in economics, +yet democracy cannot permit the economic vote of a vicious or of +a foolish group to stand, where the goods, services, and prices +resulting offend the prevailing public judgment and social conscience. + +Sec. 10. #Competition modified by charitable distribution.# In practice +the competitive method of distribution always has been modified or +supplemented in varying degrees by the other methods. Important among +these is charitable distribution. Charitable is here used in its +original sense, as synonymous with benevolence and affection. First is +parental love, the root and type of all the forms of charity. There is +a complete lack of economic equivalence in the relation of parent and +child in early years. The helpless infant does nothing for the parent, +the parent gives all and does all for the child. Gradually, however, +the balance is regained; as the years go on, not only do children +repay in affection but in many cases they repay in material ways. +Especially in the factory districts and on the farm the child sooner +or later begins to reestablish the balance, becomes a worker, and +contributes to the family income as much as the cost of his support, +and finally more. A student of modern English town life has traced the +curve of poverty traversed by the average poor family as the children +are first an economic burden, and later an aid to their parents. In +the middle, or propertied, classes the children do not for many years +cease to be a financial burden to their parents, and in most eases the +economic balance is never reestablished. It is not to the parents, but +to the succeeding generation, that the debt is tardily paid. + +Friendship widens the range of generosity and multiplies the mass of +gifts. Broad sentiments of humanity lead to gifts outside the range of +personal affection and personal interest, to the beggar on the street, +to institutions devoted to charity. In New York state alone a sum of +more than $20,000,000 a year is expended by institutional charities. +About $512,000,000 in public benefactions were given in the United +States by private donors in the year 1915, and in this respect that +year was not exceptional. An enormous and increasing body of property +is thus being year by year socialized, largely through bequests +from persons without direct heirs. Great public subscriptions to +the sufferers from great disasters, such as the Irish and the Indian +famines, the Chicago fire, the Galveston flood, the San Francisco +earthquake, the great European war, bespeak a widening generosity. +Religion impels to the building of churches, to the support of +priests, missions, and manifold religious undertakings. Charity in +this connection is the expression of a sentiment that varies from +the most intense personal, affection to the broadest and most general +humanitarian sentiment. + +Sec. 11. #Competition modified by authoritative distribution.# Authority +is, after force, the oldest and was the earliest widely operative +method of distribution. It shades into force, status, and charity in +manifold ways, but it is essentially the assignment of a common, or +social, income to individuals by some person or persons chosen, or +accepted, by the society to perform this function. Thus it may be +distinguished from force, which takes for itself what belongs to +another; and from charity, which gives to another what belongs to +one's self; and from status, which transmits claims to income from one +generation to another by a fixed impersonal rule, not by a personal +judgment in the particular case. + +Authoritative distribution is the dominant method in patriarchal +tribes, in communal societies, and in monastic and other religious +orders. Each person works at what he is commanded to do, and some one +in authority (patriarch, head of the community, father of the monastic +order) portions out the tasks and the rewards. In the family this rule +largely prevails, and even after the children have come to years of +discretion they not infrequently accept, from habit or affection, the +will of the parents, and give up their entire wages to receive back +a portion. The method of charitable distribution while the child is +young gradually changes to authoritative distribution after the child +becomes a worker. The untrained and indocile youth, however, is made +the subject of compulsory distribution. + +The collection and distribution of taxes is by public authority. No +attempt is made to give back an exact equivalent to each taxpayer. The +money is taken and spent by authority. The new forms, or at least the +new extensions, of taxation, especially of incomes and inheritances +at progressive rates, are very important examples of authoritative +distribution.