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+*** START OF THE PROJECT GUTENBERG EBOOK 75629 ***
+
+
+
+
+
+Transcriber’s Note: Italics are enclosed in _underscores_; boldface
+text is enclosed in =equals signs= (but there is an actual equals sign
+in Footnote 1). Additional notes will be found near the end of this
+ebook.
+
+
+
+
+ECONOMICS FOR HELEN
+
+
+
+
+                             ECONOMICS FOR
+                                 HELEN
+
+
+                                   BY
+
+                             HILAIRE BELLOC
+
+
+                             [Illustration]
+
+                     J. W. ARROWSMITH (LONDON) LTD.
+
+             6 Upper Bedford Place, Russell Square, London
+
+
+
+
+         THE FIRST EDITION _of this book was printed on
+           Hand-made Paper (Medium 8vo) and consisted of 265
+           numbered copies, of which 250 were for sale. It was
+           published in March, 1924._
+
+         _This_, THE SECOND EDITION _(Crown 8vo), was also
+           published in March, 1924_.
+
+
+                      Printed in Great Britain by
+             J. W. ARROWSMITH LTD., 11 Quay Street, Bristol
+
+
+
+
+Contents
+
+
+                                PART I
+
+                             THE ELEMENTS
+
+                                                                    PAGE
+
+    I  WHAT IS WEALTH?                                                10
+
+   II  THE THREE THINGS NECESSARY TO THE PRODUCTION OF WEALTH--
+         LAND, LABOUR AND CAPITAL                                     15
+
+  III  THE PROCESS OF PRODUCTION                                      27
+
+   IV  THE THREE PARTS INTO WHICH THE WEALTH PRODUCED NATURALLY
+         DIVIDES ITSELF--RENT, INTEREST, SUBSISTENCE                  33
+
+    V  EXCHANGE                                                       52
+
+   VI  FREE TRADE AND PROTECTION                                      61
+
+  VII  MONEY                                                          66
+
+
+                                PART II
+
+                        POLITICAL APPLICATIONS
+
+  INTRODUCTION                                                        87
+
+  PROPERTY--THE CONTROL OF WEALTH                                     95
+
+  THE SERVILE STATE                                                  109
+
+  THE CAPITALIST STATE                                               115
+
+  THE DISTRIBUTIVE STATE                                             124
+
+  SOCIALISM                                                          132
+
+  INTERNATIONAL EXCHANGE                                             141
+
+  FREE TRADE AND PROTECTION AS POLITICAL ISSUES                      150
+
+  BANKING                                                            167
+
+  NATIONAL LOANS AND TAXATION                                        189
+
+  THE SOCIAL (OR HISTORICAL) VALUE OF MONEY                          201
+
+  USURY                                                              217
+
+  ECONOMIC IMAGINARIES                                               230
+
+
+  INDEX                                                              243
+
+
+
+
+Part I
+
+THE ELEMENTS
+
+
+
+
+THE ELEMENTS
+
+
+Economics is the name which people have come to give to the study of
+Wealth. It is the study by which we learn how Wealth is produced, how
+it is consumed, how it is distributed among people, and so on. It is a
+very important kind of study, because it often depends upon our being
+right or wrong in Economics whether we make the whole State poorer or
+richer, and whether we make the people living in the State happier or
+not.
+
+Now as Economics is the study of Wealth, the first thing we have to
+make certain of is, _What Wealth is_.
+
+
+
+
+I
+
+WHAT IS WEALTH?
+
+
+The Economic definition of Wealth is subtle and difficult to
+appreciate, but it is absolutely essential to our study to get it clear
+at the outset and keep it firmly in mind. It is through some muddlement
+in this original definition of wealth that nearly all mistakes in
+Economics are made.
+
+First, we must be clear as to what Wealth is _not_.
+
+Wealth is never properly defined, for the purposes of economic study,
+by any one of the answers a person would naturally give off-hand. For
+instance, most people would say that a man’s wealth was the money he
+was worth. But that, of course, is nonsense; for even if there were no
+money used his possessions would still be there, and if he had a house
+and cattle and horses the mere fact that money was not being used where
+he lived would not make him any worse off.
+
+Another and better, but still a wrong, answer is: “Wealth is what a man
+possesses.”
+
+For instance, in the case of this farmer, his house and his stock and
+his furniture and implements are what we call his “wealth.” In ordinary
+talk that answer will do well enough. But it will not do for the
+strict science of Economics, for it is not accurate.
+
+For consider a particular case. Part of this man’s wealth is, you
+say, a certain grey horse. But if you look closely at your definition
+and make it rigidly accurate, you will find that _it is not the horse
+itself which constitutes his wealth, but something attaching to the
+horse_, some quality or circumstance which affects the horse and gives
+the horse what is called its _value_. It is this _Value_ which is
+wealth, not the horse. To see how true this is consider how the value
+changes while the horse remains the same.
+
+On such and such a date any neighbour would have given the owner of
+the horse from 20 to 25 sacks of wheat for it, or, say, 10 sheep, or
+50 loads of cut wood. But suppose there comes a great mortality among
+horses, so that very few are left. There is an eager desire to get hold
+of those that survive in order that the work may be done on the farms.
+Then the neighbours will be willing to give the owner of the horse much
+more than 20 or 25 sacks of wheat for it. They may offer as much as
+50 sacks, or 20 sheep, or 100 loads of wood. Yet the horse is exactly
+the same horse it was before. The wealth of the master has increased.
+His horse, as we say, is “worth more.” _It is this_ WORTH, _that is,
+this ability to get other wealth in exchange, which constitutes true
+Economic Wealth_.
+
+I have told you that the idea is very difficult to seize, and that you
+will find the hardest part of the study here, at the beginning. There
+is no way of making it plainer. One has no choice but to master the
+idea and make oneself familiar with it, difficult as it is. _Wealth
+does not reside in the objects we possess, but in the economic values
+attaching to those objects._
+
+We talk of a man’s wealth or a nation’s wealth, or the wealth of the
+whole world, and we think at once, of course, of a lot of material
+things: houses and ships, and pictures and furniture, and food and all
+the rest of it. But the economic wealth which it is our business to
+study is not identical with those _things_. Wealth is the sum total of
+the _values_ attaching to those things.
+
+That is the first and most important point.
+
+Here is the second: Wealth, for the purposes of economic study, _is
+confined to those values attaching to material objects through the
+action of man, which values can be exchanged for other values_.
+
+I will explain what that sentence means.
+
+Here is a mountain country where there are few people and plenty
+of water everywhere. That water does not form part of the Economic
+_wealth_ of anyone living there. Everyone is the better off for the
+water, but no one has _wealth_ in it. The water they have is absolutely
+necessary to life, but no man will give anything for it because any man
+can get it for himself. It has no _value in exchange_. But in a town to
+which water has to be brought at great expense of effort, and where
+the amount is limited, it acquires a value in exchange, that is, people
+cannot get it without offering something for it. That is why we say
+that in a modern town water forms part of _Economic Wealth_, while in
+the country it usually does not.
+
+We must carefully note that wealth thus defined is NOT the same thing
+as well-being. The mixing up of these two separate things--well-being
+and economic wealth--has given rise to half the errors in economic
+science. People confuse the word “wealth” with the idea of well-being.
+They say: “Surely a man is better off with plenty of water than with
+little, and therefore conditions under which he can get plenty of water
+for nothing are conditions under which he has _more wealth_ than when
+he has to pay for it. He has more _wealth_ when he gets the water free
+than he has when he has to pay for it.”
+
+It is not so. Economic wealth is a separate thing from well-being.
+Economic wealth may well be increasing though the general well-being of
+the people is going down. It may increase though the general well-being
+of the people around it is stationary.
+
+The Science of Economics does not deal with true happiness nor even
+with well-being in material things. It deals with a strictly limited
+field of what is called “Economic Wealth,” and if it goes outside its
+own boundaries it goes wrong. Making people as happy as possible is
+much more than Economics can pretend to. Economics cannot even tell
+you how to make people well-to-do in material things. But it can tell
+you how exchangeable Wealth is produced and what happens to it; and as
+it can tell you this, it is a useful servant.
+
+That is the second difficult point at the very beginning of our study.
+_Economic Wealth consists in_ EXCHANGEABLE _values, and nothing else_.
+
+We must be as clear on this second point as we have made ourselves upon
+the first, or we shall not make any progress in Economics. They are
+both of them unfamiliar ideas, and one has to go over them many times
+before one really grasps them. But they are absolutely essential to
+this science.
+
+Let us sum up this first, elementary, part of our subject, and put it
+in the shortest terms we can find--what are called “Formulæ,” which
+means short and exact definitions, such as can be learnt by heart and
+retained permanently.
+
+We write down, then, two Formulæ:
+
+
+1. =Wealth is made up, not of things, but of economic values attaching
+to things.=
+
+2. =Wealth, for the purposes of economic study, means ONLY exchange
+values: that is, values against which other values will be given in
+exchange.=
+
+
+
+
+II
+
+THE THREE THINGS NECESSARY TO THE PRODUCTION OF WEALTH--LAND, LABOUR
+AND CAPITAL
+
+
+You will notice that all about you living beings are occupied in
+changing the things around them from a condition where they are _less_
+to a condition where they are _more_ useful to themselves.
+
+Man is a living being, and he is doing this kind of thing all the time.
+If he were not he could not live.
+
+He draws air into his lungs, taking it from a condition where it does
+him no good to a condition where it keeps him alive. He sows seed;
+he brings food from a distance; he cooks it for his eating. To give
+himself shelter from the weather he moulds bricks out of clay and puts
+them together into houses. To get himself warmth he cuts down wood and
+brings it to his hearth, or he sinks a shaft and gets coal out of the
+earth, and so on.
+
+Man is perpetually changing the things around him from a condition in
+which they are _less_ useful to him into a condition where they are
+_more_ useful to him.
+
+_Whenever a man does that he is said to be creating, and adding to,
+Human Wealth_: part of which is Economic Wealth, that is Wealth
+suitable for study under the science of Economics.
+
+Wealth, therefore, that thing the nature and growth of which we are
+about to study, is, so far as man is concerned, the result of this
+process of changing things to man’s use, and it is through looking
+closely at the nature of this process that we get to understand what
+is necessary to it, and what impedes it, and how its results are
+distributed among mankind.
+
+We must next go on to think out _how_ wealth is so produced. We have
+already seen what the general statement on this is: Wealth is produced
+by man’s consciously transforming things around him to his own uses;
+and though not everything so transformed has true _Economic Wealth_
+attaching to it (for instance, breathing in air does not produce
+Economic Wealth), yet all Economic Wealth is produced as _part_ of this
+general process.
+
+Now when we come to examine the Production of Wealth, we shall find
+that _three_ great separate forces come into it; and these we shall
+find to be called conveniently “Land,” “Labour” and “Capital.”
+
+Let us take a particular case of the production of Economic Wealth and
+see how it goes forward. Let us take the case of the production of,
+say, 100 sacks of wheat.
+
+
+1. LAND.
+
+A man finds himself possessed of so much land, and when he sets out to
+produce the 100 sacks of wheat, the following are the conditions before
+him.
+
+There are natural forces of which he takes advantage and without which
+he could not grow wheat. The soil he has to do with has a certain
+fertility, there is enough rainfall to make the seeds sprout, and so on.
+
+All these natural forces are obviously necessary to him. Though we talk
+of man “creating” wealth he does not really create anything. What he
+does is to use and combine certain natural forces of which he is aware.
+He has found out that wheat will sprout if it is put into the ground at
+a particular season, and that he will get his best result by preparing
+the ground in a particular manner, etc. These natural forces are the
+foundation of the whole affair.
+
+For the sake of shortness we call all this bundle of natural forces
+(which are the very first essential to the making of wealth) “LAND.”
+This word “Land” is only a conventional term in Economics, meant to
+include a vast number of things beside the soil: things which are not
+Land at all; for instance, water power and wind power, the fertility
+of seed, the force of electricity, and thousands of other natural
+energies. But we must have some short convenient term for this set of
+things, and the term “Land” having become the conventional term in
+Economic Science for all natural forces, it is now the useful and short
+word always used for them as a whole: the reason being, I suppose,
+that land, or soil, is the first natural requisite for food--the most
+important of man’s requirements, and the _place_ from which he uses all
+other natural forces.
+
+We say, then, that for the production of wealth the first thing you
+need is the natural forces of the world, or “Land.”
+
+
+2. LABOUR.
+
+But we next note that this possession of natural forces, our knowledge
+of how they will work, and our power of combining them, _is not enough
+to produce wealth_.
+
+If the farmer were to stand still, satisfied with his knowledge of the
+fertility of the soil, the quality of seed, and all the rest of it, he
+would have no harvest. He must, as we have said, prepare the land and
+sow the seed: only so will he get a harvest at the end of his work.
+These operations of human energy which end in his getting his harvest
+are called “LABOUR”: that is, _the application of human energy to
+natural forces_. There are no conditions whatsoever under which wealth
+can be produced without natural forces or “land;” but there are also no
+conditions whatsoever under which it can be produced without “labour,”
+that is, the use of human energy. Even if a man were in such a position
+that he could get his food by picking it off the trees, there would
+still be the effort required of picking it. We say, therefore, _that
+all wealth comes from the combination of LAND and LABOUR: That is_, of
+_natural forces_ and _human energy_.
+
+
+3. CAPITAL.
+
+At first sight it looks as though these two elements, Land and Labour,
+were all that was needed; and a very great deal of trouble has been
+caused in the world by people jumping to this conclusion without
+further examination.
+
+But if we look closely into the matter we shall see that Land and
+Labour alone are _not_ sufficient to the production of wealth in any
+appreciable amount. The moment man begins to produce wealth in any
+special fashion and to any appreciable extent, a third element comes
+in which is as rigorously necessary as the two others; and that third
+element is called CAPITAL.
+
+Let us see what this word “CAPITAL” means.
+
+Here is your farmer with all the requisite knowledge and the natural
+forces at his disposal. He has enough good land provided him to produce
+a harvest of 100 sacks of wheat if he is able and willing to apply his
+manual labour and intelligence to this land. But he must be kept alive
+during the many months required for the growth of the wheat. It is no
+use his beginning operations, therefore, unless he has a stock of food;
+for if he had not such a stock he would die before the harvest was
+gathered. Again, he must have seed. He must have enough seed to produce
+at the end of those months one hundred sacks of wheat. So we see that
+at the very least, for this particular case of production, the natural
+forces about him and his own energies would not be of the least use to
+the production of the harvest unless there were this third thing, a
+stock of wheat both for sowing and for eating.
+
+But that is not all. He must be sheltered from the weather; he must be
+clothed and he must have a house, otherwise he would die before the
+harvest was gathered. Again, though he might grow a very little wheat
+by putting in what seed he could with his hands into a few suitable
+places in the soil, he could not get anything like the harvest he was
+working for unless he had special implements. He must prepare the land
+with a plough; so he must have a plough; and he must have horses to
+draw the plough; and those horses must be kept alive while they are
+working, until the next harvest comes in; so he must have a stock of
+oats to feed them with.
+
+All this means quite a large accumulation of wealth before he can
+expect a good harvest: the wealth attaching to clothes, houses, food,
+ploughs, horses for a year.
+
+In general, we find that man, when he is setting out on a particular
+piece of production of wealth, is absolutely compelled to add to his
+energies, and to the natural forces at his disposal, a third element
+consisting of _certain accumulations of wealth made in the past_--an
+accumulation of food, clothing, implements, etc.--without which the
+process of production could not be undertaken. _This accumulation
+of_ ALREADY-MADE WEALTH, _which is thus absolutely necessary to
+production_, we call _CAPITAL_.
+
+It includes _all kinds of wealth whatsoever which man uses_ WITH THE
+OBJECT OF PRODUCING FURTHER WEALTH, _and without which the further
+wealth could not be produced_. It is a reserve without which the
+process of production is impossible. Later on we shall see how very
+important this fact is: for every healthy man has energy, and natural
+forces are open to all, but _capital_ can sometimes be controlled by
+very few men. If they will not allow their capital to be used, wealth
+cannot be produced by the rest; therefore those who, by their labour,
+produce wealth may be driven to very hard conditions by the few owners
+of Capital, whose leave is necessary for any wealth to be produced at
+all.
+
+But all this we must leave to a later part of our study. For the moment
+what we have to get clearly into our heads are these three things: (1)
+_Natural Forces_, (2) _Human Energy_, and (3) _Accumulated stores and
+implements_, which are called, generally, for the sake of shortness:
+_LAND_, _LABOUR_ and _CAPITAL_. In the absence of any one of these
+three, production of Wealth is impossible. All three must be present;
+and it is only the combination of all three which makes the process of
+producing economic values possible.
+
+
+POINTS ABOUT CAPITAL.
+
+There are _three_ important things to remember about Capital.
+
+1. The first is that what makes a particular piece of wealth into
+capital is not the kind of object to which the economic value
+attaches, but the _intention_ of using it as capital on the part of
+the person who controls that object; that is, the intention to use
+it for the _production of future wealth_. Almost any object can be
+used as capital, but no object is capital, however suitable it be for
+that purpose, _unless there is the intention present of using it as
+capital_. For instance: One might think that a factory power engine
+was always Capital. The economic values attaching to it, which make
+an engine worth what it is are nearly always used for the production
+of future wealth, and so we come to think of the engine as being
+necessarily capital simply because it is an engine, and the same is
+true of factory buildings and all other machinery and all tools, such
+as hammers and saws and so on.
+
+But these things are not capital _in themselves_; for if we do not use
+them for the production of future wealth they cease to be capital. For
+instance, if you were to put the engine into a museum, or to keep a
+hammer in remembrance of someone and not use it, then it would not be
+capital.
+
+And this truth works the other way about. At first sight you would say,
+for instance, that a diamond ring could not be capital: it is only a
+luxurious ornament. But if you use it to cut glass for mending a window
+it is capital for that purpose.
+
+2. The second important thing to remember about Capital is that, being
+Wealth, _it is at last consumed, as all other Wealth is_. Capital is
+consumed in the process of using it to make more Wealth, and as it is
+consumed it has to be replaced, or the process of production will break
+down. Take the case of the farmer we gave just now. He had to start, as
+we saw, with so much Capital--horses and a plough and a stock of wheat
+and a stock of oats, etc.; and only by the use of this capital could
+he procure his harvest of 100 sacks of wheat at the end of the year;
+but if he is going on producing wheat year after year he must replace
+the wastage in his capital year after year. His stock of wheat for food
+and for seed will have disappeared in the year; so will his stock of
+hay and oats for keeping his horses. His plough will be somewhat worn
+and will need mending; and his horses, after a certain time, will grow
+old and will have to be replaced. Therefore, if production is to be
+continuous, that is, if there are to be harvests year after year, each
+harvest must be at least enough to replace all the wastage of capital
+which goes on during the process of production.
+
+3. The third thing to remember about Capital is that Capital is
+_always the result of saving_: That is, the only way in which people
+can get Capital is by doing without some immediate enjoyment of
+goods, and putting them by to use them up in creating wealth for the
+future. This ought to be self-evident; but people often forget it,
+because the person who _controls_ the capital is very often quite a
+different person from the person who _really accumulated_ it. The owner
+of the capital is very often a person who never thinks of saving.
+Nevertheless, the saving has been done by _someone_ in the past, and
+saving must go on the whole time, for if it did not the Capital could
+not come into existence, and could not be maintained once it was in
+existence.
+
+Suppose, for instance, a man inherits £10,000 worth of Capital invested
+in a Steamship Company.
+
+This means that he has a share in a number of hulls, engines, stocks of
+coal and food, and clothing for the crews, and other things which have
+to be provided before the steamships can go to sea and create wealth by
+so doing.
+
+All this capital has been saved by someone. Not by the man himself; he
+has merely inherited the wealth--but by someone.
+
+Someone at some time, his father or whoever first got the capital
+together, must have forgone immediate enjoyment and put by wealth for
+future production, or the capital could not have come into existence.
+Thus, if the first accumulator of the capital had used his wealth for
+the purchase of a yacht in which to travel for his amusement, the
+labour and natural forces used in the production of that yacht would
+have made wealth consumed in immediate enjoyment, and it would not have
+been used for future production as is a cargo ship.
+
+In the same way this capital, once it has come into existence in the
+shape of cargo ships and stocks of coal and the rest, would soon
+disappear if it were not perpetually replenished by further saving. The
+man who owns the shares in the Steamship Company does not consciously
+save year after year enough money to keep the capital at its original
+level.
+
+Nevertheless, the saving is done for him. The Directors of the Company
+keep back out of the total receipts enough to repair the ships and
+to replenish the stocks of coal, etc., and they are thus perpetually
+accumulating fresh capital to replace the consumption of the old. How
+true it is that all Capital is the result of saving by _someone_,
+_somewhere_, we see in the difference between countries that do a
+lot of saving and countries that do little. Savages and people of
+a low civilisation differ in this very much from people of a high
+civilisation. They want to enjoy what they have the moment they have
+it, and they lay by as little as possible for the future; only just as
+much as will keep them going. But in a high civilisation people save
+capital more and more, and so are able to produce more and more wealth.
+
+Now let us sum up in some more Formulæ what we have learnt so far.--
+
+
+1. =All production of Wealth needs three things: (_a_) Natural forces,
+(_b_) Human energy, and (_c_) an Accumulation of wealth made in the
+past and used up in future production.=
+
+2. =These three are called, for shortness: (_a_) Land, (_b_) Labour,
+(_c_) Capital.=
+
+3. =The last, Capital, (_a_) depends for its character on the intention
+of the user, (_b_) is consumed in production, (_c_) is always the
+result of saving.=
+
+
+
+
+III
+
+THE PROCESS OF PRODUCTION
+
+
+You have seen how the production of wealth takes place through the
+combination of these three things, LAND, LABOUR AND CAPITAL, and you
+have also seen how the wealth so produced consists not in the objects
+themselves, but in the economic values attached to the objects.
+
+Now we will take a particular instance of wealth and show how this
+works out in practice and what various forms the production of wealth
+takes.
+
+Wealth, as we have seen, arises from the transposing of things around
+us from a condition where they are less to a condition where they are
+more useful to our needs.
+
+Let us take a ton of coal lying a thousand feet down under the earth
+and no way provided of getting at it. A man possessing that ton of
+coal would not possess any wealth. The coal lying in the earth has no
+economic value attaching to it whatsoever. It has not yet entered the
+process whereby it ultimately satisfies a human need.
+
+A shaft is sunk to get at that coal, and once the coal is reached a
+first economic value begins to attach to it. Next, further labour,
+capital and natural forces are applied to the task of hewing the coal
+out and raising it to the surface. This means that yet more economic
+values are attached to the ton of coal. These we express by saying that
+the ton of coal at the bottom of the mine, just hewed out, is worth so
+much--say 15/-; and later at the pit head is worth so much more--say
+£1. But the process of production of wealth is not yet completed. The
+coal is needed to warm you in your house, and your house is a long way
+from the pit head. It must be taken from the pit head to your house,
+and for this transport further labour, natural forces and capital must
+be used, and these add yet another economic value to the coal.