[14] The courts sometimes find themselves obliged to +apply the method of authoritative distribution, altho they do it +unwillingly. They try to confine their efforts to interpreting the +contracts men have voluntarily entered into, and they avoid, so far +as possible, the making of contracts or the fixing of rates. +Authoritative distribution is exemplified in the work of many +commissions appointed by law to fix rates or settle disputes, such as +boards of conciliation and arbitration and railway commissions. + +Sec. 12. #Meanings of socialism.# Our reason for leaving to the last the +discussion of _authority_ as a method of distribution is not that it +appeared last in historical development, but that it now is the most +strongly advocated as an alternative of competition. One of the most +striking developments of opinion in the nineteenth century was that +favoring an increasing use of authority in distribution. This was +meant not merely to supplement and modify competition, but to displace +it completely, or (in the more moderate program) in large part. This +opinion, or plan, has appeared under a variety of names, the main ones +being communism, collectivism, social-democracy, and socialism, of +which the last name has just now the greatest vogue. Socialism is +a word of manifold meanings no one of which is generally accepted. +Discussion is therefore often a Babel of tongues. + +Socialism designates (1) a social[15] philosophy (2) a mode of social +action, (3) a particular political party. There is thus philosophic, +active, and partisan socialism. Each of these may be taken either in +an absolute or in a more or less relative sense. The first meaning +is the most fundamental, the second less so, and the last the least +fundamental, but just now the most frequently used. + +Sec. 13. #Philosophic socialism.# As a philosophy socialism is related +to social just as individualism is related to individual. Socialism +is faith in the group motive and group action rather than in +self-interest and competitive action. Instead of social philosophy we +may say social faith, or social ideals. This faith may be absolute, +or radical, to the rejection of all economic competition; or it may +be moderate, and leave more or less place for self-interest and +competition. Every man of conscience and of ideals has moods that +are socialistic (in this sense) and dreams of a world without toil, +competition, or poverty. + +This social philosophy has taken form as "Christian Socialism" among +men of strong religious natures, in various religious denominations. +Great secular dreamers--Plato in his "Republic," Sir Thomas More, in +his "Utopia," Edward Bellamy, in "Looking Backward," William Morris, +in "News from Nowhere," and others--have painted beautiful pictures of +ideal economic states from which all of the great evils and problems +of our society have been banished. + +Sec. 14. #Socialism in action.# Active socialism is group action in +economic affairs. This may be by private voluntary groups, as a club, +church, or trade union, or by a public group, or political unit of +government, which has therefore a compulsory character. The radical +kind of active socialism would be the ownership by government of all +the means of production and the conduct of all business, assigning +men, by authority, to particular work and granting them such incomes +as the established authority thought they deserved. This kind exists +nowhere. A moderate kind of active socialism is represented by each +separate case of public ownership or industry. Even public regulation +by authority, of the many kinds described in this volume, is touched +with a quality of active socialism. In this sense there can be more or +less of active socialism in a community; a state may be more or less +socialized in its economic aspects. An English Chancellor of the +Exchequer declared in the last decade of the nineteenth century, "We +are all socialists now." The ever-increasing sphere of the state[16] +gives to that statement to-day a larger, fuller meaning than when it +was uttered. + +Socialism in action is of course always the expression of a more or +less socialistic philosophy shared by a majority of the people. This +great recent movement of socialization in industry is the expression +not of a radical but of a moderate social philosophy. It does not look +to the abolition, but only to the modification and limitation in +some directions, of private property and of competitive industry. The +spirit of this movement is opportunist, or experimental. It is ready +to try public action, but recognizes that it has difficulties and +limitations. The ultra-radical and the ultra-conservative alike +declare that these measures "logically" lead on to the complete +destruction of private property. But men find that they can warm their +hands without being "logically" compelled to thrust them into +the fire, and that they can quench their thirst without a growing +resolution to drink the well dry. When this governmental activity has +proceeded somewhat extensively and systematically in cities, as in +Great Britain, it is called municipal socialism; and in states, as in +Germany, it is called state socialism. + +Sec. 15. #Origin of the radical socialist party.# Socialism in the +partizan sense is an actual political organization. Both in Europe +and in America such organizations have been designated as +"social-democratic," "socialist labor," or "labor" parties. Socialism +in this sense of a party organization, or movement, is very different +from a social philosophy. In its partizan phase socialism exhibits all +of the baffling variability and elusiveness that it does in its other +aspects. However, in its printed program the socialist party sets +forth both a socialist philosophy and an ideal of active socialism in +their most radical forms. + +Modern political socialism traces its origin directly to the most +radical of German social philosophers, Marx, Engels, and Lassalle. +Karl Marx (1818-1883), preeminently the philosophic leader of the +movement, sought to give a solider foundation of reason to the +somewhat romantic socialist philosophy current in his day. His own +doctrine, first set forth connectedly[17] in the Communist Manifesto +in 1848, he called Communism. This has come to be called by his +followers, "scientific socialism." "Scientific" was meant to emphasize +the contrast with "Utopian" socialism, as Marx and Engels somewhat +scornfully characterized the older communist philosophy, romances of +the ideal state, and attempts to found and conduct small communistic +states. + +Sec. 16. #The two pillars of "scientific" socialism.# Scientific +communism was to be based upon two immovable pillars. The one was +"the labor theory of value," by which all profits and incomes +from investment were shown to be robbery of the wage-workers.[18] +"Capital," that is, the ownership of the means of production, was +declared to be the instrument of this "exploitation." The other +foundation stone was "the materialistic philosophy of history," that +is, the explanation of all the intellectual, cultural, and political +changes of mankind from the side of the material economic conditions +as causes. As Engels expressed it, "The pervading thought ... that the +economic production with the social organization of each historical +epoch necessarily resulting therefrom forms the basis of the political +and intellectual history of this epoch." This doctrine denies that, +in an equally valid sense, biological changes in brain, and cultural +changes in science, arts, and education, cause the mechanical +inventions and improved processes and thus alter the form bf economic +production. + +Sec. 17. #Aspects of the materialistic philosophy of history#. Marx's +general formula of economic materialism had three minor propositions +or corollaries: (a) The doctrine of the _class conflict_; all history +is a record of the class struggle between those who have property, +the ruling classes within the nations, and those who have not, the +oppressed working class, (a conception of history blind to most of the +great international conflicts). The class conflict was declared to +be more sharply marked and bitter than ever before; "the entire human +society more and more divides itself into two great hostile camps, +into two great conflicting classes, _bourgeoisie_ and proletariate." +(b) The doctrine of _increasing misery_; the conditions before +described must cause the steadily increasing degradation of the +masses. (c) The _catastrophic theory_; the final and inevitable result +of this movement must be a revolution, when the downtrodden workers +will throw off their chains and expropriate the expropriators. There +is no doubt that