+
+We express this by saying that the ton of coal _delivered_ (that is, at
+your house) is worth not £1, which it was at the pit head, but £1 10s.;
+and in this example we see that transport is as much a part of the
+production of wealth as other work. We also see a further example of
+the truth originally stated that wealth does not consist in the object
+itself but in the values attached to it. The ton of coal is there in
+your cellar exactly the same (except that it is broken up) as it was
+when it lay a thousand feet under the earth with no way of getting
+to it. In your cellar it represents wealth. In possessing it you are
+possessing wealth to the amount of 30s. You could exchange it against
+30s. worth of some other thing, such as wheat. But the wealth you thus
+possess is not the actual coal, but the values attaching to the coal.
+These economic values are being piled up from the very beginning of the
+process of production until the process of consumption begins.
+
+Here is another case which shows how the process of production will add
+values to a thing without necessarily changing the thing itself.
+
+Suppose an island where there is a lot of salt in mines near the
+surface, but with very poor pasture and very little of it; most of the
+soil barren and the climate bad. On the main-land, a day’s journey from
+the island, there is good soil and pasture and a good climate, but
+there is no salt. Salt is a prime necessity of life, and it comes into
+a lot of things besides necessaries. To the people of the main land,
+therefore, salt, which they lack, is of high value. To the people of
+the island it is of low value, for they can get as much of it as they
+want, with very little trouble. Meanwhile, meat is of very high value
+to the people of the island, who can grow little of it on their own
+soil, while it is of much less value to the people of the main-land,
+who have plenty of it through their good pastures and climate. Here we
+have, let us say, 100 tons of salt in the island and 100 tons of meat
+on the main-land. A boat takes the 100 tons of salt from the island
+to the main-land and brings back the meat from the main-land to the
+island. Here wealth has been created on both sides, although no change
+has taken place in the articles themselves except a change in position.
+Both parties, the islanders and the main-land people, are wealthier
+through the transaction, and this is a case where _exchange_ is a
+direct creator of wealth, and the transport effecting the exchange is a
+creator of wealth.
+
+Strictly speaking, everything done to increase the usefulness of an
+object right up to the moment when consumption begins is part of the
+production of wealth. For instance, wealth is being produced from the
+moment that wheat is sowed in the ground to the moment when the baked
+loaf is ready for eating, and the wealth expressed by the loaf, that
+is, the values attaching to it, are made up by all the processes of
+adding values from the first moment the seed was sown. When you eat a
+sixpenny loaf you are beginning to consume values created by the sowing
+of the wheat and its culture and its harvesting and grinding, and the
+working of the flour into dough, and the baking, and created by every
+piece of transport in the process, the carting of the sheaf into the
+rick, the carting thrashed wheat to the mill, the taking of the flour
+to the baker, the taking of the baked loaf to your house, and even the
+bringing of the loaf from the larder to your table. Every one of these
+actions is part of the production of wealth.
+
+There is attaching to the process of the production of wealth a certain
+character which we appreciate easily in some cases, but with much more
+difficulty in others. We have already come across it in discussing
+Capital. It is this:
+
+_All wealth is consumed._
+
+This is universally true of all wealth whatsoever, though the rate of
+consumption is very different in different cases.
+
+The purpose of nature is not the purpose of man. Man only creates
+wealth by a perpetual effort against the purpose of nature, and the
+moment his effort ceases nature tends to drag back man’s creation from
+a condition where it is more to a condition where it is less useful to
+himself.
+
+For some sorts of wealth the process is very rapid, as, for instance,
+in the consumption of fuel, or in the wasting of ice on a hot day.
+Man with an expenditure of his energy and brains applied to natural
+forces, and by the use of capital, has caused ice to be present under
+conditions where nature meant there to be no ice--a hot summer’s day.
+
+He has brought it from a high, cold place far away; or he has kept it
+from the winter onwards stored in an ice house which he had to make and
+to which he had to transport it; or he has made it with engine power.
+But the force of nature is always ready to melt the ice when man’s
+effort ceases.
+
+The moment man’s effort ceases, deterioration, that is, _the
+consumption of the wealth present_, at once begins. And this truth
+applies at the other end of the scale. You may make a building of
+granite, but it will not last for ever. The consumption is exceedingly
+slow, but it is there all the same. And whether the consumption takes
+place in the service of man (as when fuel is burnt on a hearth) or
+by neglect (as when a derelict house decays) it is always _economic
+consumption_.
+
+We may sum up in the following Formulæ:--
+
+
+1. =Transport and Exchange, quite as much as actual work on the
+original material, form part of the Production of Wealth.=
+
+2. =All Wealth is ultimately consumed: that is, matter having been
+transposed by man from a condition where it is less to a condition
+where it is more useful to himself, is dragged back from a condition
+where it is more to a condition where it is less useful to himself.=
+
+
+
+
+IV
+
+THE THREE PARTS INTO WHICH THE WEALTH PRODUCED NATURALLY DIVIDES
+ITSELF--RENT, INTEREST, SUBSISTENCE
+
+
+We now come to that part of Economics which has most effect upon
+human society, and the understanding of which is most essential to
+sound politics. It is not a difficult point to understand. The only
+difficulty is to keep in our minds a clear distinction between what
+is called economic law, that is, the necessary results of producing
+wealth, and the moral law, that is the matter of right and wrong in the
+distribution and use of wealth.
+
+Some people are so shocked by the fact that economic law is different
+from moral law that they try to deny economic law. Others are so
+annoyed by this lack of logic that they fall into the other error of
+thinking that economic law can override moral law.
+
+You have to be warned against both these errors before you begin to
+approach the subject of Rent, Profit and Subsistence. Only when we
+have worked out the principles of these three things can we come back
+again to the apparent clash between economic law and moral law, the
+understanding of which is so very important in England to-day.
+
+The motive of production is to satisfy human needs, and the simplest
+case of production is that of a man working for himself and his family
+as a settler in a new country. He cuts down wood and brings it where
+it is wanted; he builds a hut and a bridge with it; he stacks it ready
+to burn for fuel. The wealth he thus produces by his labour goes to
+him and his, and because the labour he has to expend is what impresses
+him most about the process, he calls the wealth produced at the end of
+it: “Wealth produced by his labour.” He thinks of his labour as the
+one agent of the whole affair, and so it is the one immediate _human_
+agent; but, as we have seen, there are two other agents as well. His
+mere labour (that is, the use of his brain and his muscles) would not
+have produced a pennyworth of wealth, but for two other agents: Natural
+Forces (or Land) and Capital. And we shall find when we look into it
+that the wealth he thus produces and regards as one thing is also
+really divided into three divisions: one corresponding to each of the
+three agents which produce wealth.
+
+Being a settler living by himself and possessing his own land and his
+own implements, he controls all he produces and does not notice the
+three divisions. But three divisions there are none the less present
+in all wealth produced anywhere, =and these three divisions do not
+correspond to the moral claim man has to the result of his labour=.
+They are divisions produced by the working of economic law, which is as
+blind and indifferent to right and wrong as are the ordinary forces of
+nature about us.
+
+These three divisions are called =RENT=, =INTEREST= (or =Profit=) and
+=SUBSISTENCE=. In order to see how these three divisions come about we
+must take them in the order of _Subsistence_ first, then _Interest_,
+then _Rent_.
+
+
+1. SUBSISTENCE.
+
+In any civilisation you will find a certain amount of things which
+are regarded as necessaries. In any civilisation it is thought that
+human beings must not be allowed to sink below a certain level, and a
+certain amount of clothes of a certain pattern, a certain amount of
+housing room and fuel, and a certain amount of food of a certain kind
+are thought the very least upon which life can be conducted. Even the
+poorest are not allowed to fall below that standard. This does not
+mean that no one is allowed to starve or die of insufficient warmth.
+It means that any particular civilisation (our own, for instance, or
+the Chinese) has its regulation minimum and lets men die rather than
+fall below it. This “certain amount,” below which even the poorest
+people’s livelihood is not allowed to fall, is called =THE STANDARD OF
+SUBSISTENCE=.
+
+Most people when they first think of these things imagine that there is
+some very small amount of necessaries which, all over the world, and
+at all times, would be thought absolutely essential to man. But it is
+not so. The standard set is always higher than the mere necessity of
+keeping alive would demand.
+
+For instance, we in this country put into our standard of necessity
+clothes of a rather complicated pattern. We should not tolerate the
+poorest people going about in blankets. They must have boots on their
+feet, which take a lot of labour and material. We should not tolerate
+the poorest people going about barefooted, as they do in many other
+countries, nor even with sandals. It is not our custom. They may die
+of wet feet through bad leather boots and bad, thin clothing of our
+complicated pattern, but they must not wear wooden shoes or walk
+barefoot or go about in blankets.
+
+Again, we do not live on anything at random, but upon cooked meat and a
+certain special kind of grain called wheat. There are some grains much
+cheaper than wheat; but our custom demands wheat even for the poorest,
+if there is not enough wheat there is a famine, and famine is preferred
+by society to the giving up of the wheat standard. Again, we insist
+upon even the poorest having a certain amount of protection against the
+weather in the way of houses, which must be up to a certain standard.
+We do not tolerate their living in holes in the ground or mud huts.
+
+One way and another we have set up a certain _standard of subsistence_
+even for the poorest; _and every community in history has, at all
+times, lived under this idea of a_ MINIMUM STANDARD OF SUBSISTENCE.
+This is so true that people will suffer great inconvenience, even
+to famine, as I have said, rather than give up the standard of
+subsistence. When people are too poor to afford this least amount of
+what we think necessaries effort is made to supply them by doles or a
+poor rate, or something of that kind; but the standard is not abandoned.
+
+Well, this _Minimum Standard of Subsistence_ is the first division
+in the Wealth produced. The prosperous man, tilling his own land and
+possessed of his own capital, consumes, of course, much more than the
+bare standard of subsistence would allow. He eats more food and better
+food, and has more and better clothes and house room and fuel and the
+rest than the mere standard of subsistence of his civilisation demands.
+Nevertheless, even in his case the standard of subsistence is there. It
+is a minimum below which, if things went wrong, he would not fall. Ask
+him to fall below it and he would simply fail to do so. He would try to
+produce that minimum amount of wealth in some other way, or if he could
+not do that he would die.
+
+This “Standard of Subsistence,” which is to be found in its various
+shapes in every civilisation, may be called “_The Worth While of
+Labour_.” Human energy would not be forthcoming, the work would not
+get done, unless at the very least the person doing the work got this
+Standard of Subsistence. In England to-day it is =set= for a man and
+his family at something like 35s. to 40s. a week. One way and another,
+counting for allowance in rent and overtime and so on, even the poorest
+labourer gets that, and if he did not get it labour would stop. Our
+civilisation would run to famine and plague rather than go below this
+minimum.
+
+Another way of putting it is this: Under the standard of subsistence
+in our civilisation in England a man must, on the average, produce
+something like £2 worth of economic values a week, otherwise it is not
+worth while living, not worth while going on.
+
+I say “on the average.” A great many people, of course, produce
+nothing. But there must be an average production of that amount to keep
+society going at all, merely in labour, that is, in human energy and
+brains. As a fact, of course, the average production is much higher.
+But it could not fall to _less_ than this without the production of
+wealth gradually coming to an end.
+
+It is very important to recognise this principle in Economics, for it
+is nearly always misunderstood, and it makes a great difference in our
+judgment of social problems. You often hear people speaking as though
+the subsistence of their fellows might fall to any level so long as
+they had so much weight of food and amount of warmth as would keep them
+alive. But it is not so. Every society has its own standard, and will
+rather have men emigrate or die than fall below it: and that standard
+is the basis of all production. _It must be satisfied or production
+ceases._
+
+
+2. INTEREST.
+
+Now, if this “Worth While of Labour” was all that had to be considered,
+things would be a great deal simpler than they are. Unfortunately,
+there is another “worth while” from which one cannot get away, and
+which makes the second division in the produce of wealth. This is the
+“Worth While of Capital”: called “Profit” or “Interest.”
+
+We must be careful not to mix up “Interest on Money,” that is, the
+word “interest” in its ordinary conversational use, with true economic
+interest. Interest on money does not really exist. It is either
+interest on _Real Capital_ (machines, stores, etc.) for which the
+money is only a symbol, or else it is usury, that is, the claiming of
+a profit which is not really there; and what usury is exactly we shall
+see later on. The thing to remember here is that there is no such thing
+in Economic Science as Interest on Money.
+
+We have seen that Capital cannot come into existence unless somebody
+saves. We have also seen that since it is always being consumed and
+must be replaced, the saving has got to go on all the time, if the
+production of wealth (to which capital is necessary) is to continue.
+
+Now, as you will see in a minute, capital cannot be accumulated without
+some motive. You only accumulate capital by doing without a pleasure
+which you might have at a certain moment, and putting it off to a
+future time. You go without the immediate enjoyment of your wealth in
+order to use it for producing further wealth. That means restraint and
+sacrifice.
+
+But restraint and sacrifice require some motive. Why should a man, or a
+society, do without a present enjoyment if the sacrifice is not to be
+productive of future good?
+
+What happens is this: A man says: “On my present capital I can produce
+so much wealth. If I accumulate more capital I shall, in the long run,
+have a larger income. I will therefore forgo my present pleasure. I
+will add to my capital and have more income in the future through my
+present self-restraint.” Or again: “If I don’t _keep up_ my capital
+by continual saving to replace what is consumed in production I shall
+gradually get _less_ income.”
+
+But here comes in a very important law of Economics called “_The
+Law of Diminishing Returns_.” After a certain point, capital as it
+accumulates, does not produce a _corresponding_ amount of extra wealth.
+It produces _some_ more, but not as much in proportion. For instance,
+if you till a field thoroughly with the use of so many ploughs and
+horses and so on, you will get such and such a return. If you add a
+great deal more capital in the shape of food for more labourers and
+more tillage till you treat the land as a sort of garden, you produce
+more wealth from that field; but though you may have doubled your
+capital you will not have doubled your income. You will only have added
+to it, say, half as much again. If you were to double your capital
+again, making four times your original amount, using a lot more food
+for labourers and a lot more implements, you would again have a larger
+produce, probably, but perhaps only double your original amount: _Four_
+times the original amount of capital, and only _twice_, say, the old
+income.
+
+So the process goes on; and in all forms of the production of wealth
+this formula applies, and is true: “_The returns of increasing capital,
+so long as the method of production is not changed, get greater in
+amount, but less in proportion to the total capital employed._”
+
+Men developing a certain section of natural forces get 10 per cent. on
+a small capital, perhaps 5 per cent. on a larger one; on a still larger
+one only 2½ per cent., and so on, if they apply that capital to the
+_same section_ of natural forces and in the _same manner_.
+
+Well, this advantage which a man gets by adding to his capital at the
+expense of present enjoyment can be measured.
+
+For instance, a man owning a farm and tilling it himself gets a
+harvest of 1,000 sacks of wheat. In order to get this result he must
+have capital at the beginning of every year--ploughs and horses, and
+sacks of grain and what not--worth altogether 10,000 sacks of wheat.
+His income, in wheat, is one-tenth of his capital. Every ten sacks of
+capital produces him an income of one sack a year. He says to himself:
+“If I were to plough the land more thoroughly and put on a lot more
+phosphates and slag and get new, improved machinery I might get another
+fifty sacks a year out of the land, but this new capital will have to
+be saved.”
+
+He carefully saves on every harvest, exchanging the wheat for the
+things he needs in the way of new capital, until, after a few years,
+the implements and the phosphates and slag and the rest on his land,
+and all his other capital is worth much more than it used to be.
+
+Instead of being worth only _one_ thousand sacks, his capital is now
+worth _two_ thousand sacks, and he gets the reward for his putting by
+and doing without immediate enjoyment in the shape of a larger harvest.
+But though he has doubled his capital he has not doubled his income.
+Instead of the old income of 100 sacks of wheat he is now getting 150
+sacks of wheat. Thus though his income is larger, the _proportion_ of
+that income to the total capital is less. For 1,000 sacks of capital he
+got 100 sacks of wheat at harvest; but now for 2,000 sacks of capital
+he only gets 150 sacks at the harvest. Or (as we put it in modern
+language), his income is no longer 10 per cent. on his capital, but 7½
+per cent. only. He has a larger income, but it is smaller in proportion
+to the capital invested.
+
+Now, although the 2,000 of capital invested is thus bringing him in
+a smaller _proportion_ of income than the old 1,000 did, he thinks
+it worth while: because he is at any rate getting more _income_; 150
+sacks instead of only 100. But there must come a time when he will no
+longer think it worth while to go on saving. Supposing he finds, for
+instance, that after taking all the trouble to accumulate and apply to
+his land capital to the value of 10,000 sacks of wheat, he gets only
+200 sacks, that is 2 per cent. annual reward for all this saving, he
+will not think it good enough, and he will stop saving. The point where
+he stops, the return below which he does not think it worth while to
+save, marks the _minimum profits of capital_. A man is delighted, of
+course, to have _more_ profit than this if he can. But the point is, he
+will not take _less_. Rather than make less than a certain proportion
+of income to his capital he will stop saving, and spend all he has in
+immediate enjoyment.
+
+It is this obvious truth which makes the second great division in the
+produce of wealth. You must, as we have seen, produce enough to keep
+labour going. That is, you must produce enough to satisfy the standard
+of subsistence in your society; _but you must also produce enough
+more to keep capital accumulating_. You must produce, over and above
+subsistence, whatever happens to be the amount of _profits_ for which
+capital will accumulate in any particular society (with us, to-day, it
+is about 5 per cent.).
+
+It is very important to observe that this second division, Profit, or
+Interest, must always be present, no matter how the capital is owned
+and controlled, no matter who gets the profit.
+
+Some people have thought that if you were to take capital away from the
+rich men who now own most of it and to give it to the politicians to
+manage for everybody, this division, Profit, would disappear. But it
+is not so. The people who were managing the capital for the benefit of
+everybody would have to tell the electors that they could not have all
+the wealth produced to consume as they chose: a certain amount would
+have to be kept back, and people would only consent to have a certain
+amount kept back on condition that they got an advantage in the future
+as a reward of their immediate sacrifice. Even if you had a Despot at
+the head of the State who cared nothing for people’s opinions, this
+division of profit would still be there; for it would be mere waste to
+accumulate capital at a heavy sacrifice to himself and his subjects,
+unless it produced a future reward.
+
+If the Despot said, “This year you must do without _half_ your usual
+amount of leisure and without _half_ your usual amounts, pay _double_
+for your cinemas and for your beer, and all that in order to earn one
+hundredth more leisure and amusements next year,” it would be found
+intolerable.
+
+So it comes to this: There are always present in the process of
+production two agents, Capital and Labour, and each of these must
+have in one form or another its “Worth While,” otherwise it won’t go
+on. You must satisfy the “Worth While of Labour” and you must satisfy
+the “Worth While of Capital.” If you do not, labour stops working and
+capital stops accumulating, and the whole business of production breaks
+down.
+
+    (Of course, we must be careful to distinguish between the case of
+    a private man increasing his investments and the general increase
+    of capital as applied to an unchanging area of natural forces. John
+    Smith having £1,000 invested at 5 per cent. can save another £1,000
+    and another and many more, and still get 5 per cent. But that is
+    because he is saving and makes up for others wasting, or because
+    his saving is so small a proportion of the total Capital of Society
+    that it has no appreciable effect. But if the total Capital of
+    Society be thus increased the Law of Diminishing Returns eventually
+    comes into play.)
+
+
+3. RENT.
+
+We arrive through this at the third division, _Rent_.
+
+Under some circumstances the “Worth While of Labour” and the “Worth
+While of Capital” can just barely be earned, and no more. Under those
+circumstances production will take place, but under worse circumstances
+it will not.
+
+For instance, where there is very light, sandy soil near a heath a man
+finds that by putting a thousand pounds of capital on to a hundred
+acres of land he can get his bare subsistence and £50 worth of produce
+over: 5 per cent. on his capital. It is worth his while to cultivate
+that land, just barely worth his while. He also possesses land on
+a still more sandy part over the boundary of the heath itself. He
+calculates that if he were laboriously to save another £1,000 and take
+in 100 acres of the new, worse land, he would make the bare subsistence
+of the labour employed upon it, but only £10 extra, that is, only 1 per
+cent. on his new capital. He would say: “This is not worth while,” and
+the too-sandy bit of land would go uncultivated.
+
+When the conditions are such that the capital and labour applied to
+them _just_ get their worth while and no more, those conditions are
+said to be “_on the margin of production_,” which means that they are
+the worst conditions under which men in a particular society will
+consent to produce wealth at all. Put them on conditions still worse,
+and they will not produce.
+
+Now the existence of this Margin of Production creates the third
+division in Wealth, which is called =RENT=.
+
+_Rent is the surplus over and above the minimum required by labour and
+capital out of the total produce._ (We must be careful, as we saw in
+the case of “Interest” not to confuse true economic Rent with “Rent”
+in the conversational sense. Thus what is called “the rent” of a house
+is part of it true economic rent, but part of it interest on the
+accumulated or saved wealth, the _Capital_ of its bricks and mortar and
+building.)
+
+Take the case of a seam of coal, which at one end of its run crops
+out on the surface, a couple of miles on is only 1,000 feet below the
+surface, but dips down gradually until, within twenty miles, it is
+10,000 feet below the surface.
+
+Under the conditions of the society in which the coal is being mined,
+and in the state which the science of mining has reached, it is found
+that, at a depth of 5,000 feet, this seam is _just_ worth while mining:
+that is, the capital which has to be accumulated for sinking the shafts
+and bringing the miners up and down from their work, and raising the
+coal to the surface, and providing subsistence for the miners at their
+work, _just barely_ gets the profit below which it would not be worth
+while to use it.
+
+A shaft sunk at this depth, for instance, and the machinery and stores
+cost £10,000, and when you get the coal to the surface that coal will
+pay the standard of subsistence of the labourers and leave £500 profit
+for capital; that is, 5 per cent. Capital will not accumulate if it
+gets less than 5 per cent. Labour will not be exercised if it gets less
+than its standard subsistence; therefore, the coal which lies farther
+along the seam, deeper than 5,000 feet, will be left untouched. It is
+not “worth while” to sink a shaft to try and get it. It is “below the
+Margin of Production.”
+
+[Illustration]
+
+What happens to the coal in the places where it gets nearer and nearer
+to the surface? Obviously, it is better worth while to sink shafts
+there than it is at 5,000 feet. You only want the same amount of labour
+for cutting the coal out, whether it is 5,000 feet below the surface
+or 2,000, and you want much less capital and labour in sinking the
+shafts and bringing the coal to the surface and getting the miners up
+and down. There is, therefore, a surplus. Thus with a shaft only 2,000
+feet deep you need, say, only £5,000 worth of capital to get £500
+worth of coal over and above the subsistence of the labourers. 5 per
+cent. on £5,000 is £250--so in that case there is a benefit of an extra
+£250 _after_ the “worth while” of Capital and Labour are satisfied.
+Over and above what is just the “worth while” of capital and labour for
+getting the coal you have in the shallower mines extra value, and that
+extra value gets larger and larger as the distance of the coal from the
+surface gets less and less. The deepest mine is on what we call “the
+margin of production.” It is just worth while to work it. The surplus
+values in all the shallower mines are called RENT. If a landlord owned
+the coal in quite a shallow part where it was within a thousand feet of
+the surface, he could say to the labourers and the owners of capital
+who were coming to dig it out: “The mine which is working at 5,000 feet
+is just worth your while. If you work here at 1,000 feet you will have
+a great deal more than 5 per cent. on your capital, and the subsistence
+of labour is just the same. All this extra amount of values, however, I
+must have, otherwise you shall not work my coal.”
+
+Since the Capitalists are content to accumulate capital for a return
+of 5 per cent. and the labourers to work for their subsistence, the
+extra amount is paid to the landlord. If one set of people refuse to
+pay it, there will always be another set of people who will be content
+to pay it and this extra amount or surplus is called “Economic _Rent_,”
+which is something, of course, much more strictly defined than, and
+different from, what we call Rent in ordinary conversation.
+
+Or again, take three farms of equal area but varying fertility. Each
+requires £1,000 capital to stock it and five labourers to work it.
+The £1,000 capital demands £50 a year profit. The five labourers need
+£500 in a year to meet their standard of subsistence. The poorest farm
+raises just £550 worth of produce a year. The next best raises £750,
+and the best one £950 worth. Then there is _no_ economic rent on the
+first; it lies on the “margin of production.” There is £200 economic
+rent a year on the second, and £400 on the third.
+
+       *       *       *       *       *
+
+We can sum the whole thing up and say that on the mass of all
+production there are three charges:
+
+
+1. =First, the charge for the subsistence of labour.=
+
+2. =Next, the charge of profits, or interest, for the reward of
+capital, that is, of saving, and lastly=
+
+3. =In varying amounts, rising from nothing at the margin of
+production, to larger and larger amounts under more favourable
+circumstances, the surplus value called Economic Rent.=
+
+
+These three divisions are always present whenever wealth is produced.
+The same man may get all three at once, as happens when a farmer works
+good land which is his own. Or again, when one man owns the fertile
+land and another man provides the capital, and yet another man provides
+the labour, the three divisions appear as three incomes of Labourer,
+Farmer and Landlord receiving separately Wages, Profit and Rent.
+Whether these divisions appear openly, paid to different classes of
+men, or whether they are concealed by all coming into the same hands,
+they are present everywhere and always. That is a fixed economic law
+from which there is no getting away.
+
+Always remember that these economic laws are in no way binding in a
+social sense. They are not laws like moral laws, which men are bound
+to obey. They are certain mathematical consequences of the very nature
+of wealth and its production, which men must take into account when
+they make their social arrangements. It does not follow because Rent or
+Interest are present that such and such rich men, or the State, or the
+labourers, have a right to them. That is for the moralist to decide;
+and men can in such matters make what arrangements they will. All
+economic science can tell us is how to distinguish between the three
+divisions, and to remember that they are inevitable and necessary.
+But we must wait until a little later on to discuss social rights and
+wrongs under Applied Economics and continue here for the present to
+confine ourselves to the Elements of economic law alone.
+
+
+
+
+V
+
+EXCHANGE
+
+
+=EXCHANGE= is really only a form of production, as we saw in the
+illustration of the island with salt and the main-land with meat. When
+the exchange of the things is of advantage to both parties it creates
+wealth for both, and profitable exchange is, therefore, when it takes
+place, only the last step in a general chain of production.
+
+But Exchange is so separate an action that students of Economics have
+agreed to treat it as a sort of chapter by itself, and we will do so
+here.
+
+The characteristic of Exchange is that you take a thing from a place
+where it has less value to a place where it has more value, thus adding
+an economic value to the thing moved and so creating wealth. In the
+same transaction you bring back something else against it, which has
+more value in your own place than it had in the place from which you
+took it, that is again adding an economic value and therefore creating
+wealth. We saw how this was in the case of the salt and the meat, and
+so it is with thousands upon thousands of exchanges going on all over
+the world.
+
+For instance, we in England have grown fond of drinking tea in the last
+200 years. But our climate will not allow us to grow tea. Tea can only
+grow in a very hot country.
+
+Now in very hot countries specially heavy labour upon metal work is not
+to be expected. Men are not fit for it. But in this cool climate men
+are fit for it, and also men here have through long practice become
+very skilful at working metal: smelting iron, for instance, and making
+it up into machines.
+
+Therefore, there is a double advantage to us and to the people who live
+in the hot countries where tea is grown if we _exchange_. We send them
+metal things that we have made and which are useful to them, and which
+they could hardly make themselves, or only with very great difficulty
+(and, therefore, at a great expense of energy), and we get from them
+tea, which we could not grow here except in hot houses: that is, at
+much more expense of energy than is needed in the countries where tea
+grows naturally out of doors.
+
+When there are present two or more objects of this kind, such that the
+exchange of them between two places will benefit both parties, we may
+speak of “_a potential of exchange_,” stronger or weaker according to
+the amount of mutual advantage derived.
+
+This word “potential” you will not find yet in many books, but it is
+coming in, for it is a very useful word. It is taken by way of metaphor
+from Physical Science. When there is a head of water over a dam, or a
+current of electricity of such and such an intensity, we talk of the
+“_potential_” and measure it. For instance, we say this electrical
+current is double the potential of that, or the head of water working
+such and such turbines is at double the potential of another head of
+water in the neighbourhood. In the same way we talk of a “potential” of
+exchange, meaning a tendency for exchange to arise between two places
+or people because it is of mutual benefit to both.
+
+Potentials of exchange come into existence not only through difference
+of climate or differences of habit, but also through what is called
+the _Differentiation of Employment_, which is also called Division of
+Labour.
+
+Thus two countries may be both equally able to produce, say, metal work
+and silk fabrics, and yet if one of them concentrates on getting better
+and better at metal work and the other on getting better and better
+at silk fabrics, it may well be that both will benefit by separating
+their jobs and exchanging the results. And this is true not only of two
+countries, but of individuals and groups.
+
+The cobbler does not make his own clothes. He makes boots, and by
+learning his trade and getting used to it makes them much better and in
+a much shorter time than other men could, and therefore makes a pair
+of boots with less expense of energy, that is, _cheaper_, than another
+man would. The tailor can say the same thing about making clothes.
+So it is to the advantage of the cobbler to exchange his extra boots
+against the extra clothes the tailor has made.
+
+In general: intelligent societies always tend to build up a very
+wide-spread system of exchange, because intelligent people tend to
+concentrate each on the job that suits him best, and also because
+intelligent people discover differences of climate and soil and the
+rest which may make exchange between two places a mutual advantage for
+both.
+
+It is indeed a great mistake to do as some modern people do, and put
+Exchange in front of Production. Thus you hear people talking as
+though the trade a country does, the total amount of its exports and
+imports, were the test of its prosperity, whereas the real test of its
+prosperity is what it has the power to consume, not what it manages to
+exchange.
+
+But still, though it comes at the end of Production and must never be
+made more important than the whole process of Production, Exchange is
+present universally wherever there is active production of Wealth. Thus
+the group of people who build ships are really exchanging what they
+make against the produce of other people who make clothes and grow food
+and build houses, and the rest of it; and in a highly-civilised country
+like ours much the greater part of the wealth you see consumed around
+you has gone through many processes of exchange.
+
+There are a few elementary Formulæ concerning Exchange which it is
+important to remember.
+
+
+1. =There is a Potential of Exchange, that is, exchange tends to take
+place, when of two objects the proportionate values are different in
+two different communities.=
+
+
+It is not very easy to understand the meaning of this until one is
+given an example. Supposing a ton of coal from England to be worth £2
+by the time it is delivered in Cadiz, and supposing that making a dozen
+bottles of wine in England, with all the apparatus of hot-house grapes
+and the rest of it, came to £5 of expense. Supposing that in Cadiz,
+from the small coal mines near by, they can produce coal at only £1 a
+ton, but on account of their climate they can produce a dozen of wine
+for a shilling. Then you get this curious situation:
+
+It pays the exporting country, England, to sell coal in Cadiz _at less
+than its English economic value_, and to import the wine from Cadiz.
+It pays your English owner of coal, although the values attaching to
+it by the time it has got to Cadiz are £2 a ton, to sell a ton of coal
+there for only £1, and to exchange that against the wine of Cadiz, and
+bring that back to England. At first sight it sounds absurd to say that
+selling thus at a lower value than the cost of production and transport
+can possibly be profitable. But if you will look at it closely you
+will see that it is so.
+
+If the Englishman had tried to make his wine at home it would have cost
+him £100 to make twenty dozen bottles, but when he has sold his coal
+at Cadiz for £1 he can with that £1 buy twenty dozen of wine and bring
+it back to England. He is much the wealthier by the transaction, and
+so is the man at Cadiz. The Cadiz man could have spent his energies in
+digging out a ton of coal near Cadiz instead of importing it, but the
+same energies used in making wine produce enough wine to get him rather
+more coal from England.
+
+
+2. The second Formula to remember about Exchange is this: =Goods do not
+directly exchange always one against the other, but usually in a much
+more complicated way, by what may be called= _Multiple Exchange_.
+
+
+Of course, the vehicle by which this is done is a currency, or _money_,
+which I will explain in a moment; but the point to seize here is that
+exchange is just as truly taking place when there is no direct barter
+of two things but a much longer and complicated process.
+
+For instance, a group of people called a Railway Company in the
+Argentine want a locomotive. A locomotive can be produced cheaper and
+better, that is, with less expenditure of energy for the result, in
+England than in the Argentine. But on the other hand, England wants
+to import tea. Now the Argentine grows no tea. What happens? How does
+England get the tea? That locomotive goes out to the Argentine. An
+amount of wheat sufficient to exchange against the locomotive goes
+against it, _not_ to England, but to Holland, a country which, like us,
+has to import a lot of wheat. As against the wheat sent to Holland,
+the people in Holland send, say, the cheeses which they make so well,
+on account of their special conditions, and the consignment goes to
+Germany. The Germans send out a number of rails equivalent to the
+number of cheeses and of the wheat and of the locomotive, as they are
+very good at making rails, and have specialised on it. But they do not
+send the rails to Holland. They send them to some Railway Company which
+has asked for them in Egypt. The Egyptian people send out an equivalent
+amount of cotton, which they can grow easily in their climate, and this
+cotton goes to mills in India, and against it there comes an equivalent
+amount of tea, but the tea does not go back to Egypt. It goes to
+England.
+
+There you have a circle of Multiple Exchange in which everybody profits
+by the exchange going on, although it is indirect. In the same way,
+of course, it is true that all of our domestic exchanges at home are
+multiple. If I write a book which people want to read, whereas I want
+not books but several other things, boots and fuel and furniture, I
+do not take my books round to the man who provides boots and to the
+one who provides fuel and to the one who provides furniture. I go
+through the process of selling my book to a publisher, and through an
+instrument he gives me, called a cheque (I will explain this when we
+come to the point of money), I can obtain boots and fuel and furniture
+to the amount of the value of the books of mine which my publisher will
+sell. Yet when exchange is thus highly indirect and multiple it is just
+as much exchange as though I went and bartered one book for one pair of
+boots with the cobbler.
+
+3. The third thing to remember about Exchange is of the utmost
+importance, because it has given rise to one of the biggest discussions
+of our English politics. The Formula runs thus:--
+
+
+=Other things being equal, the greatest freedom of exchange in any
+given area makes for the greatest amount of wealth in that area.=
+
+
+It ought to be self evident, but it is astonishing how muddled people
+get about it, when they become confused over details and cannot see
+the wood for the trees. It ought, I say, to be self-evident that if
+you leave Exchange quite free, anybody being at liberty to produce
+what he can produce best, and exchange it for things which other men
+can produce better than he, both parties will tend to be the richer by
+such freedom and the wealth of the whole country will be greatest when
+all exchanges in it are thus left free to be worked by the sense of
+advantage.
+
+If there were a law, for instance, preventing me from buying etchings,
+or preventing Jones, the etcher, from buying books, Jones would have to
+write his own books (or do without them, which is what he would do),
+and I should have to etch my own etchings, which would be exceedingly
+poor compared with the wonderful etchings of Jones. We are obviously
+both of us better off if we are left free to exchange what we can each
+make best. And so it is with all the countless things made in a State.
+
+This principle applies not only to a particular nation but to the whole
+world. If you left the whole world free to exchange the whole world
+would be the richer for it. And any interference with exchange between
+one nation and another lessens the total possible amount of wealth
+there might be in the world.
+
+So far so good; and, as I have said, such a truth ought to be
+self-evident. But here there comes in a misunderstanding of its
+application, and that misunderstanding has made any amount of trouble.
+It is so important that I must give it a separate division to itself.
+
+
+
+
+VI
+
+FREE TRADE AND PROTECTION
+
+
+Nations, as we know, put up tariffs against goods which come from
+abroad: That is, their Governments tax imports of certain goods and
+thereby interfere with the freedom of exchange. For instance, the
+French have a tax of this kind upon wheat. Wheat grown in France will
+cost, let us say, £1 a sack, but the Argentine can send wheat to France
+at an expense of only 10s. a sack, because the land there is new, and
+for various other causes. If the wheat from the Argentine were allowed
+to come in freely, and the French to export against it things which
+they can make more easily than wheat they would have more wheat at a
+less total expense; but they prefer to put a tax of ten shillings upon
+every sack, that is, to put up a barrier against the import of wheat
+from abroad, and so keep up the price artificially at home.
+
+When a nation does this with regard to any object that may be imported,
+if the object can also be produced within the nation (which it nearly
+always can) it is said to _protect_ that object, and the system of so
+doing is called =Protection=. The word arose from the demand of certain
+trades to be “protected” by their Governments without considering
+whether it was for the good of the whole nation or not. It obviously
+would be a very nice thing for people who breed sheep, for instance, in
+this country, if all mutton coming from the Colonies were taxed at the
+Ports, while the mutton grown inside the country were not taxed; for in
+this way the value of the mutton would rise in England, and the rise
+would benefit the sheep owners. But it would be at the expense of all
+the other people who did not grow sheep, and who would have to pay more
+for their mutton.
+
+As opposed to this system of _Protection_, and interfering with
+international exchange by a tariff, intelligent people a long lifetime
+ago began to agitate for what they called “=FREE TRADE=,” that is the
+putting of no tariff on to an import, or at least no tariff high enough
+to give an artificial price to the producer of the same thing at home.
+Thus, when England was completely Free Trading (which it was until the
+war) there was a tariff on tea; but that was not Protection, for those
+who would try to grow tea here would have to grow it in hot houses and
+at an enormous expense, and the tax on tea, though heavy, did not make
+it anything like so dear as to make it worth while to produce tea here.
+
+Another principle of Free Trade was that if it was thought advisable
+to put a tariff on to anything coming into the country which could be
+produced in the country, then you would have to put what was called
+“_an equivalent excise_” on the thing produced at home. For instance,
+in order to get revenue, one might put a tax of a 1d. on the pound
+on sugar coming from Germany, but, according to the doctrine of Free
+Trade, you must put a similar excise (that is, a home tax of 1d. on the
+pound) upon any sugar produced in England. If you did not do that you
+would be benefiting the sugar manufacturer in England at the expense
+of all other Englishmen, which would be unjust and also make England
+less wealthy because it would be inducing Englishmen to make sugar by
+offering them a reward and so take them away from some production for
+which they were better fitted.
+
+This idea, that Free Trade must necessarily be of advantage to
+everybody, and that it was only stupidity or private avarice which
+supported Protection, was very strong in England, and, in the form you
+have just read, it seems beyond contradiction.
+
+But if you will look closely at Formula No. 3 written in the last
+division on page 59 you will see that there is a fallacy hidden in this
+universal Free Trade theory. It is perfectly true that free exchange
+over any area tends to make the wealth of all that area greater, and
+if the area include the whole world, then free exchange all over the
+whole world, that is, complete Free Trade, would make the world as a
+whole richer.
+
+_But it does not follow that_ EACH PART _of the area thus made richer
+is itself enriched_. That is the important point which the Free Trade
+people missed, and it is this which supports, in some cases, the
+argument for Protection.
+
+If we allow free exchange everywhere throughout England, England as a
+whole will, of course, be the richer for it; but it is quite possible
+that Essex will be the poorer. If we allow Free Trade throughout all
+Europe, Europe will be the richer for it; but it is quite possible that
+some particular part of Europe, Italy or Spain, may be made poorer by
+the general process, and as they don’t want to be poorer they will
+by Protection and tariffs cut themselves off from the area of free
+exchange.
+
+
+=There are conditions where an interference with free exchange over
+the boundaries of a particular area make that area richer: when those
+conditions exist, there is what is called an Economic Reason for
+Protection.=
+
+
+So we may sum up and say that the theory of universal Free Trade being
+of benefit to the world as a whole is perfectly true. If we are only
+considering the world, and do not mind what happens to some particular
+area of the world, then the case for Free Trade is absolute. But if
+we mind a hurt being done to some particular area, such as our own
+country, more than we mind the hurt done to the world as a whole,
+then we should look at our particular conditions and see whether our
+country may not be one of those parts which will be drained of wealth
+by Free Trade and will be benefited by artificially fostering internal
+exchanges.
+
+In the second part of this book I will go into this again, and show
+how the discussion arose in England and what the arguments are for and
+against Universal Free Trade, and how true it is that a sound economic
+argument for Protection exists.
+
+
+
+
+VII
+
+MONEY
+
+
+When people begin exchanging by bartering goods one against another
+they at once find that there is an awkward obstruction to this kind of
+commerce; at least, they find it the moment there are more than two of
+them. It is this: That the person they are nearest to for the striking
+of a bargain may not want, at the moment, the particular thing they
+have to offer, but something else which a third party has who is _not_
+present.
+
+For instance: John is a hunter who has a surplus of skins to offer. He
+can get skins easier than other people. William, farming good soil, has
+surplus wheat to offer, and Robert, living near a wood and skilled as a
+woodman, has extra wood to offer. John wants wood. He takes one of his
+furs to Robert and says: “I will give you this fur for a cartload of
+wood.” But Robert may answer, “I don’t happen to want a fur just now.
+What I do want is a sack of wheat.”
+
+Either no transaction will take place on account of this hitch, or one
+of these two things will happen: Robert will take the fur from John
+and give him his cartload of wood, and will then take the fur over
+to William, and see whether William wants a fur in exchange for some
+wheat. Or John, very much wanting the wood, will go to William, and if
+William wants a fur, will exchange it for wheat; then John will take
+the wheat back to Robert, and exchange it for the wood that he wants.
+
+That is the sort of complicated and clumsy come-and-go that will be
+continually happening even with quite a few exchangers, and with
+quite a small number of articles. When it came to a great number of
+exchangers and a great number of articles the trouble would grow
+impossible and exchange would break down.
+
+But things arrange themselves thus: It is soon found that one of the
+things which are being exchanged is easier to carry than the rest, and
+perhaps lasts longer and also can be easily used in small or large
+amounts. For instance, in the case of our three producers, John,
+William and Robert, _wheat_ might easily appear in this character.
+People always want wheat sooner or later. It keeps well. It is not very
+difficult to transport, and you can divide it into quite small amounts,
+or lump it up in large amounts.
+
+So the chances are that when any of the three wanted to benefit by
+getting rid of some of his surplus produce he would get into the habit
+of taking _wheat_ in exchange, even if he did not want it for the
+moment. For he would say to himself: “I can always keep it by me and
+then exchange it against somebody else’s produce when that somebody
+else happens to want wheat”. Soon you would find each one of the three
+would be keeping a little wheat by him for the purpose of saving
+tiresome journeys to effect complicated double exchanges, and the wheat
+so used by all three of them would be in effect =MONEY=. It would be
+used as a common medium of exchange to facilitate the disposal of goods
+one against the other, without the elaborate business of making special
+barters, after long search.
+
+Mankind has found, in most cases, that where a very large number of
+articles were being exchanged _two_ in particular naturally lent
+themselves to this particular use, and those two were GOLD and SILVER.
+They have also used bronze, and even iron and in some places rare
+shells, and all sorts of other things. But gold and silver came to be
+for nearly all mankind, and are now for all civilised mankind, the
+objects which most naturally are used as money.
+
+The reason for this is as follows:
+
+The thing which naturally becomes money out of all the things that
+are exchanged will be that which best combines a certain number of
+qualities, some of which we have already mentioned, and of which here
+is a list.
+
+1. It must be portable, that is, a large weight of it must take up
+little room, so that quite considerable values can be taken easily from
+place to place--for money has to be always moving from one to another
+to effect purchases and sales.
+
+2. It must be easily divisible, for one is always wanting to use it in
+all sorts of amounts, very little and very large.
+
+3. It must keep. That is, it must not deteriorate quickly, or it would
+have very little use as Money.
+
+4. It must be of an even quality, so that, wherever you come across it,
+you may count on its being pretty well always the same, and therefore
+weight for weight of the same value.
+
+5. It must be more or less stable in value. It would be difficult to
+use as money some object which was very plentiful at one moment and
+suddenly scarce at another; very cheap this year, and very dear next
+year--such as are, for instance, agricultural products depending upon
+the season.
+
+Now of all objects Gold and Silver best fulfil all these requirements.
+Precious stones are more portable, value for value. A £1,000 worth of
+diamonds takes up less space and is less heavy than a £1,000 worth of
+gold. And precious stones are fairly stable in value and also keep
+very well; but they are not easily divisible. Again, they are not of
+the same standard value in all cases. They vary in purity. But gold
+and silver have all the qualities required. Gold hardly decays at all
+through the passage of time, and silver very little; and each, but
+especially gold, is valuable for its bulk, and its value is fairly
+stable, and each is easily divisible and can therefore be presented in
+any amount, from a tenth of an ounce to a hundred pounds weight.
+
+So, by the mere force of things, Gold and Silver became the Money
+of mankind. People kept gold and silver by them in order to effect
+their exchanges, and very soon a producer did not feel himself to be
+exchanging at all (in the sense of exchanging goods against goods), but
+thought of the affair as _Buying and Selling_. That is, of exchanging
+his produce, not against other produce, but against gold and silver,
+with the object of _later_ re-exchanging that gold and silver for other
+things that he needed.