Marx, when he first formulated this philosophy, +believed that such a revolution, most violent in nature, would occur +within a few years. + +Sec. 18. #Utopian nature of "scientific" socialism#. The term +"scientific" set in contrast with "utopian" was meant to imply that +the doctrine of Marx was not "utopian" (a word which had come to mean +fanciful and impracticable). Marx had a contempt for the romances +of the ideal state and for what he deemed to be the unfounded +speculations of earlier prophets of communism. But utopian (from +_utopia_, Greek for no place) means nonexistent, and Marxian socialism +surely was that. "Experimental" or "actually at work" would have +been a more logical contrast with "utopian." Marx and his followers +likewise had a contempt for the communistic experiments, or +settlements and colonies, which by the scores had been started and had +failed, bringing discredit upon all communistic proposals. The beauty +of "scientific" socialism was that it never could be tried on a small +scale--or tried at all until a whole nation adopted it. + +The old time "scientific" socialist had a lofty scorn for any less +dogmatic philosophy than his own or for any less sweeping social +change than that he expected. Moderate social reform to him was but +temporizing; indeed, it was evil, inasmuch as it helped to postpone +the inevitable, but in the end, beneficent catastrophe of the +social revolution. A step-by-step movement toward socialism, state +socialism,[19] even of a pretty sweeping character, was, to the +old-time Marxians, not really socialism at all. A valid reason for +this attitude was found in the extremely limited manhood suffrage +and in the aristocratic class government of most European countries, +especially of Germany; so that, as the party socialists saw it, +multiplying state enterprises but increased the power of the ruling, +and eventually of the militarist, class. The social-democratic leaders +felt that until they themselves were in power, the growth of "state +socialism" would be a calamity for the nation. The events of 1914 may +make our judgment tolerant toward their feeling. + +Sec. 19. #Its unreal and negative character.# The so-called "scientific" +socialism had, therefore, a peculiarly unscientific spirit; for, in a +modern sense, science implies a patient search for truth, not a +sudden revelation; a constant testing of opinions by observation +and experiment, not a dogmatic conviction that refuses the test of +reality. "Scientific" socialists talked much (and still talk much) of +the "evolution" of social institutions; but they refused to admit the +essential condition for institutional evolution, the competitive trial +on a small scale, of a new form of economic organization to prove its +fitness to survive. Indeed, it had been tried on a small scale many +times, and had always failed in a brief time. + +Lincoln said that a man's legs ought to be long enough to reach to the +ground; but "scientific" socialism was not built on that plan. To be +sure it contained many elements of truth, but these were so distorted +that the result was a caricature of history, of philosophy, of +economics, and of prophecy. The most important influence of radical +socialism has been exerted through negative criticism. It has +performed the function of a party in opposition, relentlessly hunting +out and pointing out the defects of existing institutions, arousing +the smugly contented, and, by its very recklessness and bitterness, +inspiring at times a wholesome fear of more revolutionary evils. This +has been a real service to the cause of moderate and constructive +reform. + +Sec. 20. #Revisionism and opportunism in the socialist party#. Most +men have always agreed in an adverse judgment of the claims of +"scientific" socialism. The criticisms have been admitted in part even +by the intellectual leaders among the Social-democrats. They lost some +of their fantastic illusions, they tempered some of their exaggerated +claims of oracular inspiration. "Revisionism," the socialist higher +criticism, became influential in the party. Whenever the party gained +any success at the polls, the socialists in public office and the +party leaders found it necessary to "do something" immediately. +The rank and file might be willing to talk of the millennium, but +preferred to take it in instalments instead of waiting for it to come +some centuries after they were dead. And so the socialist party, as +fast as it gained any practical power, became "opportunist" and +worked for moderate practical reforms. The leaders did this with many +misgivings lest the masses might become so reconciled to the present +order that they would refuse to rise in revolt. In that case the +revolution never could happen (altho it was inevitable). + +As the party socialists did more to improve the present, they talked +less of the distant future state. They ceased their criticisms of +"mere temporizing" "_bourgeois_" reforms, and began to claim these as +the achievements of the socialist party. They began to write of the +remarkable growth of social legislation in Europe and America in the +past half century under such titles of "socialism in practice" and +"socialists at work." This was despite the fact that these reforms +were all brought about by governments in which the socialist party had +no part whatever or was a well-nigh insignificant minority. This bald +sophistry, or self-deception, was easily possible by confusing the +word "socialist" as relating to the abstract principle of social +action, with socialist as applied to their own party organization. It +is as if the Republican party in the United States were to claim +as its own all the works of the republican spirit and principles of +government in the world from the party's organization to the present +time. + +Sec. 21. #Alluring claims of party socialism.# In thus changing the +emphasis of its claims, the socialist party has been somewhat put to +it to retain any clear distinction between itself and other parties of +social reform. It has done this however by continuing to proclaim the +_ultimate_ desirability of reorganizing all society without leaving +any productive wealth in private hands. It has had no misgivings +prompted by the experience of the world. Its case continues to be far +the strongest in its negative aspect, the exposure of the evils in +present society. To many natures the claims of the socialist party +have all the allurements of patent medicine advertisements. These +describe the symptoms so exactly and promise so positively to cure +the disease, that they are irresistible--especially when the regular +physicians keep insisting that the only way to get well is to take +baths and exercise, and stop the use of whisky and tobacco. + +Those attracted to the socialist party by its sweeping claims are of +two main types. The one is the low-paid industrial wage-worker; the +other is the sympathetic person of education or of wealth (or of +both), who has become suddenly aroused to the misery in our industrial +order. To both of these types, feeling intensely on the subject, +the socialist party appeals as the only party with promises sweeping +enough to be attractive. The one becomes the proletarian, the +other the intellectual, the one becomes the workshop, the other the +parlor-socialist. Many of the latter type are persons overburdened +either with unearned inherited wealth or with an undigested education. +Many of them, having enjoyed for a time the interesting experience of +radical thought and of bohemianism, come later to more moderate social +opinions. + +Sec. 22. #Growth and nature of the socialist vote.# In 1912 the socialist +party in the United States polled 900,000 votes in the presidential +election. The socialist parties in the various lands have almost +steadily grown, and now cast votes numbering in the aggregate six +to ten million (as variously estimated, the name socialist being +elastic). The socialist parties may be expected to continue +growing. They will ultimately gather within their folds most of +the ultra-discontented, and others that are not able to find an +alternative economic philosophy and a plan that inspire their hopes. +But the socialist party vote is made up of men of many shades +of opinion, a large number of whom hold only the mildest sort +of socialistic philosophy. Not many of the more than 3,000,000 +social-democratic voters in Germany before the war were members of the +regular party organization; but they supported the party as the +one unequivocal way to declare themselves against militarism and +undemocratic class-government. In the United States only about one +tenth of the socialistic party voters have been enrolled as members of +the party. + +Sec. 23. #Economic legislation and the political parties.