+
+Money, once thus established, is called =A MEDIUM OF EXCHANGE= and
+also =CURRENCY= or =THE CIRCULATING MEDIUM=. It is called “currency”
+and “circulating” because it goes its round through society, effecting
+the exchanges, and this running around or circulating gives it its
+name: “That which is current” from the Latin for “running.” That which
+“circulates” from the late Latin word for “going the rounds.”
+
+When gold and silver become the money of mankind it is important to
+be able to tell at once the exact amounts you are dealing with. This,
+under simple conditions, is done by weighing; but it is more convenient
+to stamp on separate bits of metal what weight there is in each, and
+that is called “coining the metal.” All that a Government does when it
+makes a sovereign is to guarantee that there is so much weight of gold
+in the round disc of metal which it stamps.
+
+Money does not only fill this main function of being a medium of
+exchange, that is, of making a vast quantity of complicated exchanges
+possible, it also has great social value as a measurer or standard,
+and soon after money comes into use men begin to think of the economic
+values of things in terms of money: that is, in what we call “=Prices=.”
+
+All things which men produce are fluctuating the whole time in value.
+There is now rather more of one article, and now rather less. A sack
+of barley at one moment will exchange exactly against a sack of wheat,
+and then in a few weeks against rather less than a sack of wheat.
+Meanwhile, where it used to fetch a lamb in exchange it may, in a
+few months, need two sacks for a lamb; and so with all the hundreds
+and thousands of other objects. When we have money the whole mass of
+transactions is referred to the current medium, and that is of immense
+social value. For no one could keep in his head all the changing
+exchange values of a multitude of articles one against the other,
+but it is easy to remember the exchange values against one standard
+commodity, such as gold. And whatever the exchange value is in gold we
+call the =price= of the article.
+
+For instance, when you say that a house is worth £500, that that is the
+“_price_” of the house, you mean that the amount of gold you would
+have to exchange to get it is about Ten Pounds weight of the metal.
+And when you say that the price of a ticket to Edinburgh is £4, you
+mean that the service of taking you to Edinburgh in the train will be
+exchanged against about an ounce of the metal gold.
+
+       *       *       *       *       *
+
+I now come to a most difficult point about money and prices which is
+rather beyond the elements of Economics, but which it is important to
+have some idea of, though it is very difficult.
+
+There is a very interesting study in Economics called “_The Theory
+of Prices_,” showing why _all prices on the average_ (what is called
+“General Prices,” that is the value of all goods _in general_ as
+measured against gold) sometimes begin to go up and at other times
+go down: Why goods as a whole begin to get dearer and dearer in gold
+money, or cheaper and cheaper. It is a complicated piece of study,
+and people dispute about it. But the general rules would seem to be
+something like this: The exchange value of things against gold, or
+the value of gold, against the things for which it exchanges (that is
+prices) is made up of two things: _First_, the amount of gold present
+to do the work of exchange; _Secondly_, the amount of work you can make
+it do in exchange: The pace at which you can get it to circulate. It is
+obvious that one piece of gold moving rapidly from hand to hand will
+do as much work in helping exchanges to be carried out as ten pieces
+moving ten times more slowly.
+
+If, for any reason, the total amount of gold becomes suddenly smaller
+or suddenly larger, or if the pace at which it is used changes very
+quickly, then prices fluctuate violently.
+
+Supposing you could, in a night, take away half the gold in
+circulation. Then, of course, the remaining gold would become much more
+valuable. In other words, prices would fall. For if an ounce of gold is
+rarer and more difficult to get than it was, it will exchange against,
+that is, “buy” more than it did; this means that “the price of things
+has fallen.” We used to say, for instance, that a quarter of wheat was
+worth an ounce of gold. But if we suddenly change the amount of gold
+so that gold becomes much rarer and more valuable, perhaps an ounce of
+gold will buy not one quarter but two. The price of one quarter used to
+be an ounce of gold. Now the price is only half an ounce of gold. Wheat
+has become cheaper in proportion to gold, and “prices,” that is, values
+measured in gold, in money, have fallen.
+
+The same thing would happen if you did not lessen the amount of gold in
+circulation but made the circulation much more sluggish. The amount of
+gold in circulation would be the same, but as it went its rounds more
+slowly it would be more difficult to get a certain amount of gold in
+any one place at any one time.
+
+Prices, then, depend upon the actual amount of money that is present to
+do the work, _and_ the pace at which it is made to go the rounds: or
+(to put it in technical terms), on the amount of the currency _and_ its
+“_efficiency in circulation_.”
+
+Now, there is in the human mind a very strong tendency to keep prices
+stable. We think of them by a sort of natural illusion as though they
+were absolute fixed things. We think of a pound, and a shilling, and
+five pounds as real, permanent, unchanging values. If we find that
+quite suddenly five pounds will buy a great deal more than it used
+to, or quite suddenly a great deal less, if we are met by a sudden
+and violent fluctuation in prices of this kind, our minds tend,
+unconsciously, to bring things back, as much as possible, to the old
+position; and I will show you how this tendency works in practice.
+
+Supposing a very great deal of gold, for some cause, were to disappear.
+People suddenly find prices falling very rapidly. A man with a £1,000 a
+year can buy twice as many things, perhaps, as he used to buy. On the
+other hand, a man with anything to sell can only get half the amount he
+used to get. For gold has become rarer, and therefore more valuable as
+against other things.
+
+What is the result? _The result is a very rapid increase in the pace at
+which the gold circulates._ Every purchaser feels himself richer. The
+gold is tendered for a much larger number of bargains, and though the
+mind, by this illusion it has of gold value as a fixed thing, cannot
+bring the actual gold back, what it can do is so to increase the second
+factor, =Efficiency in Circulation=, as largely as to make up for the
+lack of gold; and under the effect of this prices will gradually rise
+again. In the same way, if the mass of current medium by some accident
+becomes suddenly increased that should lead to an equally sudden rise
+in prices; but the unconscious tendency of the human mind to keep
+prices stable sets to work at once. Efficiency in Circulation slows
+down, the new large amount of currency works more sluggishly, and,
+though prices rise, they do not rise nearly as much as the influx of
+money might warrant.
+
+We see, therefore, that the factor in the making of prices called
+“Efficiency in Circulation” works like a sort of automatic governor,
+tending to keep prices fairly stable; but of course it cannot prevent
+the gradual changes, and sometimes it cannot prevent quite sharp
+changes, as we shall see a little later on. For the moment, the
+interesting thing to note about Efficiency in Circulation is that we
+owe to this factor in prices the creation of _paper money_.
+
+If, with only a certain stock of gold to work on, business rapidly and
+largely increases, if a great many more things are made and exchanged,
+then, as the gold will have a lot more work to do--and so become more
+difficult to obtain in any one time or place--that should have the
+effect, of course, of making it more valuable, that is, of lowering
+prices.
+
+Now with the beginnings of modern industry, about a hundred and fifty
+years ago, a vastly greater number of things began to be made than had
+ever been made before, and the number of exchanges effected multiplied
+ten, twenty and a hundredfold. The stock of gold, though it was
+increased in the nineteenth century by discoveries in Australia and
+California, and later in South Africa, would have been quite unable to
+cope with this flood of new work, and prices would have fallen very
+much indeed, had it not been for the creation of _Paper Money_. Paper
+money was a method of immensely increasing Efficiency in Circulation.
+
+This is how it worked.
+
+A Bank or a Government (but especially the Bank of England, with the
+guarantee of the Government) would print pieces of paper with the
+words: “I promise to pay to the bearer of this Five Pounds.” Anyone
+who took one of these pieces of paper to the Bank of England could get
+Five Golden Sovereigns. But since this was publicly known, people were
+willing to take the piece of paper _instead of_ the five sovereigns.
+
+If you sold a man a horse for fifty pounds, you were just as willing to
+take ten five pound notes for him as fifty sovereigns. They were more
+convenient to carry, and you knew that whenever you wanted the actual
+gold you had only to go to the bank and get it.
+
+Because people were thus willing to be paid in paper instead of in
+the actual gold, a large number of notes could be kept in circulation
+at any one time, and only a small amount of gold had to be kept in
+readiness at the Bank to redeem them. In practice it was found that
+very much less gold than the notes stood for was quite enough to meet
+the notes as they were brought in for payment. Much the most of the
+note circulation went on going the rounds, and in normal times it took
+a long time for a note on the average to be brought back to the Bank.
+
+You can see that this dodge of paper money had the effect of increasing
+the total _amount_ of the current medium in practice, and of greatly
+increasing its Efficiency in Circulation. Moreover, it made the
+Efficiency in Circulation very elastic, because in times of quiet
+business, more notes would go out of circulation and be paid into
+the bank, while in time of active business more notes would go on
+circulating.
+
+_So long as every note was redeemed in gold every time it was brought
+to the bank, so long as the promise to pay was promptly kept, the money
+still remained good; the paper currency did not interfere with the
+reality of the gold values, there was no upsetting of prices, and all
+went well._
+
+Unfortunately, Governments are under a great temptation, when they
+have exceptionally heavy expenses, to falsify the Currency. People get
+so much in the habit of trusting the Government stamp on paper or metal
+that they take it as part of nature. What the Government is really
+doing when it coins a sovereign is giving a guarantee that this little
+disc of yellow metal contains 123 grains of gold with a certain known
+(and small) amount of alloy to make the gold hard. When the Government
+has to pay a large amount in wages, or for its Army and Navy, or what
+not, it is tempted to put in less gold and more alloy and keep the old
+stamp unchanged, and that is called “Debasing the Currency.”
+
+For instance, the Government wants a hundred tons of wheat to feed
+soldiers with, and the price of wheat in gold at that moment is Ten
+Sovereigns a ton. It says to a merchant, “If you will give me a
+hundred tons of wheat, I will give you a thousand sovereigns.” But
+when it comes to paying the thousand sovereigns, instead of giving a
+thousand coins with 123 grains of gold in each, it strikes a baser
+coin with only a hundred or less than a hundred grains in each, and
+pays the merchant with these. It is a simple form of cheating and
+always effective, because the merchant thinks the sovereign is genuine.
+Only when these bad sovereigns get into circulation they naturally
+find their level in gold; for people begin to test them, and find
+that they have not got as much gold in them as they pretend to have.
+Then, of course, prices as measured in this new base coin rise. If the
+Government wants to buy another hundred tons of wheat it must offer
+more than a thousand of the base coins; it must offer, say, thirteen
+hundred of them. But again it is tempted to put even less gold into
+the coins with which it pays for the second lot of wheat, and so the
+coin gets baser and baser, until at last, perhaps, a sovereign will not
+really be worth half what it pretends to be. Governments in the past
+have done this over and over again, but it was not until our time that
+the worst form of debasing the coinage came in.
+
+It came in as a result of the Great War, and we are all suffering from
+it to-day. This last and worst form of debasing coinage worked, not
+through cheating about the metal, but through a trick played with paper
+money.
+
+Before the war, if you got a Five Pound note saying “I promise to pay
+Five Pounds” the promise was kept and the five golden sovereigns were
+there for you whenever you went with your note to the bank and asked
+for them; but when the Government had these very heavy expenses to
+meet on account of the war, they first began making difficulties about
+paying when people brought their paper to the bank, and at last stopped
+paying altogether. At the same time, they did everything they could to
+get the gold out of private people’s hands and to make them use paper
+money instead. The consequence was that, people being so accustomed
+to think of a paper guarantee of the Government exactly as though it
+were real money, readily took to the new notes and used them as money,
+thinking of these wretched bits of paper exactly as though they were
+so many golden sovereigns. The Government could go on printing as many
+bits of paper as it liked, and they would still be used as though they
+were real money. So long as the amount of paper printed was not more
+than _would have been printed_ when the notes were redeemable, and when
+the currency was on a true “_Gold Basis_,” no harm was done; but of
+course it paid the Government to go on printing a great many more notes
+than that, because, when it could make money thus cheaply, it could pay
+for anything, however great the expense; but at the cost, of course, of
+debasing the currency more and more.
+
+This kind of money, forced upon people, pretending to be the same as
+real money but actually without a Gold Basis, is called _Fiat_[1]
+money, and that is the kind of money the whole world has to-day, except
+those countries which did not take part in the Great War, and the
+United States which did not ever give up its gold basis.
+
+Of the different European fighting countries, however, ours did best in
+this matter. We are still living on Fiat money, and we have much more
+of it than we ought to have. But the French have more in proportion, so
+that prices measured in _their_ money are now (1923) more than three
+times what they would be in gold. The Italians are worse off still.
+With them it is four times. With the Germans it is millions of times,
+and their currency has quite gone to pieces; a paper coin in Germany
+is worth (at the time I write, October, 1923) _ten million_ times less
+than the real metal coin which it is supposed to represent.
+
+This is one of the very worst things that has happened on account of
+the war, for as the money now being used all over Europe is not real
+money, no one feels certain whether he can get his debts really paid,
+or whether his savings are safe, or whether a contract made for a
+certain payment a few months hence will be really fulfilled or not. A
+man may lend a thousand francs or marks or pounds for a year, and then
+at the end of the year, when he is to be paid back, he may be paid in
+coin which has got so much worse that he is really receiving only half
+or a tenth or a thousandth of the real value he lent. A man in Germany
+sells a hundred sheep for so many marks, to be paid for in a month; and
+at the end of the month the marks will only buy ten sheep!
+
+This piece of swindling, which has been the note of the last five
+years, is the first point we have touched on so far where a problem in
+Economics and the study of economic law brings one up against questions
+of right and wrong.
+
+It is morally wrong for the Government to swindle people out of their
+property by making false money. What is the way out, allowing for
+Economic Law? It is morally wrong that some men should starve while
+other men have too much: allowing for Economic Law, what is the way out
+of such evils?
+
+As you go on in the study of Economics you find quantities of questions
+where you have to decide whether economic laws render possible
+political actions which you would very much like to undertake, and
+which seem right and just. Many such actions, though one would like to
+undertake them, cannot be undertaken because our study of Economics
+has shown us that the consequences will be very different from what we
+hoped.
+
+On the other hand, a great many people try to get out of what it is
+their duty to do politically by pleading that Economic Law prevents it.
+
+Before ending these notes, then, we must go into the main questions
+of this kind, and see what there is to be said, in the light of
+economic knowledge, for our present system of society, which is called
+=Capitalism=; for other systems in the past such as =Slavery=; for
+=Private Property=; for the various theories of =Socialism=; for and
+against =Usury=, and so on.
+
+It is necessary to go into these points even in the most elementary
+book on Economics, because the moment one begins the practical
+application of one’s economic science these questions at once arise; to
+answer them rightly is the most important use we can make of economic
+knowledge.
+
+
+
+
+Part II
+
+POLITICAL APPLICATIONS
+
+
+
+
+INTRODUCTION
+
+
+So far I have been putting down the elements of Economics just as one
+might put down the elements of Arithmetic. But Economics have, just
+like Arithmetic, a _practical application_: if it were not for this,
+there would be no real use in studying Economics at all.
+
+For instance: we find out, when we do the elements of Arithmetic, that
+solid bodies vary with the cube of their linear measurements. That is
+the general abstract principle; but the _use_ of it is in real life
+when we come (for instance) to measuring boats. We learn there from
+Arithmetic that, with boats of similar shape, a boat twice as long as
+another will be eight times as big; it is also by using the elements of
+Arithmetic that we can keep household accounts and do all the rest of
+our work.
+
+It is precisely the same with Economics. We are perpetually coming upon
+political problems which Economics illustrate and to which economic
+science furnishes the answer--or part of the answer--and that is where
+the theoretical elements of Economics have practical importance.
+
+For instance: once we know the elementary economic principle that
+rent is a surplus, we appreciate that it does not enter into cost
+of production. We do not try to make things cheaper by compulsorily
+lowering rent. Or, again, when we have learned the nature of money we
+can appreciate the dangers that come from using false money.
+
+In these political applications of Economics we also come upon what
+is much more important than mere politics, and that is the question
+of right and wrong. We see that such and such a thing ought to be so
+as a matter of justice; but we may blunder, as many great reformers
+have blundered, in trying to do the right thing and failing to do it,
+because we have not made a proper application of our economic science.
+And the opposite is also true: that is, a knowledge of Economics
+prevents their being wrongly applied by those who desire evil. Many
+men take refuge in the excuse that, with the best will in the world,
+they cannot work such and such a social reform because economic science
+prevents their doing what they know to be right. If we know our
+Economics properly we can refute these false arguments, to the great
+advantage of our own souls and of our fellow-men.
+
+For instance: it is clearly our duty to-day to alleviate the fearful
+poverty in which most Englishmen live. A great many people who ought to
+know better say, or pretend, that economic laws prevent our doing this
+act of justice. Economic laws have no such effect; and an understanding
+of Economics clears us in this matter, as we shall see later on.
+
+We have hitherto been following the statement and examination of
+economic laws: that is, the _theoretical_ part of our study and its
+necessary foundation. Now we go on to the _practical_ part, or “Applied
+Economics,” which is the effect of those laws on the lives of men.
+
+Before leaving this Introduction I think it is important to get quite
+clear the difference between what is called “theoretical” study
+and the practical application of such study. People are very often
+muddle-headed about this, and the more clearly we think about it the
+better.
+
+A theoretical statement is a statement following necessarily and
+logically from some one or more known first principles. Thus, we know
+that two sides of a triangle are longer than the third, so we say it
+follows _theoretically_ that a straight road from London to Brighton
+is quicker motoring than going round by Lewes. But the number of first
+principles at work in the actual world is indefinitely large. Therefore
+one must test any one theoretical conclusion by practice: by seeing how
+it works. Because, side by side with the one or two first principles
+upon which our theory is built, there are an indefinitely large number
+of other first principles which come into play in the real world.
+Thus there is, in motoring, the principle that speed varies with road
+surface. So the way round by Lewes may be quicker than the straight
+road if it has a better surface. There is yet another principle that
+speed is checked by turnings in the road, and it may prove that on
+trial the two ways are about equal.
+
+Or again: we know that the tidal wave is raised on either side of the
+earth, and that there is, therefore, about twelve hours of even ebb and
+flow, six hours each on the average and taking the world as a whole:
+because the earth takes twenty-four hours to go round.
+
+But if you were to act upon that first principle _only_ in any one
+part of the world, and to say without testing the thing in practice,
+“I can calculate the tide theoretically,” you would very often wreck
+your ship. For many other principles come into play in the matter of
+the tide besides this twelve-hour period. In one case the tide will be
+delayed by shoals or by the current of a river. In another there may be
+two or three tides meeting. In a third the sea will be so locked that
+there will be hardly any tide for many hours, and then a rush at the
+end--and so on.
+
+Now it is just the same with Economics. Your economic first principle
+makes you come to such and such a _theoretical_ conclusion. But there
+are a lot of other first principles at work, and they may modify the
+effect _in practice_ to any extent. When people object to “theoretical
+dreaming,” as they call it, they mean the bad habit of thinking
+that one conclusion from one particular set of first principles is
+sufficient and will apply to any set of circumstances. It never does.
+One has always to watch the thing in practice, and see what other
+forces come in.
+
+In the political applications of economic science we have to deal with
+the effect of human society upon economic law. For instance: economic
+law tells us that, given a certain standard of living for labour--the
+“worth while” of labour--and a certain minimum profit without which
+capital will not accumulate--the “worth while” of capital--there is, as
+we have seen, a lowest limit of production; a set of conditions below
+which production will not take place. Land which is below a certain
+standard of fertility will not be farmed; a vein of metal below a
+certain standard of yield will not be mined under such and such social
+conditions. But all circumstances in which production has greater
+advantages than this lowest limit produce a surplus value called
+“Rent.” That is an economic law, and it is always true.
+
+But it does not follow that the owner of the land, for instance,
+will get the full economic rent of the land. There may be customs in
+society, or laws, by which he is compelled to share with the tenant.
+The theoretical economic rent is there all right, but one cannot deduce
+from this truth that the landlord will necessarily and always get the
+whole of it. And so it is with every other political application.
+
+       *       *       *       *       *
+
+Having said so much by way of Preface, let us turn to the particular
+problems, and first of all consider the idea which underlies all
+practical economic conclusions, the idea of =Property=.
+
+The very first governing condition of economic production and
+distribution in the real world is the condition of _control_. Who
+_controls_ the process of production in any particular Society? Who
+in it owns (that is, has the right and power to use or leave idle, to
+distribute or withhold) the means of production, the stores of food
+and clothing, and houses and machinery? On the answer to that question
+depends the economic structure of a society. This control is called
+_Property_, and as the first thing we have to study in practical
+Economics is the character of _Property_, we will make that the first
+division of our political applications.
+
+
+
+
+PROPERTY
+
+THE CONTROL OF WEALTH
+
+
+All the political application of Economics--that is, all the
+application of Economic Science to the conduct of families in the
+State--turns on The Control of Wealth, and of the things necessary to
+make wealth.
+
+The first thing to grasp is that _someone_ must control every piece of
+wealth if it is to be used to any purpose. Every bundle of economic
+values in the community must be under the control of some human
+will; otherwise those pieces of wealth “run to waste,” that is, are
+consumed without use to mankind. For instance, a ton of threshed wheat
+represents a bundle of economic values. It represents a piece of wealth
+equivalent, in currency measure, to say £16. If no one has the right
+to decide upon its preservation and use, when and how it is to be kept
+dry and free from vermin, when and how it is to be ground and the flour
+made into bread, then it will rot or be eaten by rats, and in a short
+time its economic values will have disappeared. It will be worthless.
+The £16 worth of wealth will have been “consumed without use”; in plain
+language, wasted. But if wealth were all wasted humanity would die
+out. So men must, of necessity, arrange for a _control_ of all wealth,
+and this they do by laws which fix the control of one parcel of wealth
+by one authority, of another by another; men make laws allowing such
+control by some people and preventing attempted control by other people
+not authorised. This lawful control over a piece of wealth we call
+_Property_ in it.
+
+       *       *       *       *       *
+
+Thus, the coal in your cellar which you have bought is by our laws your
+property. It is for you to burn it as you want it and when you choose.
+If another person comes in and takes some of it without your leave, to
+burn it as _he_ chooses, he is called a thief and punished as such. The
+coal in the Admiralty Stores is State property. The State has the right
+to decide into what ships it is to be put and how and when it is to
+be burnt, and so on. But whether the control is in private hands such
+as yours, or in the naval authorities who are officers of the State,
+control there must always be.
+
+When people say that they want to “abolish property,” or that “There
+ought to be no property,” they mean _Private_ property: the right of
+individuals, or families, or corporations to control wealth. Property
+in the full sense, meaning the control of wealth by _someone_, whether
+the State, or private individuals, or what not, is inevitable, and
+is necessary in every human society. So, granting that property must
+exist, we will first examine the various forms it may take.
+
+At the beginning of our examination we noticed that wealth, owned
+and controlled by whoever it may be--the State, or an individual,
+or a corporation--is of two kinds. There is the wealth which will
+be consumed in enjoyment and the wealth which will be consumed in
+producing future wealth.
+
+The wealth which will be consumed in producing future wealth is, as we
+have seen, called _Capital_. For instance: if a man has a ton of wheat
+and eats half of it while he is doing nothing but taking a holiday, or
+doing work which has some moral but no material effect--that is not
+Capital. But if he uses the other half to keep himself alive while he
+is ploughing and sowing for a future harvest, and keeps a little of it
+for the seed of that harvest, all that he so uses is _Capital_. Since
+control of wealth is necessary, no matter of what kind the wealth be,
+it is clear that there must be property not only in what is about to
+be consumed in enjoyment but also in Capital. Someone, then, must own
+Capital.
+
+But here comes in a very important addition. The fertility of land,
+space upon which to build, mines of metal, water power, natural
+opportunities of any kind and natural forces, _though they are not
+wealth_,[2] are the necessary conditions for producing wealth. Someone,
+therefore, must control these also: someone must have the power of
+saying, “This field shall be ploughed and sown thus and thus. This
+waterfall must be made to turn this turbine in such and such a spot,
+and the power developed must be applied thus and thus.” For if no one
+had such power the fertility of the land, the force of the stream,
+would be wasted.
+
+Property, therefore, extends over two fields, one of which is itself
+divided into two parts. A.--It extends over natural forces. B.--It
+extends over wealth, and, in the case of B, wealth, it extends over B.1
+wealth to be used for future production (which kind of wealth, when it
+is so used, is called Capital), and also B.2 wealth which is going to
+be consumed without the attempt to produce anything else: consumed,
+as the phrase goes, “in enjoyment.”[3] Natural forces may be grouped,
+as we have grouped them in the first part of this book, under the
+conventional term “Land.” So Property covers Land and Capital, as well
+as Wealth to be consumed without the attempt to produce other wealth.
+You may put the whole thing in a diagram thus:--
+
+[Illustration]
+
+In studying the social effects of Property it is convenient to group
+together _Land_ and that part of wealth which is used for further
+production and is called _Capital_, and to call the two “_the means of
+production_”: because, in a great many social problems the important
+point is not who owns the Capital separately or the land separately,
+but who owns the whole bundle of things which constitute the “Means of
+Production,” without which no production can take place.
+
+For instance: Supposing a man owns a hundred acres of fertile land,
+that is his property, and though we call it wealth in ordinary
+conversation it is not real wealth at all. It is only the opportunity
+for producing wealth. If no one worked on that land, if no one even
+worked so little as to take the trouble of picking fruit off the trees
+or cutting the grass or looking after animals on it, it would be worth
+nothing. Supposing another man to own the stores of food and the houses
+and the clothing necessary for the livelihood of the labourers on the
+land, and also the horses and the ploughs and the stores of seeds
+necessary for farming, then that man owns the Capital only. But to the
+_labourers_ the important thing is that someone else owns the “Means
+of Production,” _without which they cannot live_, and they are equally
+dependent whether one or many control or own the _Means of Production_
+in any particular case. _Their_ condition has for its main character
+_the fact that they do not own the “Means of Production.”_
+
+Labour must be kept going. That is, human energy, for producing wealth
+from land, while it is at work, waiting between one harvest and
+another, will consume part of the stores of food and some proportion
+of the housing (which is a perishable thing, though it only perishes
+slowly) and of the clothing, and of the seed, etc. So we have to
+examine the various ways in which labour (which is not wealth) and land
+(which is not wealth) and capital (which _is_ wealth) may be controlled.
+
+There are three main types of human society which differ according
+to the way in which control is exercised over these three factors of
+Labour, Capital and Land. These three types are:--
+
+
+1. =The Servile State=: that is, the state in which the material Means
+of Production are the property of men who also own the human agents of
+Production.
+
+2. =The Capitalist State=: that is, the state in which the material
+Means of Production are the property of a few, and the numerous human
+agents of Production are free, but without property.
+
+3. =The Distributive State=: that is, the state in which the material
+means of Production are owned by the free human agents of Production.
+
+
+There is also a fourth imaginary kind of state which has never come
+into being, called the Socialist or Communist State. We will examine
+this in its right place, but the only three _actual_ states of which we
+know anything in history and can deal with as real human experiences,
+are these three just described: the _Servile_ State, the _Capitalist_
+State, and the _Distributive_ State.
+
+But, before going farther, we must get hold of a very important
+principle, which is this:--
+
+
+=The nature of an economic society is not determined by its
+arrangements being universal, that is, applying without exception to
+all the families of the State, but only by their applying to what is
+called= _The Determining Number_ =of the families of the State: that
+is, in so great a proportion as to colour and give its form to the
+whole society.=
+
+
+No one can exactly define the amount of this “determining number,”
+but we all know in practice what it means. For instance: we say the
+English are a tall race, from 5½ to 6 feet high. But that does not mean
+necessarily that the majority of the people are over 5½ feet. You have,
+of course, to exclude the children, and there are a great number of
+very short people and a few very tall people. It means that the general
+impression conveyed when you mix with English people--the size of the
+doors and the implements with which men work, and the clothes that are
+produced, and the rest of it--turn upon the general experience that you
+are dealing with a race of about that size--5½ to 6 feet. Or again, you
+say that the _determining_ number or proportion of our society speaks
+English. That does not mean that they all speak English. Some are dumb;
+some speak Welsh or Gaelic. Many speak with such an accent that others
+with a different accent find it difficult to understand them. Yet it is
+true to say that the society in which we live speaks English.
+
+Now it is exactly the same with the economic conditions of society. You
+may have a society in which there is a certain number of slaves, and
+yet it is not a slave-owning society, because the number of free men
+is so great as to give a general tone of freedom. Or you have, as we
+have in England, a great deal of property owned by the State--barracks
+and battleships and arsenals, some of the forests, and so on--but we do
+not say that England is economically a State-owned society, because the
+_determining_ proportion of property is not owned by the State but by
+private people. The general effect produced is one of private ownership
+and not of State ownership.
+
+One more principle must be set down before we go farther, and that is
+that almost any society is mixed. A society of which the determining
+proportion is slave-owning will yet certainly have a proportion of free
+men; for if it did not there would be no one to own the slaves. In the
+same way what is called a Capitalist Society, which I will describe in
+a moment (and which is the society in which we now live in England) has
+a great number of people not living under purely capitalist conditions.
+It is mixed.
+
+But, though only a _determining number_ is required to mark the
+character of a particular society, and though every society is _mixed_
+in its character, it remains true that all societies we know of, in the
+past or the present, fall into one of these three groups--the Servile
+(that is, slave-owning), the Capitalist, and the Distributive.
+
+The definition of these three systems is as follows:--
+
+1. In the Slave-owning Society, or SERVILE STATE, a certain minority
+owns a determining amount of the wealth and also of land--that is,
+the means of production (land and capital) and the wealth ready for
+consumption in enjoyment. The rest of the community is compelled by
+positive law to give its labour for the advantage of these few owners;
+and this rest of the community are, by economic definition, (whether
+they call themselves by the actual name or not) slaves: that is, they
+can be compelled to work for the owners, and can be punished by law if
+they do not work for the owners.
+
+2. In the CAPITALIST STATE a determining number of the families or
+individuals are free; that is, they cannot be compelled by positive law
+to work for anybody. They are at liberty to make a contract. Each can
+say to an owner of land or capital: “I will work for you for so much
+reward, such and such a proportion of the wealth I produce. If you will
+not give me that I will not work at all,” and no one can punish him for
+the refusal.
+
+But the mark of the Capitalist State is that a determining amount of
+land and capital is owned by a small number of people, and that the
+rest of the people--much the greater number--though free, cannot get
+food or housing or clothing except in so far as the owners of these
+things (that is, of the means of production) choose to give it them. In
+such a state of society the people who own nothing, or next to nothing,
+are free to make a contract and to say: “I will work on your farm” (for
+instance) “if you will give me half or three-quarters of the harvest.
+If you will not, I will not work for you.” But this contract is bound
+by a very hard condition, for if they push their refusal to the limit
+and continue not to work they will starve, and they will not be able
+to get housing against the weather or clothes to wear.
+
+We are living to-day, in England especially, in such a Capitalist
+State. In such a state the free men who contract to sell their labour
+often have a certain very small proportion of things on which they can
+live for a short time. They have a suit of clothes and perhaps a little
+money with which they can purchase a few days’ livelihood--some of them
+more, some of them less. But the tone or colour of the society is given
+by the fact that _the great majority, though free, are dispossessed of
+the means of production, and therefore of livelihood, and that a small
+minority controls these things_.
+
+The word “Capitalism” does not mean that there exists capital in such
+a society. Capital exists in all societies. It is a necessary part of
+human society and of the production of wealth, without which no society
+can live at all. The word “Capitalism” is only “shorthand” for the
+condition we have just described: a condition where capital and land
+are in few hands though all men are free.
+
+3. The DISTRIBUTIVE STATE is a state in which a determining number
+of the citizens, a number sufficient to colour the habits, laws
+and conditions of the whole society, is possessed of the means of
+production, as private property, divided among the various families.
+The word “distributive” is an ugly, long word, only used for want of a
+better; but the reason that we have to use such a tiresome word is an
+odd and paradoxical reason well worth grasping. The Distributive State
+is the natural state of mankind. Men are happiest in such conditions;
+they can fulfil their being best and are most perfectly themselves
+when they are owners and free. Now whenever you have natural and good
+conditions, not only in Economics but in any other aspect of life, it
+is very difficult to find a word for it. There is always a word ready
+for odd, unnatural conditions: but it is often difficult to find a word
+for conditions normal to our human nature. For instance: we have the
+words “dwarf” and “giant,” but we have no similar common, short word
+to describe people of ordinary stature. So it is with the Distributive
+State. We have to use an ugly new word, because men more or less take
+for granted this state of affairs in their minds, and have never
+thought out a special word for it.
+
+However, a name it must have; so let us agree to call that kind of
+society in which most men are _really_ free and dignified and full
+citizens, not only possessing rights before the law, but _owning_, so
+that they are at no other man’s orders but can live independently, “The
+Distributive State.”
+
+Then we have these three main types of Society within human experience:
+the Servile, the Capitalist, the Distributive.
+
+To put these three estates clearly before our minds, let us describe
+the kind of thing you would see in any one of the three.
+
+In the _Servile State_, as you travelled through the country, you would
+most ordinarily see working on the fields men who were the slaves of a
+master. That master would own the land and the seed, and the food and
+the houses, and the horses and ploughs and everything, and these men
+you would see working would be compelled to work for their master, and
+he would have the right by law to punish them if they did not.
+
+If you were in a _Capitalist State_ (as we are in England) the men you
+would see working would, as a rule, be earning what are called “wages,”
+that is, an allowance (actually of money but immediately translated
+into food and clothes and house-room and the rest), which allowance
+would be paid to them at fairly short intervals, and without which
+they could not live. The ploughs and horses with which they would be
+working, the seed they would be sowing, the houses they lived in would
+be the property of another man owning this _capital_, and therefore
+called _The Capitalist_. If you asked any one of these men who were
+working whether he were _compelled_ to work by law he would indignantly
+tell you that he was not. For he is a free man; his wages are paid
+him as a result of a contract; he has said: “I will work for you for
+so much,” and no one could compel him to work if he did not choose to
+work. But in this state of society a man without capital must make a
+contract of this sort in order to live at all. He is not compelled
+by law to work for another, but he is compelled by the necessity of
+living to work for another.
+
+Lastly, if you were travelling through a _Distributive State_ (Denmark
+is the best example of such a state in modern Europe) you would find
+that the man working on the land was himself the owner of the land, and
+also of the seed and of the horses and the houses, and all the rest of
+it. He would be a free man working for his own advantage and for nobody
+else’s. He would also have a share in the factories of the country
+and be a part owner in the local dairies, sharing the profit of those
+dairies where the milk of many farms is gathered together, turned into
+butter and cheese, and sold.
+
+This is what we mean by the three types of State. In each you would
+find many exceptions, but each has its _determining number_--of slaves
+in the one case, wage earners in the other, and independent men in the
+third.
+
+       *       *       *       *       *
+
+We will now take each of these three kinds of State separately and see
+the good and evil of them and what the consequences of them are.
+
+
+
+
+THE SERVILE STATE
+
+
+The Servile State is that which was found among our forefathers
+everywhere. It is the Servile State in which we Europeans all lived
+when we were pagan two thousand years ago. For instance: In old pagan
+Italy before it became Christian, or in old pagan Greece--both of them
+the best countries in the world of their time and both of them, as you
+know, the origins of our own civilisation--most of the people you would
+have seen working at anything were slaves, and above the slaves were
+the owners: the free men.
+
+Since we are talking of the political applications of political
+economy, we have to consider _human happiness_, which is the object of
+all human living; and when we talk of “advantage” or “disadvantage” in
+any particular economic state we mean its greater or less effect on
+human happiness.
+
+The great disadvantage of the slave-owning state is clearly apparent:
+in it the mass of men are degraded: they are not citizens: they cannot
+exercise their own wills. This is so evident and great an evil that it
+must be set against all the advantages we are about to notice. Slavery
+is a most unhappy condition in so far as it wounds human honour and
+offends human dignity; and that is why the Christian religion gradually
+dissolved slavery in the process of many centuries: slavery is not
+sufficiently consistent with the idea of man’s being made in the image
+of God. Slavery can also be materially unhappy, if the masters are
+cruel or negligent. The great mass of slaves in such a society might
+be, at the caprice of their masters, very unhappy; and under bad phases
+of those societies they _were_ very unhappy.
+
+But we must not be misled by the ideas that have grown up around the
+word “slave” in the modern mind. Because we have no one in England
+to-day who is called a slave and bought or sold as a slave, and no
+one is yet compelled by law to work for another man, therefore we
+regard slavery as something odd and alien; and because it is natural
+to dislike things which are odd and alien, unaccustomed, we think of
+slavery as something simply bad.
+
+That is a great mistake. The Servile State had--and, if it comes back,
+will have again--two great advantages: which were _personal security_
+and _general stability_.
+
+_Personal security_ means a condition in which everybody, master and
+man, is free from grave anxiety upon the future: can expect regular
+food and lodging and a continuance of his regular way of life.
+
+_General stability_ means the continuance of all society in one
+fashion, without the violent ups and downs of competition and without
+the friction of unwilling, constantly interrupted labour--as in strikes
+and lock-outs.
+
+In the Servile State work always got done and was done regularly. The
+owners knew “where they were.” With so much land and so many slaves
+they were sure of a certain average annual produce. On the whole it was
+to the advantage of a man to keep his slaves alive and fairly well fed
+and housed. Also, the human relation came in, and a man and his slave,
+in the better and simpler forms of the Servile State, would often be
+friends and were usually in the same relation as people are to-day with
+their dependents. For instance: in well-to-do houses of the Servile
+State we know from history that certain slaves were often the tutors of
+the children, and thus had a very important and respectable position,
+and there were other slaves who acted as good musicians and architects
+and artists. There was always the feeling of a fixed social difference
+between slave and free, but this did not necessarily nor perhaps
+usually lead to great unhappiness.
+
+This stability and security which slave-owning gave to all society (to
+the owned to some extent, and to the owners altogether) also produced
+a very valuable effect, which is, the presence of _leisure_. Because
+revenue was fairly certain, because this kind of arrangement prevented
+violent fluctuation of fortune, competition in excess, and the rest
+of it, therefore was there a considerable proportion of people at any
+time who had ample opportunity for study, for cultivating good tastes,
+for writing and building well, and judging well, and--what is very
+important--for conducting the affairs of the State without haste or the
+panic and folly of haste.
+
+One alleged _economic_ disadvantage of slave-owning must be looked at
+narrowly before we leave this description of the Servile State.
+
+One often hears it said that slave labour is less productive than
+free labour, that is, labour working at a wage under Capitalism.
+People sometimes point to modern examples of this contrast, saying
+that places like the Southern States of America, where slave labour
+was used a lifetime ago, were less productive than the Northern
+States, where labour was free. But though this is true of particular
+moments in history, it is not generally true. Free labour working at
+a wage under the first institution of capitalism--when, for instance,
+a body of capitalists are beginning to develop a new country with
+hired free men to work for them--will be full of energy and highly
+productive. But when what is called “free labour”--that is, men
+without property working by contract for a wage--gets into routine
+and habit, it is doubtful whether it is more productive than slave
+labour. It is accompanied by a great deal of ill-will. There is
+perpetual interruption by strikes, and lock-outs,[4] and the process of
+production cannot be as minutely and absolutely directed by the small
+and leisured class as can slave labour. _There is no reason why a free
+man working for another’s profit should do his best._ On the contrary,
+he has every reason to work as little as possible, while a slave can be
+compelled to work hard.
+
+But whether slave labour be more or less productive is not so important
+as the two points mentioned above, of advantage and disadvantage. The
+_disadvantages_, as we have seen, are (1) that it offends our human
+love of honour and independence, degrading the mass of men, and (2)
+that it is so terribly liable to abuse in the hands of cruel or stupid
+owners, or in conditions where great gangs of slaves grow up under
+one owner who can know nothing about them personally and is therefore
+indifferent to their fate. The _advantages_ are security and stability,
+running as a note throughout society and showing themselves especially
+in the leisure of the owning classes, with all the good fruits of
+leisure in taste, literary and artistic. It was a society based on
+slavery which produced what is perhaps the best fruit of leisure, and
+that is the profound and fruitful thinking out of the great human
+problems. All the great philosophy and art of the ancients was worked
+out by the free owners in the slave-owning states, and so was the best
+literature ever made.
+
+
+
+
+THE CAPITALIST STATE
+
+
+The Capitalist State is that one in which though all men are free (that
+is, though no one is compelled to work for another by law, nor anyone
+compelled to support another), yet a few owners of the land and capital
+have working for them the great mass of the people who own little or
+nothing and receive a _wage_ to keep them alive: that is, a part only
+of the wealth they produce, the rest going as rent and profit to the
+owners.
+
+The Capitalist State is a recent phenomenon compared with the great
+length of known recorded history. It is a modern phenomenon produced by
+our white race alone, by no means covering the whole of that race, nor
+the most of it, but of great interest to us in England because we alone
+are, of all nations, an almost purely capitalist society.
+
+Here again we can tabulate the advantages and disadvantages.
+
+The chief moral advantage of Capitalism as compared with the
+Slave-owning State is that _every man, however poor, feels himself to
+be free and to that extent saves his honour_. He may be compelled by
+poverty to suffer a very hard bargain; he may see himself producing
+wealth for other men, of which wealth he is only allowed to keep a
+portion for himself. To that extent he is “exploited,” as the phrase
+goes. He feels himself the victim of a certain injustice. He remains
+poor in spite of all his labour, and the man for whom he works grows
+rich. But, after all, it is a contract which the free workman has made,
+and he has made it as a citizen. If those who own nothing, or next to
+nothing, in a capitalist state (this great majority is technically
+called in economic language “the _proletariat_”) organise, they can
+bargain, as our great Trade Unions do, with the few owners of their
+means of livelihood and of production, and be fairly certain, for some
+little time ahead, of a reasonable livelihood.
+
+Another advantage of Capitalism, purely economic, is the _effectiveness
+of human energy_ under this system, at least, _in the first part of its
+development_. We spoke of this in the last section.
+
+But the disadvantages are very grave indeed.
+
+Under Capitalism the capitalist himself acts competitively and for a
+profit. He does not, like the slave-owner, direct a regular, simple
+machine which works evenly year in and year out. He is perpetually
+struggling to rise; or suffering, through the rise of others, a fall
+of fortune. He is always on the look-out to buy labour as cheaply as
+he can and then to sell the product as dearly as he can. There is thus
+a perpetual gamble going on, the owners of Capital rapidly growing
+rich and poor by turns and a general insecurity gradually poisoning
+all the owning part of society. A far worse insecurity affects the
+propertyless majority. The Proletariat--that is, the mass of the
+State--lives perpetually under the fear of falling into unemployment
+and starvation. The lash urging the workman to his fullest effort is
+this dread of misery. At first that lash urges men to intense effort,
+but later it destroys their energy. Capitalism was marked by nothing
+more striking when it first arose than by the immense expansion of
+wealth and population which followed it. In every district which fell
+under the capitalist system this expansion of total wealth and of total
+population could be observed; and England, which has become completely
+capitalist, had in the hey-day of its Capitalism--up to the present
+generation--a more rapid rate of expansion in wealth and population
+than any other ancient people. But already the tide has turned, and the
+inhumanity of such a life is beginning to breed everywhere an ill-ease
+and revolt which threaten our civilisation.
+
+The disadvantages of Capitalism are, in the long run, so great that
+now, after not more than a lifetime of complete Capitalism, and that
+in only one State--the English State--nearly everybody is profoundly
+discontented with it and many people are in violent rebellion against
+it. This grinding and increasing insecurity which attaches to the
+Capitalist system is killing it. No one is safe for the morrow.
+Perpetual competition, increasing with every increase of energy, has
+led to a chaos in human society such as there never was before. The
+mass of the people, not being slaves, cannot be certain that they will
+be kept alive. They live in a state of perpetual anxiety as to whether
+their employment will continue; while among the owners themselves the
+same anxiety exists in another form. The competition among them gets
+more and more severe. The number of owners gets less, and even the
+richest of them is more insecure than were the moderately rich of a
+generation ago. All society is like a boiling pot, with individuals
+suddenly coming into great wealth from below and then dropping out
+again; the whole State suffers from an increasing absence of leisure
+and an increasing turmoil.
+
+There is, then, this very grave disadvantage of insecurity everywhere,
+and particularly for the mass of the people, who live under permanent
+conditions of insecurity; nearly all the wage-earners have had
+experience at some time, longer or shorter, of insufficiency through
+unemployment. Capitalism leaves free men under a sense of acute
+grievance (which they would _not_ feel if they were slaves, accustomed
+to a regular and fixed status in society), and, what is worse,
+Capitalism _in its later stages_ need not provide for the livelihood of
+the mass of citizens, and, in effect, _does not_ so provide.
+
+The magnitude of these evils is obvious. A man who is a free man, a
+citizen, able in theory to take part in the life of the State, equal
+with the richest man before the law, yet finds himself living on a
+precarious amount of necessaries of life doled out as wages week
+after week; he sees his labour exploited by others and suffers from a
+sense of injustice and oppression. The wealth of the small, owning,
+class does not seem a natural adjunct to its social position, as it
+does in the slave-owning state; for there is no tradition behind that
+class; it has no “status,” that is, no general respect paid to it as
+something naturally--or, at any rate, traditionally--superior to the
+rest of men. Many a modern millionaire capitalist, exploiting the
+labour of thousands of his fellows, is of a lower culture than most of
+his labourers; and, what is more, he may in a few years have lost all
+his economic position and have been succeeded by another, even baser
+than himself. How can the masses feel respect for such a man in such a
+position of chance advantage?