# This floating +socialist vote is now so large that it is eagerly sought by candidates +of the older parties. These independent voters care little for the +radical and distant tenets of the socialist party leaders, and these, +to attract wider support, are forced to place increasing stress upon +immediate and moderate reforms. On the other hand, men of larger +qualities of leadership in the older parties are constantly adopting +and advancing pending measures of social reform. Where this is not +done the socialist party tends more quickly to develop into the one +powerful party of protest and of popular aspiration, receiving support +from many elements of the middle and small propertied classes and from +non-radical wageworkers. This movement from both sides is leaving less +noticeable the contrast between the socialist party and other parties +claiming to be "progressive" or "forward looking." The strongest +allies of the more radical communistic faction of the socialist party +are those members of the conservative parties who fail to recognize +the need of humane legislation, who irritate by their unsympathetic +utterances, and who unduly postpone by their powerful opposition the +gradual and healthful unfolding of the social spirit, energy, and +capacity of the nation. The greatest problem of social and economic +legislation for the next generation is to determine how far, and how, +the principle of authority may wisely be substituted for the principle +of competition in distribution. + + +[Footnote 1: Distribution as a problem of incomes is not to be +confused with distribution of physical goods by transportation (as +on the railroads) or by commercial agencies transferring goods from +producer to consumer (as in cooeperative distribution). Functional +distribution is the prime subject of the theory of value in Vol. I +(e.g., usance, value of labor, time-preference, profits), a study +of which is prerequisite to an intelligent study of the problems of +personal distribution.] + +[Footnote 2: See Vol. I, pp. 190, 223; and above, ch. 2, secs. 11-13.] + +[Footnote 3: See Vol. I, pp. 248-255, 297-298, 406, 408, 415-418, +480-481, 483-484: also Vol. II, pp. 22-23, 146-148, 161-162, 178-180, +283, and various passages in the chapters of this Part.] + +[Footnote 4: See above, ch. 2, sec. 7, on limitations upon bequest and +inheritance.] + +[Footnote 5: See ch. 18.] + +[Footnote 6: See ch. 12, sec. 14.] + +[Footnote 7: See ch. 2, sec. 10.] + +[Footnote 8: See Vol. I, pp. 54 and 66; also pp. 504 507 in an organic +theory of value.] + +[Footnote 9: See above, sec. 2, note 3.] + +[Footnote 10: Compare, e.g., portions of chs. 9, 15, 20, 21, 27; and +29, see. 17.] + +[Footnote 11: See ch. 2, sees. 11-13.] + +[Footnote 12: See Vol. I, p. 75.] + +[Footnote 13: See, e.g., Vol. I, pp. 25, 71, 205, 479, 509, 511, 513.] + +[Footnote 14: See above, ch. 18.] + +[Footnote 15: See Vol. I, p. 6, on "social" and the social sciences.] + +[Footnote 16: See e.g., ch. 9, secs. 2, 10; ch. 11, secs. 7, 8; ch. +16, secs. 3, 4, 12; chs. 18, 21, 22, 23, 27, 29, and 30.] + +[Footnote 17: See Vol. I, p. 502, on communism and value theory.] + +[Footnote 18: See Vol. I, pp. 210, 228, 502 on the labor-theory of +value.] + +[Footnote 19: See above, sec. 14.] + + + + +INDEX + +Accident insurance, +Agricultural credit, +Agricultural, decay, + economics, problems of, + prices, fall of, +Agricultural, and rural population, +Agriculture and crises, +Agriculture, exhaustion of the soil, + medieval, + number in, + the new, +Aldrich report, + Senator, + plan, +American Federation of Labor, +Appreciation and interest, +Arbitration, voluntary, + compulsory, +Assessment insurance, +Assessment of taxes, +Authoritative distribution, + + +B + +Balance of merchandise, +Balance of trade argument, +Bank, deposits as investments, + notes, + restriction act, +Banking, in the U.S., before 1914, +Banks, functions of, + in U.S., + taxes on, +Bellamy, Edward, +Bills of exchange, +Bimetallism, +Bonds, taxation of, +Bowley, statistician, +Boycott, +Building and loan associations, +Business cycle, + +C + +California Fruit Exchange, +Canadian Industrial Disputes Act, +Canals, +Capital, +Capitalistic monopoly, +Charitable distribution, +Capitalization theory of rises, +Charity, and control of vice, +Child-labor, +Christian socialism, +City growth, +Clark, John B., +Clay, Henry, +Clayton Act, + and farmers, +Cleveland, Grover, +Closed shop, see Open shop +Coal, +Coinage on governmental account, +Collective bargaining, +Combination, +Combinations, industrial, +Common law, on monopoly, +Comparative advantages, doctrine of, +Compensated gold dollar, +Compensation, for accidents, +Competition among