+
+It is inevitable that a moral evil of this sort should make the whole
+State unstable. You cannot make of great differences in wealth between
+citizens a stable state of affairs, save by breeding respect for
+the owners of great wealth. But the more the turmoil of Capitalism
+increases the less respect these owners of great wealth either deserve
+or obtain: the less do they form a class, and the less do they preserve
+traditions of any kind. And yet it is under these very conditions of
+Capitalism that there is a greater disparity of wealth than ever the
+world knew before! It is clear that society in such a condition must be
+as unstable as an explosive.
+
+So much for the first great disadvantage of Capitalism, chaos. But
+the second main disadvantage--the fact that Capitalism in its later
+stages ceases to guarantee the livelihood of the people--is a little
+less easy to understand. Indeed, most people who discuss Capitalism,
+even when they strongly oppose it, seem unable to grasp this second
+disadvantage--so let us examine it closely.
+
+I have said that Capitalism, in its later stages, _does not provide for
+the maintenance of the mass of the people_.
+
+To see how true this is, consider an extreme case.
+
+Supposing one man were to own all the means of production, and
+supposing he were to have in his possession one machine which could
+produce in an indefinite amount all that human beings need in order to
+live. Then there would be no economic reason why this one man should
+provide wealth for anyone except himself and his family. He might turn
+out enough things to support a few others whom he wanted for private
+servants or to amuse him, but there would be no reason why he should
+support the masses around him.
+
+Now it is true that we have not yet come, under Capitalism, to so
+extreme a case. But the moral applies, though modified, to Capitalism
+in its last stages, when very few men control the means of production,
+when machinery has become very efficient, and when the great mass
+of people are dependent upon employment by the capitalist for their
+existence.
+
+Consider that it is of the essence of Capitalism to keep wages down,
+that is, to buy labour cheap. Therefore, the labourer who actually
+produces, say, boots cannot afford to buy a sufficient amount of
+the boots which he himself has made. The capitalist controlling the
+boot-making machinery, when he has provided himself with a dozen pair
+of boots, and the working classes of the community with such boots as
+their wages permit them to buy, must either try to sell the extra boots
+abroad (and that outlet can’t last long) or stop making them. He has
+restricted the home market by the necessity of cheap labour, and you
+have the absurd position of men making more goods than they need, and
+yet having less of those goods available for themselves than they need:
+the labourer producing, or able to produce, every year enough clothing
+for ten years, and yet not being able to afford sufficient for one: the
+labourer producing or able to produce ten good overcoats, yet not able
+to buy one.
+
+So under Capitalism in its last stages you have the abnormal position
+of millions of men ready to make the necessaries of life, of machinery
+ready to produce those necessaries, of raw material standing ready to
+be worked up by the machinery if only labourers could be put on, and
+yet all the machinery standing idle, the wealth not being produced,
+and the mass who could produce it going hungry and ill-shod and badly
+clothed. And the more Capitalism develops the more that state of things
+will develop with it.
+
+Now this gradual lessening of purchasing power on the part of the
+working masses under Capitalism is _the destruction of the home
+market_. Low wages make great masses of English bootmakers unable
+to buy all the boots they would. Therefore the capitalist who owns
+the boot-making machinery must try to sell his surplus abroad. But
+the foreign countries, as they grow capitalist, suffer from the same
+trouble: property being badly distributed and the wage-earners kept
+as low as possible, their power to buy foreign goods also diminishes.
+Thus you have _gradual destruction of the foreign market_. You get in
+the long run the full working of what we will call the “_Capitalist
+Paradox_,” which is that Capitalism is a way of producing wealth which,
+in the long run, prevents people from obtaining the wealth produced and
+prevents the owner of the wealth from finding a market.
+
+There is no doubt that, on the balance, the disadvantages of Capitalism
+have proved, even after its short trial, overwhelmingly greater than
+the advantages.
+
+Capitalism arose in small beginnings rather more than 250 years ago. It
+grew strong and covered the greater part of the community (in England,
+at least) about 100 years ago. It came to its highest development in
+our own time; and it is already doomed. People cannot bear it any
+longer. Future historians looking back upon our time will be astonished
+at the immense productivity of Capitalism, the enormous addition to
+wealth which it made, and to population, in its early phases; but
+perhaps they will be still more astonished at the pace at which it
+ran down at its end. Urged by the extreme human suffering, moral and
+material, which capitalism now produces, remedies have been proposed,
+the chief of which is generally called Socialism, or, in its fully
+developed form, Communism.
+
+But before we talk of this supposed remedy, which has never been put
+into practice (it is an imaginary state of things) we must describe the
+third form of state--the Distributive State.
+
+
+
+
+THE DISTRIBUTIVE STATE
+
+
+A state of society in which the families composing it are, in a
+determining number, owners of the land and the means of production
+as well as themselves the human agents of production (that is, the
+people who by their human energy produce wealth with those means of
+production), is probably the oldest, and certainly the most commonly
+found of all states of society. It is a state of society which you
+get all through the East, all through Asia, and in all the primitive
+states we know. It is the state to which men try to return, as a rule,
+after they have blundered into any other, though the first state we
+described--the Servile State--runs it very close as a thing suitable
+to human nature; for we know that the Servile State did also last for
+centuries quite normally and stably in the Pagan past.
+
+The reason men commonly adopt the Distributive form of society, and
+tend to return to it if they can, is that the advantages it presents
+seem greater in most men’s eyes than its disadvantages.
+
+The advantages are these:--
+
+It gives freedom: that is, the exercise of one’s will. A family
+possessed of the means of production--the simplest form of which is
+the possession of land and of the implements and capital for working
+the land--cannot be controlled by others. Of course, various producers
+specialise, and through exchange one with the other they become more or
+less interdependent, but still, each one can live “on his own”: each
+one can stand out, if necessary, from pressure exercised against him by
+another. He can say: “If you will not take my surplus as against your
+surplus I shall be the poorer; but at least I can live.”
+
+Societies of this kind are not only free, but also, what goes with
+freedom, elastic--that is, they mould themselves easily to changed
+conditions. The individual, or the family, controlling his or its own
+means of production, can choose what he will do best, and can exercise
+his faculties, if he has sufficient knowledge, to the best advantage.
+
+This arrangement also gives security, though not as much security
+as the Servile State. Men in this position of ownership are not in
+dread of the immediate future. They can carry on. They may, if they
+choose, make a reserve of their produce to carry them over moments
+of difficulty. For instance, they will probably have each a reserve
+of food to carry them over a bad harvest or some natural disaster.
+Further, it is found in practice that societies of this kind continue
+for centuries without much change. They go on for generations with a
+property well divided among them and everybody free, so far as economic
+situation is concerned. No such society has ever been destroyed except
+by some great shock; and so long as every shock can be warded off,
+this system of having the land and the means of production controlled
+by the mass of the citizens as private owners is enduring. There are
+districts of Europe to-day where the system has continued from beyond
+the memory of man. Such a little state as Andorra is an example,
+and many of the Swiss valleys. Further, when the system has been
+laboriously reconstructed, when the mass of families who used to be
+dispossessed have been again put into possession of land and the means
+of production, we find that the state arrived at is stable.
+
+The best example of that sort of reconstruction to-day is to be found
+in Denmark, but you have it also in a less marked fashion in most
+parts of France and in most of the Valley of the Rhine, in Belgium and
+Holland, in Norway, and in many other places. Wherever it has been
+settled it has taken root firmly.
+
+The disadvantages of such a system are, first, that though in practice
+it is found usually stable, yet in theory it is not necessarily stable,
+and in practice also there are some communities the social character of
+which is such that the system cannot be established permanently.
+
+It is obvious that, with land and the means of production well
+distributed among the various families, a few may by luck or special
+perseverance and cunning, tend to buy up the land and implements of
+their less fortunate neighbours, and nothing will prevent this but a
+set of laws backed up by strong public opinion. In other words, people
+must desire this state of society, and desire it strongly in order to
+maintain it; and if the desire for ownership and freedom is weak this
+distributive arrangement will not last.
+
+In the absence of special laws, and a public opinion to back them,
+the idler or the least competent or least lucky of the owners will
+gradually lose their ownership to the more industrious or the more
+cunning or more fortunate.
+
+Another disadvantage which has often been pointed out is that a state
+of society of this sort, though usually stable and enduring, falls
+into a routine (that is, into a traditional way of doing things),
+which it is very difficult to change. The small owner will not have
+the same opportunities for travel and for wide experience as the rich
+man has, and he will tend to go on as his fathers did, and therefore
+when some new invention arises outside his society he will be slow to
+adopt it. In this way his society becomes less able to defend itself
+from predatory neighbours and goes under in war. For a society of this
+kind is unfitted to the discovery of new things. Contented men feel no
+special spur to discover or to act on such discovery. That is why we
+find societies in which land and all the other means of production are
+well distributed among the greater part of the families of the State
+becoming too conservative--that is, unwilling to change even for their
+own advantage.
+
+This, of course, is not universally true. For instance: no society in
+Europe has made more progress in agriculture than the Danish society
+of small owners. But, take the world all over, this kind of state is
+usually backward, that is, slow to take up improvements in production
+and to avail itself of new discoveries in physical science.
+
+There is also another disadvantage which the Distributive State has
+when it is in competition with a Capitalist State, or even a Servile
+State, and that is _the difficulty of getting a very large number of
+small owners to put their money together for any great purpose_. The
+small owner will probably have less opportunities for instruction and
+judgment than the few directing rich men of a Capitalist or Servile
+State, and even if he is, on the average, as well educated as these
+rich men in neighbouring states, it will be more difficult to get a
+great number of small owners to act together than to persuade a few
+large owners to act together. Therefore highly Capitalist States, such
+as England, will be found more enterprising than less Capitalist States
+in their investments and commerce. They will open up new countries
+more rapidly, and will get possession of the best markets.
+
+Lastly, this disadvantage attaches to the Distributive State--that it
+is not so easy in it to collect great funds for war or for national
+defence, or for any other purpose, as it is in a Capitalist or Servile
+State. You cannot tax a Distributive State as highly as you can tax a
+Capitalist State. The reason is obvious enough. A family with, say,
+£400 a year finds it terribly difficult--almost impossible--to pay out
+£100 a year in taxation. They live on a certain modest scale to which
+all their lives are fitted, and which does not leave very much margin
+for taxation. If you have a million such families with a total income
+of £400 millions you may collect from them, say, a tenth of their
+wealth in a year--£40 millions--but you will hardly be able to collect
+a quarter--£100 millions.
+
+But another society with exactly the same amount of total wealth, £400
+millions a year, only divided into very rich and very poor, a society
+in which there are, say, 1,000 very rich families with £300,000 a year
+each, and a million families with rather less than £100 a year each,
+is in quite a different situation. You need not tax at all the million
+people with a hundred a year each, but the rich people, who between
+them have £300,000,000 a year, can easily be taxed a quarter of their
+whole wealth; for a rich man always has a much larger margin, the loss
+of which he does not really feel.
+
+By a very curious paradox, which it would take much too long to go
+into in detail, but which it is amusing to notice, this power of
+taxing a very highly capitalist community is one of the things which
+is beginning to handicap our Capitalist societies to-day against the
+Distributive societies. It used to be all the other way, and it seemed
+common sense that countries where you could levy large sums for State
+purposes of war or peace would win against countries where you could
+not levy such sums for public purposes. But the fact that you can tax
+so very highly a society of a few rich and many poor has been shown in
+the last few years to have most unexpected results. The very rich men
+pay all right; but the drain on the total resources of the wealth of
+the State weakens it.
+
+The money raised by taxation is spent on State servants--many of them
+inefficient and idle.
+
+Since it is so easy to raise large sums, there is a temptation to
+indulge in all sorts of expensive State schemes, many of which come to
+nothing. And this power of easy taxation, which was a strength, becomes
+a weakness.
+
+No one suspected this until taxation rose to its present height, but
+now it is clearly apparent; and we in England might perhaps be in
+a better way later on if there had been as much resistance to high
+taxation here as there has been in countries where property is better
+distributed.
+
+
+
+
+SOCIALISM
+
+
+It remains to deal with a certain remedy which some people have
+imagined would get rid of all the disadvantages of Capitalism once and
+for all. This remedy is called _Socialism_, and Socialism, as we shall
+see in a moment, must mean ultimately _Communism_.
+
+No one has ever succeeded in putting this remedy for the evils of
+Capitalism into practice, and (though the matter is still very much
+disputed) it looks more and more as though no one would ever be able to
+put it into practice.
+
+We have seen what the evils of Capitalism were and how they have
+exasperated nearly everyone who has become subject to a capitalist
+state of society. There is the increasing insecurity which everybody
+feels--all the Proletariat and many of the Capitalists as well--whilst
+there is the necessary tendency of Capitalism to leave a larger and
+larger proportion of people unproductive, not making the wealth which
+is necessary for their support, and therefore either kept in idleness
+by Doles out of the wealth which is still produced (a process which
+cannot go on for ever) or starving. Pretty well everyone wants to get
+rid of these evils and to get out of the Capitalist system, and this
+idea of Socialism which we are going to examine seemed, when it was
+first put forward, an easy and obvious shortcut out of the Capitalist
+muddle. When we have looked into it, we shall see how and why Socialism
+does not, in practice, turn out to be a shortcut at all, but a blind
+alley.
+
+       *       *       *       *       *
+
+Ever since men began to live in societies and to leave records, you
+will find the poorer people, when their poverty became intolerable,
+clamouring for a division of the wealth which the more fortunate enjoy.
+
+That is the main, obvious remedy to inequality of wealth; to divide it
+up again. But such a scheme has nothing to do with Socialism, and must
+not be mistaken for Socialism.
+
+The Socialist theory was invented, or at any rate was first put
+clearly, by a man of genius, Louis Blanc, who was Scotch on his
+father’s side and French on his mother’s. He lived rather less than a
+hundred years ago and the scheme which he and those around him started
+was this:--
+
+The Officers of the State were to own all the Means of
+Production--machinery and land and stores of food, etc.--and they alone
+should be allowed to own it. Individuals and families and corporations
+might consume that portion of produced wealth allotted them by the
+State after it had been produced, _but they might not use it for making
+future wealth_. ANY WEALTH USED FOR THE MAKING OF FUTURE WEALTH, THAT
+IS, CAPITAL IN ANY FORM, WAS TO BE HANDED OVER TO THE OFFICERS OF THE
+STATE; AND ALL LAND AND NATURAL FORCES WERE TO BE OWNED FOR EVER BY THE
+STATE. That scheme is Socialism, and from that principle all Socialist
+ideas flow.
+
+In this way, it was claimed, there would be no division of society
+into Capitalists and Proletarians, no chaos of competition with its
+alternating riches and ruin; insecurity would be done away with, and
+insufficiency as well. Everyone in the country would be a worker, the
+State itself would be the Universal Capitalist. So there would be no
+struggle of capitalists going up and down one against the other, and no
+unemployment or lack of necessaries for anyone.
+
+Among the energetic and keen set of men who surrounded Blanc in Paris
+was a certain Mordecai, who wrote under the name his father had
+assumed, that of “Marx.” He wrote (in German) a very long and detailed
+book describing the whole scheme, as well as describing the evils of
+Capitalism, and showing how this scheme would remedy those evils. His
+book was pushed forward by the people who were converted to the idea,
+and that is why the theory of Socialism is now often called “Marxism.”
+
+For instance: the coal-mines and all the machinery of the coal-mines
+and the houses in which the miners live and the stores of food and
+the clothing, etc., which keep the miners alive while the coal is
+being mined, that is during the process of production--all these,
+which now belong to capitalists who make a profit out of the miners’
+labour, would then belong to the State, which would allot the coal
+produced to all who needed it. So it would be with all farms, farming
+implements, and cattle and horses and the stores of food and clothing
+and houses necessary to the labourers on the land during the process of
+production. So it would be with all stone-quarrying and timber-felling,
+and carpentry and brick-making for the continued production of the
+houses necessary to the producers during production. So it would be
+with all corresponding material for making cloth for clothing. So it
+would be with everything which was made in the whole country. The
+officers of the State would share out the wealth produced, so that it
+would be consumed by all the citizens, and there would be an end to the
+exploitation of one man by another and to the uncertainty of living.
+
+Communism is simply that form of Socialism in which all that is thus
+shared out by the State would be shared equally, the State giving every
+family an equal share in proportion to the numbers of people which had
+to be supported in the family, from one upwards.
+
+The reason I have called Communism the logical and only possible
+ultimate form of Socialism is that there could be under Socialism no
+reason for any other form of distribution.
+
+Some time ago certain Socialists used to try to get out of this
+necessity for Communism, so as not to frighten rich people with their
+proposals for reform. They would say to a man who was making, say,
+£5,000 a year because he owned a lot of capital and land and had rents
+and profits coming to him from the work of his labourers: “You will
+have just as much under Socialism, for we recognise what a superior
+kind of person you are, and when the State shares out its wealth among
+its citizens it will give you as much as you have now, leaving the
+same difference between rich and poor, only seeing to it that the poor
+always at least have enough to live on. Where we give one ticket to the
+labourer to claim out of the common stores what he wants for a week we
+will give you fifty tickets, so that you will get fifty times as much
+if you like.” But of course this was nonsense, and was soon discovered
+to be nonsense. With everybody working for the State under orders all
+would naturally claim equality, and there would be no way of preventing
+their getting an equal share except force. In justice, supposing a
+Socialist state to arise, there could be only the Communist form of it.
+
+This scheme has never been put into practice, and when we look closely
+at it we shall discover, I think, why it never will be put into
+practice.
+
+The reason it cannot be put into practice is this: Although we use the
+words “the State” this mere idea means in practice real men who act
+as officials to represent the State. Actual men with their varying
+characters, good and bad, lazy and industrious, just and unjust, have
+got to undertake the enormous business _first_ of running production
+in the interest of all, _next_ of distributing the resultant wealth
+equally to all.
+
+Now there are two qualities in man which make action of this sort
+break down. The first is that men love independence--they like to feel
+themselves their own masters. They like therefore to _own_, so that
+they may do what they like with material things. The next is that men
+like to get as much as possible of good things. Both these feelings
+are universally true of the human race. You will find exceptional
+people, of course, who are just as contented with a little as with
+a great deal, and you will find exceptional people who do not care
+about independence or about owning, and who are quite willing to be
+run by other people, or to give up all possession for the sake of some
+special way of living: that is, there is a comparatively small number
+of men and women who, in order to live free from responsibility, or in
+order to devote themselves to religion or to some form of study and
+contemplation, will give up all property and have the material side of
+their lives administered for them. But men and women in general will
+both want to get all they can of good things with the least possible
+exertion in the getting of them, and they will also desire freedom to
+exercise their own wills and deal with material objects as they choose.
+
+Now the Socialist scheme requires both these very strong emotions,
+common to all mankind, to be suppressed. The people who run the
+State--that is the politicians--are to be absolutely just (although
+there is no one to force them to be just), they are to forget all
+personal wishes and to think of nothing but the good of those whose
+labour they direct and among whom they share out the wealth that is
+produced. We know by experience that politicians are not angels of this
+sort. It is absurd to imagine that men coveting public office (and
+living the life of intrigue necessary to get it) would suddenly turn
+into unselfish and devoted beings of this ideal kind. You cannot give
+this enormous power to men without their abusing it.
+
+The second force making against the establishment of Socialism is still
+stronger. You will never get the run of men and women contented to
+live their whole lives entirely under orders. In exceptional moments a
+large part of individual freedom will be given up to the necessity of
+the State--as during the Great War; for if the State did not survive
+the individual’s life and that of his children would not be worth
+living. The individual in abnormal crises goes through a great deal
+of suffering for a moment in order that he and his should have less
+pain in the long run. But even in such crises a large part of liberty
+remains to him. Under Socialism he would have none. He would have
+to do what he was told by his task-masters, much more than even the
+poorest labourers now have to do what they are told by task-masters.
+And there would also be this difference: that _everyone_ would be in
+that situation and there would be no way out. Not a part of life, nor
+so many hours a day, but the whole of life, would be subject to orders
+given by others. This, humanity would certainly find intolerable.
+
+That is why, I think, Socialism has never been put into practice
+and never can be put into practice. There have been attempts at it,
+but even when they are sincere and not the mere product of alien
+despotism they break down. As in Russia to-day, where, whether the Jew
+adventurers who seized power were sincere or mere tyrants, they have,
+in spite of their attempt at seizing all the soil and keeping the
+peasants dependent on them, been compelled at last to let nearly all
+the nation live as owners tilling their own land.
+
+It is no reply to this to say that the State always has owned, and
+actually can and does own, _some_ part of the means of Production (such
+as the Post Office and certain forests and lands here in England, and,
+abroad, most mountain land, all mines and much else) and direct them
+with success. The point of Socialism--the one condition necessary
+to its existence--is that the State should own _all_ the means of
+Production that really count. Between the normal exercise of a partial
+function and the abnormal exercise of a universal function is all
+the difference between _plus_ and _minus_. A partial State ownership
+working in a society the determining character of which is private
+ownership is an utterly different thing, even an _opposite_ thing
+to general State ownership determining the character of Society and
+allowing only exceptional private ownership. Socialism can only be
+(_a_) good (_b_) possible when men desire, and are at ease in, the
+latter kind of state; that is, desire and are at ease in complete
+forgetfulness of self coupled with justice as men ruling, and complete
+surrender of personal honour and freedom and appetite as men ruled.
+
+
+
+
+INTERNATIONAL EXCHANGE
+
+
+International exchange is not really different from the domestic
+exchanges which go on within a nation. The foreigner who has some
+product of his own to exchange against a product of ours deals as
+a private man with other private men, and if you could see all the
+exchanges of the world going on you would not distinguish between the
+character of an exchange, say, between Devonshire and London and one
+between London and the Argentine. The Devonshire man grows wheat, which
+he sells perhaps in a London market, and buys manufactured products
+which a merchant in London provides. The farmer in the Argentine
+does much the same thing, sells wheat and receives in exchange what
+manufactures he needs, precisely as though he were living in Devonshire
+instead of abroad. He does not trade with “England,” but with a
+particular merchant or company in England.
+
+But there are certain points about international trade which one must
+get clear unless one is to make mistakes in the political problems
+arising out of it.
+
+In the first place, international trade is always subject to a certain
+interference which domestic trade does not suffer. All countries have
+a _tariff_, that is a set of taxes upon a great number of the articles
+coming in from abroad. Even those countries which, as England did until
+quite lately, believe in leaving their citizens on equal terms with
+foreign competitors and have gone in for complete free trade, examine
+all goods at the port of entry or at special points on the frontier,
+both in order to raise revenue and to keep out undesirable goods, such
+as certain drugs; nor does any country allow _all_ things to come in
+unexamined, lest forbidden things should come in unobserved. Moreover,
+it is important to measure the nature and volume of a nation’s foreign
+trade, and this cannot be done without stopping things at the ports or
+frontiers and examining them.
+
+In general, international trade differs from domestic trade first of
+all in this--that it always has to pass through an examination at the
+frontiers through which it enters. It also differs from domestic trade
+in that it has to use another currency. Even when all countries have
+a gold currency, there are certain small fluctuations in the exchange
+values of the different currencies. For instance: before the war the
+English pound was worth in gold about 25¼ French francs, but you
+hardly ever had this “Parity” (as it is called) exact. The franc would
+fluctuate slightly against the sovereign--sometimes above, sometimes
+below “Parity” by a penny, or even sometimes more than a penny, one
+way or the other. With many countries whose currency was not in a good
+condition the fluctuations would be more violent, and of course since
+the war, now that so many nations no longer have a gold currency at
+all, but a fictitious paper currency, the value of one currency against
+another fluctuates wildly. Within a year you could get only 50 francs
+for an English sovereign and then a little later as much as 80 francs.
+
+Within one country exchanges can be simply conducted by counting
+all values in the currency of the country; but international trade,
+involving the use of two or more currencies, cannot be so simple.
+
+There is also a third point in international trade which must be
+understood, and which proceeds from the very fact that international
+exchanges do not essentially differ from the exchanges which take
+place within the same country, and that is the fact that exchanges are
+not simple contracts between two parties, but follow a whole chain of
+contracts, covering a great number of parties.
+
+We saw, in the first part of this book, that exchange even within one
+country, was not simple barter but _multiple exchange_.
+
+In domestic exchange a farmer sells his wheat to a broker, but does
+not purchase a lorry from the same buyer: he receives money from the
+buyer, and with that money buys a lorry, say, a month later. But what
+has really happened is a whole chain of exchanges in between the wheat
+and the lorry--a miller has bought the wheat from the broker, a baker
+the flour from the miller, and so on until towards the end of the chain
+a caster has sold castings to a motor maker who has assembled them and
+sold the lorry to the farmer.
+
+It is the same with international exchanges; as we saw in the earlier
+part of this book. There is an international chain of exchanges.
+
+The total number of units engaged in this international chain may be
+as large as you like; there may be ten or fifty or a hundred links
+before it is complete. But the universal principle holds that imports
+and exports usually balance. Whatever you import from abroad into a
+country you must, as a general rule, pay for by exporting an equivalent
+set of values created within your own country. But there are certain
+exceptions to this rule which are sometimes lost sight of.
+
+In the first place, the imports and the exports need not all be what
+are called “visible” imports and exports. Many of them may be, and
+some always are, “invisible.” The most obvious example of these are
+“freights,” that is, sums paid for the carriage of goods between one
+country and another. Thus, in the old days before the war you would
+find England importing more than she exported, and one of the principal
+reasons for the difference was that the imports were mostly brought
+in English ships. Thus if a man in the Argentine were sending 50 tons
+of wheat to England worth £500, England, after a long chain of trade
+with many countries, including the Argentine, would be exporting
+values against this £500 worth of wheat, which would be worth, say,
+not £500, but only £450. The difference of £50 was made up by the cost
+of bringing the wheat from the Argentine to England _in an English
+ship_. In other words, £50 worth of the total £500 worth of wheat stood
+for the sum which the man in the Argentine had to pay to the English
+sailors to bring his wheat over the sea.
+
+Further, a wealthy or strong country very often levied tribute upon a
+poorer or weaker one, and this tribute might take several forms. There
+was the tribute of _interest upon loans_. If English bankers had lent
+to people in Egypt a million pounds with interest at forty thousand
+pounds a year Egyptian production would have to export to England,
+either directly or roundabout through the chain of trade, forty
+thousand pounds’ worth of goods, against which England had not to send
+out anything.
+
+Another form of tribute--though a small one--is that paid in pensions.
+A man having worked all his life in the Civil Service in India (for
+instance) would retire upon a yearly pension of a thousand pounds a
+year; but this pension was levied upon the taxpayers of India, and if
+the man came to live in England and spent his pension there--as nearly
+all of them did--it meant that India had to export a thousand pounds’
+worth of goods every year to England, against which England sent
+nothing back.
+
+In the same way the shareholder in some works or firms situated in a
+foreign country would, if he lived in England, cause an import to come
+in equivalent to his dividends or profits, and against that England
+would send out nothing.
+
+But the point to remember is, that _the mere volume of trade_ (that
+is, _the total of things imported and of things exported_) _is no
+indication of the wealth or prosperity of the country importing and
+exporting_.
+
+A country may be very wealthy, although it is doing hardly any
+international trade, because it may be producing within its own
+boundaries a great deal of wealth of a kind sufficient to nearly all,
+or all, its needs. Again, of international trade (and it is exceedingly
+important to remember this, because most people go wrong on it)
+_nothing increases the wealth of a country except the imports_.
+
+It ought to be quite clear, especially in the case of an island like
+Great Britain, that it _loses_ what it sends out and _gains_ what
+it brings in. Yet people get muddled about even this very simple
+proposition, because the individual trader thinks of his transactions
+as an individual sale. He does not consider the nature of trade as a
+whole. The individual trader, for instance, who makes locomotives and
+exports them, gets paid, let us say, £10,000 for each locomotive. In
+point of fact this means that in the long run he or someone else in
+England will exercise £10,000 worth of demand for foreign goods. But
+the individual trader does not usually think of that; he thinks only of
+his own transactions, and he would be very much surprised if he were
+told that his sending the locomotive abroad was, _regarded in itself,
+and apart from the import which it assumed_, a loss to the country of
+£10,000 worth of wealth.
+
+You often hear people in political arguments talking as though the
+falling off of exports from a country were a bad thing and the increase
+of imports also a bad thing. It cannot be so in the long run. The
+excess of imports over exports is the national profit on the whole of
+its foreign transactions, and any country which is exporting regularly
+more than it imports is paying tribute to foreigners abroad, while
+every country which regularly imports more than it exports is receiving
+tribute.
+
+Of course, if you consider only a short period of time, the falling off
+of exports may be a bad sign; for it may mean that the corresponding
+imports will not be gathered. If in this country we saw our exports
+regularly falling year by year we should be right to take alarm, for
+this would almost certainly mean that a corresponding falling off in
+imports would sooner or later take place also, and that therefore our
+total wealth would be diminished. But considered over a sufficient
+space of time, it is obvious that the excess of imports over exports
+is a gain and that the excess of exports over imports is a loss.
+
+One last thing to remember about international trade is that the very
+different importance of foreign trade to different countries makes the
+foreign politics of nations differ equally. A country which can supply
+itself with all it needs is free to risk its foreign trade for some
+other issue. A country importing its necessities cannot risk the loss
+of such trade, for it is a matter of life and death. The United States
+is in the first position. It has within its own boundaries not only all
+the minerals it needs, but also all the petrol and all the raw material
+for making cloth, and all the leather for boots, and all the rest
+of it. But a country like England is in quite a different position.
+We only grow half the meat we need and about one-fifth of the corn.
+Therefore it is absolutely necessary for us to have a foreign trade.
+If all the foreign trade of the United States were to be destroyed
+to-morrow, the United States, though somewhat poorer, would still be
+very rich and able to carry on without the help of anyone else. But if
+our foreign trade were destroyed there would be a terrible famine and
+most of us would die.
+
+Nations differ very much in this respect, but of all nations Great
+Britain is that which is most vitally interested in maintaining a great
+foreign trade, and next after Great Britain Belgium is similarly
+interested, for Belgium also needs to import four-fifths of its
+bread-stuffs. Almost every country except the United States _must_ have
+some foreign trade if it is to live normally. For instance: France,
+though largely a self-sufficing country, has no petrol. It has to buy
+its petrol abroad and must export goods to pay for that import. Nor has
+it quite enough coal for its needs, and, before the war, it had not
+nearly enough iron. Italy has no coal, no petrol and no iron to speak
+of--not nearly enough for its needs. And so it is with pretty well
+every nation in Europe. But of all nations our own and Belgium--our own
+particularly--are in the most need of maintaining a large foreign trade.
+
+This affects all our policy, it is the root of both the greatness and
+peril of England. It also tends to make English people judge the wealth
+of foreigners by the volume of their trade, and that is a great error.
+
+
+
+
+FREE TRADE AND PROTECTION AS POLITICAL ISSUES
+
+
+In this matter of international trade there rose up, about a hundred
+years ago, a great political discussion in England between what was
+called _Free Trade_ and what was called _Protection_.
+
+This discussion is still going on and affecting the life of the
+country, and it is important to understand the principles of it, for
+we have here one of the chief applications of theoretical Political
+Economy to actual conditions.
+
+I dealt with this subject briefly in the first part of this book under
+“Elementary Principles,” but I return to it here in more detail because
+it has given rise, in political application, to the most important
+economic discussion in modern England.
+
+The Free Traders were those who said that England would be wealthier,
+as a whole, if there were no restriction upon exchange at all, whether
+internal or external. A man having something to exchange with his
+English neighbour was, of course, free to exchange it without any
+interference; but the Free Trader’s particular point was that a man
+having something to exchange with a _foreign_ purchaser should be
+equally free to exchange it, without any interference at the ports in
+the way of export duty taxing the transaction. In the same way he said
+that the foreigner should be perfectly free to send here any goods he
+had to exchange against ours, and should neither be kept out by laws
+nor restricted by special import duties at the ports.
+
+“In this way,” said the Free Traders, “we shall get the maximum of
+wealth for the whole country.”
+
+The Protectionists, on the other hand, said: “Here are a lot of people
+engaged on a particular form of production in England. Those who have
+their capital in it are making profits, those who own the land on which
+the capital is invested are getting rents, and the working people are
+getting wages. The foreigner, having special advantages for this kind
+of production, which make him able to produce this particular thing
+more cheaply than we can, brings in that cheaper produce and offers
+it for sale to Englishmen. The people to whom it is offered for sale
+will, of course, buy the foreign stuff because it is cheaper. The
+result will be that the English people who have invested their capital
+in producing this particular thing--that is, who have got implements
+together and buildings, and the rest, suitable for producing this
+thing--will be ruined. It will not be worth their while to go on, for
+no one will buy their goods. Their profits will be extinguished, and
+their capital will decay to nothing. The rents on the land they occupy
+will also disappear, and, what is worst of all, the large population
+which live on wages produced by this kind of work will starve or have
+to be supported, idle, by other people. Their power of producing wealth
+will be lost to England. Therefore, let us tax this cheap foreign
+import so that our production at home shall be _protected_. Let us
+tax the foreign goods as they come in, so that the cost of producing
+abroad, with this tax added, comes to at least as much as the cost of
+producing the same stuff at home. In this way it will still be worth
+while for our people at home to go on producing this kind of thing. The
+Englishman at home will be just as ready to buy his fellow-citizen’s
+produce as the foreigner’s, for the price of each will be the same.”
+
+The Protectionist even said: “Let us make this tariff so high that the
+foreign goods are sold at a _dis_advantage--that is, let the tax on the
+foreign goods be such that, added to the cost of production abroad,
+they cannot be sold in England save at a _higher_ price than the
+English goods. In this way only the English goods will be bought here
+and the home industry will flourish as it did before.”
+
+Such were the two political theories, standing one against the other.
+
+Now let us look into the economic principles underlying these two
+opposing parties, and see which of them had the best of the argument.
+
+We have already seen, in the first part of this book, the elementary
+economic principle that Exchange is only the last stage in the process
+of production.
+
+And we have also had fixed the principle that _freedom of exchange
+tends to produce a maximum of wealth within the area to which it
+applies_, and that interference with freedom of exchange tends to
+reduce the total possible wealth of that area. This is so obvious that
+all the great modern nations are careful to let exchange be as free as
+possible _within their own boundaries_.
+
+Goods can be freely exchanged without interference all over the United
+States and all over Great Britain and all over France, etc., because if
+you were to set up tolls and interferences with exchange _within_ the
+country the total wealth of the country would necessarily be diminished.
+
+Now the Free Traders extended this principle to foreign trade. They
+said: “If the foreigner comes to us with something which he can sell
+to us cheaper than we can make it ourselves that is an advantage to
+us, and it is short-sighted to interfere with it under the idea that
+we are benefiting the existing trade which is threatened by foreign
+competition. For it means that we are producing something with
+difficulty which we could get with much less work if we turned our
+attention to things which we can produce with ease. Or, again, it means
+that with the same amount of work devoted to things we make well and
+exchange against the foreigner’s goods we shall get much more of the
+things which the foreigner can make more easily than we can.”
+
+If we take a concrete example we shall see what the Free Traders’
+argument means.
+
+Supposing people in this country had never heard of foreign wine, but
+had to make their wine out of their own grapes grown in hot-houses,
+and at great expense, the wine coming, let us say, to £1 a gallon.
+Meanwhile we are producing easily great quantities of coal because
+we have great coal-mines near the surface. We come to hear of people
+living in another climate who can grow grapes easily in the open,
+who need much less labour and capital to ripen them than we do in
+our artificial way in hot-houses, and who can therefore send us wine
+at 10s. a gallon. Then we can get for each £1 worth of labour and
+capital twice as much wine as we got before. Instead of wasting our
+time artificially growing grapes in hot-houses to make our wine, let
+the people who used to work in the hot-houses become coal-miners,
+so that more coal may be produced and this extra coal exchanged for
+foreign wine. A pound’s worth of labour and capital in coal will get
+us 2 gallons of wine from the foreigner when the same amount of labour
+and capital used in making the wine ourselves would only get us one
+gallon. Let the capital that used to keep up the hot-houses be spent in
+developing mines, and we shall find as a result that we are as rich as
+ever we used to be in coal and richer in wine. Our total wealth will
+be increased.
+
+In the particular case of the English dispute about Free Trade and
+Protection not wine but a much more important thing was concerned,
+namely food; and that was what gave the political discussion its
+practical value and made it so violent. It is also because food was in
+question that the Free Traders won, and that England was, for a whole
+lifetime, up to the Great War, a Free Trade country--that is, a country
+allowing all foreign produce to come in and compete on equal terms with
+home produce.
+
+This country, at the beginning of the discussion a hundred years ago,
+was already producing great quantities of manufactured goods: cloth
+and machinery, ships and so on. It also produced on its fields the
+wheat and meat and dairy produce with which it fed itself. But as the
+population increased the amount of food being produced on the soil of
+England, though getting larger in the total, got smaller in proportion
+to the rapidly increasing population. Therefore there was a danger of
+its getting dearer. The Free Traders said: “Let foreign food come in
+free. If it is produced in climates where for the same amount of labour
+you can get more wheat and more meat and more dairy produce then, of
+course, many of our agricultural people will have to give up working
+on the land. But they can take to manufacturing, and the total amount
+of food which the English will get for so much labour on their part
+will be greater. Where an agricultural labourer working an hour, for
+instance, can get a pound’s weight of food, the same man working one
+hour in a factory will get, say, by exchange of the manufacture against
+foreign food, two pounds of food, if we allow all foreign food to come
+in free.”
+
+These Free Trade arguments look, when they are first studied, not
+only simple and clear, but unanswerable, and indeed most educated
+men--nearly all educated men--in Queen Victoria’s reign, thought they
+_were_ unanswerable, and that Protectionists here at home (who were
+no longer allowed to put their theories into laws) and Protectionists
+abroad who had kept up tariffs against foreign trade, were simply
+ignorant and foolish men who did not properly understand the elements
+of Economic Science.
+
+To see whether the Free Traders were right or wrong in these ideas, let
+us next turn to the arguments with which the Protectionists met them.
+
+These arguments were of two kinds:--
+
+(_a_) There were Protectionists who said: “We cannot follow all these
+elaborate abstract discussions about a science called Economics; we are
+practical men with plenty of common sense and experience, and all we
+know is that if the foreigner comes in free we shall be ruined. He can
+sell his wheat at such a price that our farmers will lose on it. Our
+labourers will leave the land, the rents paid to our landlords will
+vanish. You will thus ruin English wealth altogether.”
+
+(_b_) There was another kind of Protectionist who said: “You Free
+Traders take for granted, and depend upon, one capital point, to wit,
+_that the labour now employed in a particular form of production, and
+the capital employed in it, both of which will be destroyed by Free
+Trade, can be used more profitably in some other form of Production_.
+But we, the Protectionists, say that, in the particular case in
+question, they would _not_ be used more profitably. We say that, in
+point of fact, things being as they are, the national character being
+what it is, the arrangements of our English society and its traditions
+being what we know them to be, the ruined industry will go on getting
+worse and worse, artificially supported by relief from the community
+outside it, the farmer losing year after year and still hanging on, the
+land going back to weeds and marsh, the buildings falling down, and so
+forth. _We_ say that, though it may theoretically be possible to use in
+other ways the labour and capital thus displaced, in practice you will
+destroy more wealth than you will create.”
+
+These two kinds of arguments on the Protectionist side are still to be
+heard everywhere to-day.
+
+It ought to be perfectly clear to anyone who thinks about the matter
+at all that argument (_a_) was nonsense, for people and capital driven
+out of an industry ill suited to our present conditions are not
+thereby destroyed. They may very well find employment producing more
+total wealth in another. But argument (_b_) was a good argument _if the
+statement about the impossibility of changing from one trade to another
+were in practice true_. The whole discussion really turned upon the
+last point.
+
+Unfortunately for the Protectionists, those who defended their cause
+in this country nearly all used argument (_a_), and were very properly
+derided as fools by the Free Traders. Argument (_b_) was only used by
+a comparatively small number of thoughtful men and they were under
+this disadvantage--that they were arguing with regard to a possible or
+probable future with no past experience to guide them, and that many
+years must pass before it could be discovered whether, in practice,
+what they said was true or false; whether in practice the ruin of
+English agriculture would diminish the well-being of England as a whole
+or not.
+
+Further, the population continued to increase at a great rate, and that
+all in the towns and on the coal-fields. Our manufacturing productions
+went up and up and up, the total wealth of the country enormously
+increased, and these processes hid and made to seem insignificant the
+corresponding decay of the fields. We had no need for Protection in any
+domestic manufactured goods; we had begun to use coal before anybody
+else; we had developed machinery before anybody else. The only thing
+which there could be any point in protecting was agriculture, and that
+would have meant dearer food for the wage-earners in the towns.
+
+The great consequence was that Free Trade won hands down, and for a
+long time all its opponents, however distinguished or reasonable, were
+laughed at.
+
+But if we wish to be worthy students of Economic Science we
+cannot dismiss the quarrel so simply. There is such a thing as a
+strong _economic_ argument in favour of Protection in particular
+circumstances. The practical proof of this truth is the immense
+increase in wealth which took place in the German Empire during the
+thirty years before the Great War, which increase exactly corresponded
+with a highly protective tariff. The same thing happened in the United
+States at the same time. But the theoretical argument in favour
+of Protection is much better, because the increase of wealth in
+Germany and the United States under Protection might be due to other
+causes, whilst it can be shown by _reason_ that Protection itself, in
+particular cases, increases the total national wealth. With the proof
+of this I will end the present chapter.
+
+We have seen that the following formula is true:--_Freedom of exchange
+tends to increase the total amount of wealth of all that area which it
+covers._
+
+But what gives the argument for Protection, in special cases, its value
+is, as we saw on page 64, a second Formula equally true. Though freedom
+of exchange tends to increase the total wealth of an area over which
+it extends, _yet it does not tend to increase the wealth of every part
+of that area_. Therefore, if a part of the area over which freedom of
+exchange extends finds itself impoverished by the process, it may be
+enriched by interfering with freedom of exchange over the boundaries of
+its own special part.
+
+Therein lies the whole argument for Protection in particular cases.
+
+Let us take for example three islands, two close together and one far
+away and prove the case by figures.
+
+[Illustration: FIG. 1.]
+
+[Illustration: FIG. 2.]
+
+We will number them A, B, C. Island A is full of iron ore. Island B is
+full of coal. Island C is also full of iron ore, like No. A, but it is
+a long way off.
+
+Iron ore naturally comes to the coal area to be smelted, because, being
+heavier, it can be carried in smaller bulk. It is cheaper to bring iron
+ore to coal than coal to iron ore. If all three islands belong to the
+same realm what will happen is quite clear. Island B will import iron
+ore from Island A and will smelt it and turn it into pig-iron and steel
+and iron manufactures of all kinds, while Island C, a long way off,
+will remain unused. We will suppose the climate of No. C to be bleak,
+the soil bad, and the people there, since they cannot sell their iron
+ore on account of the distance at which they stand, make a very poor
+livelihood out of grazing a few cattle.
+
+Let us suppose that the amount of iron ore imported every year by No. B
+from No. A is worth £10 million. This of course has to be paid for. In
+other words, Island No. B has got to export manufactured goods in iron
+and steel back to Island No. A as payment for the iron ore which No. B
+imports for smelting. It also has to pay for the freight on the iron
+ore from No. A, that is, for the cost of bringing it over the sea to
+No. B. Let us suppose this cost to be one million. The total value of
+the iron goods produced on No. B, after being smelted with the coal of
+No. B, is, let us say, £30 million. Of this, £11 million goes back for
+the cost of carrying the ore from Island No. A and for its purchase.
+Meanwhile we may neglect economic values of Island No. C, because the
+few wretched inhabitants and their handful of cattle hardly count.
+
+Here, then, we have a wealth of £30,000,000 in manufactured iron goods,
+of which £10,000,000 goes to Island No. A and £19,000,000 to Island
+No. B, and £1 million to whoever carries the ore in ships. If you were
+estimating the wealth of the whole realm made up of the three islands,
+A, B and C, you would say: “The wealth of these people consists in
+manufactured iron and steel goods. It is equivalent to £30,000,000 a
+year, of which some £10,000,000 is revenue to Island A and £19,000,000
+is revenue to Island B and £1 million earned in freights. The wealth of
+Island C is negligible.” Well and good.
+
+Now supposing the political conditions to change. Islands B and C
+belong to one realm in future but Island A has become a foreigner. The
+realm to which Islands B and C belong turns Protectionist and sets up a
+barrier in the shape of a tariff against iron ore coming from abroad.
+We have seen that the cost of carrying iron ore from No. A to No. B
+was £1,000,000. No. C being much farther away from No. B, let us say
+that the cost of carrying is £5,000,000, but it is carried by subjects
+of the realm. The tariff put up by the realm to which Island B and C
+belong is what is called “prohibitive”--that is, it is so high that it
+keeps the iron ore of No. A out altogether, and the smelters on Island
+No. B are bound to get their iron ore from that distant Island C. Let
+us see what happens.
+
+Island No. B has now got to pay a freight, that is, cost of bringing
+the iron ore, five times as much as it used to be. Instead of paying
+£11,000,000 for its ore (£10,000,000 at the mine and £1,000,000 for
+carriage) it is now paying £15,000,000 (£10,000,000 at the mine and
+£5,000,000 for carriage). It still makes £30,000,000 worth of goods a
+year, but it only has £15,000,000 left over for its own income, instead
+of the £19,000,000 which it used to have. It is thus impoverished.