employers, + among workers, + of railroads, + and monopoly, + as regulative principle, + merits of, + see also Monopoly +Competitive system, +Compulsory insurance, + economy of, +Consolidation, of railroads, +Consumers' League, +Contributory principle in insurance, +Cooeperation, producers', + consumers', + among farmers, +Corporation taxation, + difficulty of, +Corporations, +Costs of production, and the tariff, +Crises, and industrial depressions, + and unemployment, +Custom, + + +D + +Davies, Joseph E., +Deferred payments, standard of, +Deposits, bank, +Debts, public, +Dingley Act, +Discrimination, railroad, +Displacement theory of immigration, +Distribution of incomes, +Doctrine of comparative advantages, +Dollar, +Dynamic conditions, + + +E + +Economic, harmonies, + problems, + system, the present, +Emerson's premium plan, +Employers, and immigration, +Employment offices, +Engels, Friederich, +Erdman act, +Eugenics, + + +F + +Factory conditions, +Fair competition, + see also Unfair practices +Fairchild, H.P., +Farm, stock, + raw materials, + and factory, + loans, +Farmer's income, + life, +Farming, commercial, + capitalistic, + diversified, + intensive, +Farms, area, + woodlots, + equipment, + in U.S., + size of, + and railroads, +Federal Industrial Commission, +Federal legislation against monopoly, +Federal Reserve Act, +Federal Rural Credits Act, +Federal taxation, +Federal Trade Commission Act, +Fiat money, +Finance, public, +Food prices, + supply, +Foreign, banking, + exchange, + trade, +Forestry, +Forests, +Fractional coins, +Franchises, railroad, + for public utilities, +Free trade, + see also Protective tariff + + +G + +Gambling, uneconomic character of, +Gantt's premium plan, +Gardner Land Bank Act, +Garfield, James A., +Ghent, unemployment insurance, +General property tax, see Property +George, Henry, +Glass-Owen bill, +Glut theories of crises, +Gold-exchange standard, +Gold, production, + standard, defectiveness of, +Gold-using countries, +Goldenweiser, E.A., +Governmental aid to railroads, +Graduated taxation, +Graduation principle, +Greenbacks, +Gresham's law, + + +H + +Hadley, A.T., +Halsey's premium plan, +Hamilton, Alexander, +Hancock, Gen. Winfield Scott, +Harrison, Benjamin, +Hayes, Rutherford B., +Home market argument, +Housing problem, +Hours and wages, public regulation of, + + +I + +Immigrants, and organized labor, +Immigration, and low wages, + and population, + economic aspects of, + and wages, + and farming, +Imports into the U.S. chart, +Income, taxation, federal, + taxes, +Independent treasury, +Index numbers, chart, +Industrial revenues of government, + remuneration, methods of, + monopoly, problem of, + trust, nature of growth, + depressions, see Crises +Infant industry argument, +Inheritance, + taxes, + limitations of, +Interest rate, and deferred payments, + and prices, + in crises, +Insurance, principles of, + companies, taxes on, + against unemployment, +Internal revenue, +International exchange, equation of, +International trade, +Interstate Commerce Act, +Invalidity pensions, +Investment banking, + + +J + +Jackson, Andrew, +Jenks, J.W., +Justice in taxation, + + +K + +Kemmerer, E.W., +Knights of Labor, + + +L + +Labor, legislation, + and social legislation, + exchanges, see Employment offices +Laissez-faire, +Land, taxation, reform of, + banks, +Large production, in public utilities, +Large industry, +Lassalle, Ferdinand, +Leclaire, profit sharing, +Legal tender, +Loans, governmental, +Lump of labor notion, + + +M + +McKinley Act, +McKinley, William, +Market, public, +Materialistic philosophy, +Marx, Karl, +Mediation, +Mercantilism, +Merchandise, imports and exports, +Militarism, and population, +Military power, maximum, +Mill, J.S., +Minimum wage, +Mitchell, Wesley C., +Monetary economy, + system, + theory of crises, +Money, nature, use, and coinage, + value of, + quantity theory, + per capita circulation, + fiduciary, + commodity, +Monopolistic nature of protection, +Monopoly, and labor organization, + in railroads, + industrial, + prices, + public policy in respect to, + in public utilities, +Moody, John, +Moral judgments of monopoly, +More, Sir Thomas, +Morris, William, +Mortality table for insurance, +Mortgage taxation, +Municipal ownership, + + +N + +National banks, + ownership, +National Monetary Commission, +Negro problem, +Natural agents, and monopoly, +Newlands act, + + +O + +Old-age pensions, +Open shop, +Opportunism, +Organized labor, + and legislation, +Ownership of farms, + + +P + +Paper money, +Par of exchange, +Paradox of value, +Payne-Aldrich tariff, +Personal taxes, +Picketing, +Piece work, +Plato, +Police state, +Political, money, + aspects of labor, + aspect of railroads, +Population, agricultural and rural, + and immigration, +Postal savings, +Power, +Precious metals as money, +Premium plans, +Price, standard, + common market, +Prices, general level, + changes in, + rising, + and international trade, + and monopoly, +Profit sharing, +Profits from monopoly, +Progressive taxes, see graduation, +Promoters of monopoly, +Property, private, + taxes on, + tax on, + concept, +Property tax, general, +Protection, "true principle" of, +Protective, tariff, policy of, + tariffs, prevalence of, + railroad rates, +Public finance, + view of trade unions, + and labor legislation, + inspection, + ownership, +Public utility commissions, +Public utilities, monopolistic nature of, + + +Q + +Quantity theory of money, + + +R + +Race problems, +Railroad mileage, + building, + problem, + commissions, +Resources, material, + of the nation, +Reserve, cities, + plan of insurance, +Reserves, bank, + against notes, + against deposits, +Restraint of trade, +Revenue tariff, +Revisionism, +Ricardo, David, +Rich man's panic, +Ripley, W.Z., +Roads, +Roberts, Peter, +Roosevelt, Theodore, +Root, Elihu, +Rowan's premium plan, +Rural, definition, + exodus, + + +S + +Saturation point of money, +Saving, and investment, +Savings, banks, + deposits, + insurance assets as, +"Scientific" socialism, +Seasonal fluctuations, and unemployment, +Seigniorage, + charge, +Seligman, E.R.A., +Sherman Anti-trust law, +Shifting and incidence, + of insurance premiums, +Shorter working day, +Sickness, insurance against, +Single tax, +Smith Adam, +Social, legislation, + protective policy of immigration, + agricultural policy, + effects of inheritance, +Social insurance, + by trade unions, +Social utility, +Social welfare, in taxation, + and shorter working day, +Socialism, some aspects of, + meanings of, + philosophic, + active, + Marxian, + political, + "scientific", +Socialist, party, + vote, +Standard money, + defined, + see also Deferred payments, +State, sphere of, + insurance, + ownership, +Status, +Strike, right to, +Strikes, + + +T + +Tabular standard, +Taft, William Howard, +Tariff, changes and crises, + and wages, + and unemployment, + reductions, harm of, + board, a permanent, + history, American, + rates, + for revenue, + "true principle" of, + "competitive principle" of, + and business depressions, +Task work, +Taxation, objects and principles of, + revenues from, + forms of, + as a public question, + separation of, + system of, +Taxes, effect upon property valuations, + property and corporation, +Taylor's premium plan, +Tenancy on farms, +Tilden, Samuel J., +Time work, +Trade education, +Trade unions, + see also Organized labor, +Transportation, + taxes on, +Trant, on trade unions, +Trust company, +Trust, definition, + see Monopoly, +Two-profits argument, + + +U + +Underwood tariff, +Unemployment, + in crises, + insurance, +Unfair practices, +Usance of wealth, + of labor, +Usury laws, +Utility, + + +V + +Van Hise, C.R., + + +W + +Wage contract, limitation of, +Wage-system, + growth of, + practicability of, +Wages, and tariff, + and general prices, +general, and organization, + particular, and organization, + maladjustment of, and unemployment, + and immigration, see Immigration, + see also Hours and wages, +Walker, Francis A., +Walker tariff, +Washington, Booker T., +Wealth, + the nation's, + taxation of, +"Wealth of Nations", +Weir's premium plan, +Wild-cat banking, +Wilson tariff act, +Wilson, Woodrow, +Wolman, L., +Women, working day for, +Wyman, Bruce, + + + + + + + + + +End of Project Gutenberg's Modern Economic Problems, by Frank Albert Fetter + +*** END OF THIS PROJECT GUTENBERG EBOOK MODERN ECONOMIC PROBLEMS *** + +***** This file should be named 12217.txt or 12217.zip ***** +This and all associated files of various formats will be found in: + https://www.gutenberg.org/1/2/2/1/12217/ + +Produced by Juliet Sutherland, Keren Vergon, Leah Moser and the +Online Distributed Proofreading Team. + + +Updated editions will replace the previous one--the old editions +will be renamed. + +Creating the works from public domain print editions means that no +one owns a United States copyright in these works, so the Foundation +(and you!) can copy and distribute it in the United States without +permission and without paying copyright royalties. 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