+
+But Island C, from having hardly any income at all, has now an income
+of £10,000,000 a year. Island A is ruined. Protection has put the
+getting of the ore under unnatural conditions. It has compelled the
+coal-owners to go much farther off for their ore than they need
+have done under Free Trade. The total wealth of all three islands
+altogether is less than it used to be by £4,000,000, for they are
+adding £4,000,000 extra to the cost of getting the raw material. _But
+the total combined wealth of B and C, even if they pay foreign ships
+to bring the ore, is now greater than it used to be under the old
+Free Trade._ No. B has £15,000,000; No. C has £10,000,000--the total
+is £25,000,000. If they pay their own sailors to bring the ore it is
+£30,000,000. Under the old conditions the total of B and C alone was
+only £19,000,000. Island A is ruined and the total wealth of the whole
+system is less, but the Protectionists of the realm, which now only
+includes B and C, are quite indifferent to that. They are thinking of
+the wealth of their common country, and are indifferent to the ruin of
+others, and their policy is _increasing_ the wealth of their common
+country at the expense of foreigners.
+
+In that example lies the argument for Protection. _If Island C could
+do something other than mine ore, if it had other forms of wealth,
+or by ingenuity or luck could discover some new fields in which its
+activities might develop, then the argument for Protection in this case
+would break down._ Island B would say: “Let me get my iron ore cheap
+from the foreigner in Island A, and do you, on Island C, develop (let
+us say) dairy farming, or something else which I cannot do and which
+Island B cannot do. In that way we shall all three benefit, and the
+common realm, consisting of Island B and Island C, will be richer than
+ever. Island B will have all its old profit of £19,000,000 (instead of
+being reduced to £15,000,000), and Island C can well develop a dairy
+produce of more than £7,000,000.”
+
+One ought to be able to see quite clearly from an example like this
+how true it is that _the argument in favour of Protection applies to
+particular cases only, and turns entirely upon whether an undeveloped
+part of the energies of the community can be turned into new channels
+or not_.
+
+We have an excellent, though small, example to hand in England to-day.
+The English people have to send abroad about £4 worth of goods every
+year per family for pig-meat, that is, bacon and hams and the rest.
+There is no reason why they should do this. They could produce the
+pigs on their own farms without drawing a single person from the
+factories and keep this mass of manufactured goods for their own use.
+The reason we are in this state in the matter of pig-meat is that our
+agriculture has generally got into such a hole that people will not
+bestir themselves to produce enough pigs. So here is a definite case in
+point, and only experiment could show whether Protection would pay here
+or would not pay.
+
+Protection ought to take the form of saying:--
+
+“Any pig-meat from abroad must pay such and such a sum per pound at
+the ports as it enters.” This would raise the price of pig-meat in
+England somewhat. If it raised the price to such an amount that the
+English people as a whole had to pay £2 more a family, _and if at that
+increased rate of price agricultural people could be stimulated into
+feeding the right amount of pigs and taking the necessary trouble to
+keep the supply going_, then the total wealth of the community would
+be increased £2 per family. Even if the price had to increase till
+each family on the average paid £3 more, or £3 10s. 0d. more, it would
+still be of advantage to the nation _on condition that the higher price
+really did make the farmers breed enough pigs, without lessening their
+production of other things_. But if, when the charge on the community
+had risen to £4 per family, it did not stimulate the production of pigs
+in this country sufficiently to supply the market, then your Protection
+of Pigs would be run at a loss.
+
+
+
+
+BANKING
+
+
+During the last two hundred and fifty years there has arisen, among
+other modern economic institutions, the institution of _Banking_.
+
+It has origins much older; indeed, people did something of the kind
+at _all_ times, but Banking as a fully developed institution grew up
+in this comparatively short time: since the middle of the seventeenth
+century. It began in Holland and England and spread to other countries.
+
+Like other modern institutions, it only became really important in
+the latter half of this period, that is, during the last hundred
+years or so; quite recently--in the last fifty years--it has become
+of such supreme importance by the mastery it has got over the whole
+commonwealth that everybody ought to try to understand its character.
+The Power of the Banks comes to-day into the lives of all of us and
+largely affects the relations between different nations. Indeed, it has
+become so powerful quite lately that one of the principal things we
+have to watch in politics is the enmity which the power of the Banks
+has aroused and the way in which that power is being attacked.
+
+The essential of banking lies in these two combined ideas: (1) that a
+man will leave his money in custody of another man when that other man
+has better opportunities for keeping it safe than he has; (2) that the
+money so left in custody _may_ be used by the custodian of the money
+without the real owner being very anxious what is being done with it,
+so long as he is certain to get it when he wants it.
+
+The putting together of these two ideas--which are ideas naturally
+arising in everybody’s mind--is the origin of all banking, and the
+moral basis upon which banking reposes.
+
+A man has £1,000 in gold. He has to travel or to go abroad on a war,
+or is not certain of the safety of so large a sum if it is kept in his
+house. He therefore gives it into the custody of a man whom he can
+trust, and who, on account of special circumstances, can keep it more
+securely than he himself can. What the owner of the £1,000 wants in
+the transaction is to be certain of getting a part or the whole of his
+money whenever he may need it. He does not want the individual pieces
+of money. So long as he can get the value of them _or of part of them_
+at any moment from the man to whom he gave custody of the original sum
+he is satisfied.
+
+A good many other people feel the same necessity. The man who has
+special opportunities for looking after _all_ their sums of money
+collects them together and has them in his strong box in safe keeping.
+Those who have acted thus would be very angry if they found their
+money had been lost, or that when they came to ask for £20 or £100 out
+of their thousand pounds--needing such a sum for the transactions of
+the moment--the man in whose custody the whole lay was unable to let
+them have the £20 or £100 required. But so long as the _depositor_
+(as he is called, that is, the man who hands over his money for safe
+custody) finds himself, in practice, always getting the whole or any
+part of his deposit on demand, he is content; _and will not be annoyed
+to find that the person in whose custody he left the money has been
+using it in the meantime_.
+
+For instance: I might leave £1,000 in gold in the custody of someone
+who is better able than I to prevent its being stolen. I am saved all
+the trouble of looking after it, and I can call on a part of it or all
+of it whenever I like. If there were only myself leaving it thus with
+one friend, and it was a particular transaction between us two, that
+friend would be acting wrongly if he were to take my £1,000 and buy a
+ship with it, say, and do trade. No doubt he would earn a profit, and
+could say to me when I came back for £100 of it: “I am sorry that I
+cannot give you your £100, but I have used the money, without telling
+you, to buy a ship. The ship will earn a profit of £200 at the end of
+the year, and then you can have back your £100 if you like, and if you
+press me, I will even sell the ship and you shall have back the whole
+of your £1,000.”
+
+In that case I should naturally answer: “No one gave you leave to use
+my money. You have embezzled it, and you have acted like a thief.”
+
+But when a very great number of men entrust their money in this
+fashion, and do not specially stipulate that it should be left
+untouched, when there is a sort of silent understanding that, if
+whenever they want it, the money will be forthcoming, then they do not
+ask too closely what has been done with the whole of the sum in the
+custodian’s hands. For if _very many_ people are thus “banking” their
+money with one safe custodian only a certain proportion will _at any
+one time_ want their money, and the rest can be used without danger of
+the “banker’s” failing to meet any particular demand. Thus banking,
+that is, the use of other peoples’ money, arises and becomes a natural
+process because it is of mutual advantage. The Banker can earn profits
+with that average amount of money which always remains in his hands,
+the depositors have their money safely looked after and may even share
+in the profit.
+
+A hundred men, let us say, have given £1,000 each into the hands of
+such a custodian, who has come to be called their “Banker.” The total
+sum of money in this man’s hands is £100,000. It is found in practice,
+over the average of a number of years, that this hundred men do not
+“draw” upon (that is, ask for their money to be paid out to them by)
+their banker more than to the extent of, let us say, £100 every month
+each, and it is also found that, while they need this £100 to pay
+wages or bills or what not, they also come back with the money they
+earn (say, £120 per month, on the average) and give it back to their
+banker for safe keeping. In several years of this practice the banker
+discovers that he must have about 100 times £100, that is £10,000, in
+free cash to meet the demands upon him, and that he gets rather more
+put into his custody in the same period of a month, year in and year
+out. It follows that he always has about £90,000 in gold doing nothing
+the whole time. He says to himself: “Why should I not use this money
+to buy instruments of production--ships or ploughs, or machinery or
+what not--and produce more wealth? It will not hurt those who have
+deposited it with me, for I have found that, _on the average_, they
+never want more than a tenth of their money out at the same time (and
+they are also perpetually paying in more money to me--so that they and
+I are quite safe), and if I make a good profit by the use of the things
+I shall have bought with this £90,000 I can offer them part of the
+profit. So we are both benefited.”
+
+That is what the banker began by doing at the very origins of this
+institution of banking. It was a little odd. It was not quite
+straightforward. But the depositors, most of them, knew what was going
+on, and at any rate did not protest. And if, when a profit was made out
+of their combined money, they got some of that profit, they were glad
+enough to see that their money had been put to some use and that they
+had become richer by its use; while if they had kept it to themselves
+in scattered small amounts it would not have made them any richer.
+
+In England we can trace the origins of a great many banks, and of the
+fortunes of their owners, proceeding along these lines. For instance:
+there was a family of silversmiths rather more than two hundred years
+ago. They had a shop in which silver objects were bought and sold, and
+they also had gold plate to buy and sell. They had strong-boxes in
+which these things were kept, and they paid money to men who guarded
+these strong-boxes. It was a natural thing for people to go to this
+shop and say: “I have here a thousand pounds in gold which is not very
+safe at home. Will you look after it for me, on condition of course
+that I may call for any amount of it when I want it and what will you
+charge for your trouble?” The silversmiths said: “Yes, we will do this,
+we will charge nothing,” and in that way they got hold of very large
+sums which people left with them. They found, as we have just seen,
+that in practice, year after year, only a certain amount of the sums
+were required of them at any one time, and rather than leave the big
+balance lying idle they used it for buying useful things which would
+produce more wealth. They lent the money sometimes to the State for its
+purposes, that is, to the King of the time. Sometimes they employed it
+in other ways which earned a profit. The people who left the money
+with them always found that they could get back whatever they wanted
+when they asked for it, and they were content. That is how banking
+arose.
+
+Another example of which I know the history and which is very
+interesting is that of a squire in the West of England who lived rather
+less than two hundred years ago and has given his name to one of our
+great banks still existing to-day. This squire was a rich man who
+had many friends coming to his table. He had the reputation of good
+judgment and his friends would say: “I will leave this sum of money in
+your custody,” for they knew that he would be able to put it to good
+use and give them part of the profit. Thus, looking after the money of
+neighbours, he came to look after the money of a great many people whom
+his neighbours recommended, and at last had hundreds of “clients,” as
+the phrase went--that is, of people who would leave their money with
+him, knowing that he would earn a profit both for himself and for them;
+at the same time the money would be safely kept, and they might call
+for a portion of it whenever they wanted it.
+
+From such origins the banking system gradually extended until, about a
+hundred years ago, or rather more, every rich family in this country
+had a considerable sum of money left at a bank, and paid into the
+banker’s coffers further sums of money which they received. Each had a
+book of accounts with the bank showing exactly how much had been put
+in and therefore how much they could “draw” upon. At first the clients,
+or depositors, would “draw” some portion of their money which they
+might immediately need by way of a letter. Thus, if their banker’s name
+was Mr. Smith, they would write this note: “To Mr. Smith. Please pay my
+servant who brings this letter £20 out of the £1,000 which I left with
+you the other day.” They would sign this letter and send the servant
+with it; the banker would give the £20 to the servant and the servant
+would give a receipt against it.
+
+That was the origin of what are nowadays called “cheques.” The letter
+giving authority for the messenger to draw the money grew more and
+more formal and was drawn up more and more in the same terms to save
+trouble. Then the bankers would have the forms printed, so that the
+client who wanted to draw would have the least possible trouble. If
+you look at a cheque to-day you will see that it is nothing but the
+old letter put into the simplest terms. At the head of the cheque is
+the name of the bank; then there is the word “Pay,” and after that the
+client adds the sum which he wants paid and signs his name to prove
+that it is really he who is entitled to have the sum and who is asking
+for it. The words “or bearer” are sometimes printed after the word
+“Pay,” so that anyone bringing the cheque for the client can get the
+money for him.
+
+But to prevent people using these pieces of paper to get money without
+having the right to it the word “order” was more often substituted for
+the word “bearer”; and this word “order” means that the owner, who
+is drawing his money out, says: “Do not pay it to me; pay it to this
+other person whom I desire to receive the money and whose name I have
+mentioned above, who will sign to show that _his_ order for payment has
+been met.”
+
+For instance: I have £1,000 deposited with my banker, Mr. Smith. I
+write a letter: “Pay £20 to John Jones _or order_.” This means: “Do
+not, dear Mr. Smith, send the money back to me, but give it to Mr.
+Jones who will bring this letter with him, or, if he cannot come
+himself, will send a signed letter _order_ that it should be paid
+to him.” At the beginning of the system, Mr. Jones, to whom I gave
+the cheque, would write a little letter saying: “Dear Mr. Smith, Mr.
+So-and-So, who banks with you, has given me the accompanying letter by
+which I can get £20 of his _by my order_. I therefore send you this
+letter to tell you that whoever brings this cheque bears my order to
+give the money to him.” He signs the letter “John Jones” and the banker
+hands over the money to whomever it may be that brings the letter for
+John Jones.
+
+In process of time the thing was simplified. In place of the letter
+came the shortened form, the cheque, and you wrote: “Pay £20 to John
+Jones or order,” and John Jones, instead of sending a letter signed
+by himself, merely put his signature at the back of the cheque. This
+was called “endorsement,” which is a Latin form of the English meaning
+“putting one’s name on the back of anything.” A cheque “endorsed” with
+the name “John Jones,” that is, with John Jones’s name signed on the
+back of it, was paid by the bank to whomever John Jones might send to
+receive the payment. My cheque asking for £20 to be paid to John Jones
+having fulfilled its object, and the £20 being paid to whomever John
+Jones had sent after he had “endorsed” that cheque, the cheque was said
+to have been “honoured” by the bank. The word “honoured” meant that the
+bank had admitted that I had the money banked with them, and that they
+were bound to hand it over on seeing my signature asking that it should
+be handed over.
+
+The convenience of cheques used in this way for business was obvious.
+If I owed a man £20 and I had £1,000 with my banker, instead of having
+to draw out twenty sovereigns myself and take them to him, all I had
+to do was to write out a cheque to the order of this man, who would
+endorse it and get the money.
+
+Now as banking grew and came to deal with more and more people, it was
+probable that this man, Jones, would have a banking account too with
+somebody. If Mr. Smith was not his banker, then Mr. Brown would be.
+As we have seen, people not only drew out money from the original sum
+they had deposited at the bank, they also paid in money as they got
+it, on account of the convenience of having it looked after safely. So
+when John Jones got my cheque for £20, he often did not get the actual
+cash from my banker, Mr. Smith, but simply gave in the cheque, endorsed
+by him, to Mr. Brown, _his_ banker, and said: “Get this from Mr. Smith,
+the other banker, and add it to the sum which I have banked with you,
+Mr. Brown.” The banker Brown did this, and the cheque which I had
+originally signed in favour of John Jones, having gone the rounds, was
+sent back to me to prove that the transaction was complete.
+
+As banking continued to grow this system took on a vast extension.
+Thousands and thousands of people paid, and were paid, by cheques, of
+which only a small part were turned into cash, and of which much the
+greater part were paid into the bankers’ offices and then settled by
+the bankers among themselves.
+
+After many years of this system it became apparent that the enormous
+transactions, thousands of cheques all crossing each other daily in
+hundreds of ways, could be simplified by the establishment of what came
+to be called the “Clearing House.”
+
+Thus, suppose three bankers--Mr. Smith, Mr. Brown and Mr. Robinson.
+I bank with Mr. Smith, and sign a cheque in favour of Mr. Jones who
+banks with Mr. Brown, because I owe Jones a bill which I can thus pay.
+I also sign a cheque in favour of Mr. Harding (that is, to the order
+of Mr. Harding), to whom I also owe money. He banks with Mr. Robinson.
+Meanwhile Harding perhaps owes money to Jones and pays him a cheque
+ordering Mr. Robinson (Harding’s banker) to pay Jones a sum of money.
+Jones hands this over to his banker, Mr. Brown. At the end of a certain
+time--say, a month--the three bankers, Smith, Brown and Robinson, get
+together and compare the various cheques they have received. It is
+obvious that a great many will cancel out.
+
+For instance: I have given Jones a cheque for £20 which Mr. Smith, my
+banker, has to pay to Mr. Brown, Jones’s banker. But Mr. Brown has a
+cheque of Mr. Harding’s asking Mr. Robinson to pay £20 to Jones, and
+Jones has given that to Brown too. Meanwhile Jones has given me a
+cheque later on, for something which he owed me, of £10. The bankers
+compare notes and see that Smith need not pay £20 to Brown, and then
+ask Brown for £10. It is simpler to pay the difference only. Mr. Smith
+hands to Mr. Brown what is called the “balance.” The difference between
+£10 and £20 is £10, and Brown hands over £10 to Smith. At the end of
+another month perhaps it is Robinson, Harding’s banker, who finds that
+on comparing notes he has a balance against him of £10 to Brown: and so
+on.
+
+When dozens of bankers came to be established with thousands of
+clients, or “depositors,” the convenience of this system was
+overwhelming. There would perhaps be in a week as many as 10,000
+cheques out, and instead of having to make 10,000 separate transactions
+of paying from Brown to Smith, Smith to Robinson, Robinson back to
+Brown, and so on, through dozens of bankers, the cheques were compared
+and only the balances were paid over--or, as the phrase goes, “cleared.”
+
+The Clearing House was the place where all the cheques of different
+banks were put in at regular intervals and compared one with another,
+so as to see what balances remained over, owing by particular bankers
+to others.
+
+Meanwhile, as the banking system grew, most of the ready money in the
+community came into the hands of the bankers. There was a perpetual
+coming and going, and paying in and paying out, but there was always
+among the bankers as a community a very large sum of money lying
+untouched, a sort of reservoir. It was nearly always very much
+more than two-thirds of the whole amount which the banks could be
+called on to pay. That is, the depositors never wanted a third of
+their deposits out at any one time. The art of a banker, therefore,
+consisted in knowing how to purchase with this idle money left in their
+hands fruitful objects for producing future wealth, in other words,
+“investing” it in “capital enterprises,” but always prudently keeping
+a large reserve ready to meet any demands which their depositors might
+suddenly make upon them.
+
+So far so good. The banking system up to this point in its development
+was an advantage to the community and to individuals. It enabled a
+large number of small sums which could not be used very well separately
+to be collected together for big enterprises.
+
+A thousand people, depositing a thousand pounds each, left a million
+pounds in the hands of the bankers, of which much more than half a
+million could be used at any time for “development,” that is, for
+buying instruments with which to develop natural resources. The nation
+would be richer if a deep shaft were sunk and coal were got out of the
+earth, but it would cost half a million to make that mine. No one of
+the thousand small depositors could have undertaken such a task: the
+bank, using all their monies together, could undertake it--and did so.
+
+The banking system thus rapidly increased the wealth of the country,
+and that was all to the good. People meanwhile felt their money to be
+secure, and they had the great advantage of being able to draw cheques
+for payments they had to make to those to whom they owed money, and of
+receiving cheques for money due to them instead of perpetually handling
+and carrying about large sums in metal--the whole passing through the
+bank and helping to keep this reservoir of wealth perpetually filled
+and available for use in investment.
+
+That state of affairs lasted to within the memory of men now living,
+and, as I have said, the banking system during that time was an
+advantage to everybody. There was nothing to be said against it.
+
+But then came (as there comes upon every human institution after a
+certain time) a further phase of development, in which the institution
+of banking produced certain perils and evils. Those perils and evils
+are increasing, and are producing the antagonism to the banks and to
+their power which everybody is beginning to express to-day, all over
+Europe and America, and which we must understand if we are to follow
+modern political economy. I will show you how these evils in the
+Banking system arose.
+
+A man having £1,000 in the bank could draw upon it up to the total
+amount. He could sign a cheque for £100 and then for £500 (making £600)
+and then for another £400. Supposing he put nothing in during that
+time, he would have exhausted the whole of what he had in his bank; he
+would have come to an end of what is called, in the terms of banking,
+his “balance.” There, you might think, was an end of his power to draw
+cheques. He had got back all his money, so the bank and he had nothing
+more to do with each other. At first, of course, that was the regular
+state of affairs. A man could draw out all that he had in the bank, but
+no more. It seems common sense.
+
+But the banks had plenty of other people’s money lying about which
+had not been drawn out, and much of which had not yet been invested
+in capital enterprises, such as mining, or what not. They would say
+to the man who had once put £1,000 into their hands and who had now
+drawn it all out: “You still want to carry on your business; but you
+have exhausted all the money you had with us. You will probably want
+to borrow some money to tide you over until the time when further sums
+begin to come in to you through what you sell in your business. We
+are prepared to lend you money out of what we have to use from other
+people’s deposits. You will pay a certain ‘_interest_’ upon it (that
+is, so much a year on each hundred pounds we lend you--say £5 a year
+for every £100), and you shall pay us back when you can.” The bank
+accompanied this offer with the right to draw further cheques to, say,
+another thousand pounds, which the bank would “honour”--that is, for
+which the bank would pay out money which did not really belong to their
+client but was lent to him by the bank out of other people’s balances.
+And this extra amount, which the bank thus allowed their client over
+and beyond what was his own money was, and is, called an “over-draft.”
+
+At first, before the banks would allow anybody an “over-draft” (that
+is, a loan), they required the borrower to give security. He had to
+leave with them gold or silver plate or a mortgage upon his land, so
+that if, in the long run, he found himself unable to pay back, the
+banker, could sell the security and recoup himself.
+
+But it was obviously convenient and useful when a client was in a
+big way of business to grant him an “over-draft” from time to time
+although he had no security to offer. The bank said to itself: “Here is
+a merchant making very large profits every year. It takes him some time
+to get his money in from the foreigners to whom he sells goods oversea,
+but he is bound to get it sooner or later. So, without asking him for
+any security (for perhaps he has no plate or title deeds or what not to
+give), it is still well worth our while to let him have an over-draft
+(that is, a loan) out of the other people’s money. He will pay us
+interest upon it, we shall make a profit, and when the foreigners pay
+him he will be able to pay us back.”
+
+In this way the banks became on all sides lenders of money to persons
+without security, and it became exceedingly important to any trader
+whether he could or could not get the banks to back him up in this
+fashion.
+
+The thing went farther. A man might have no capital at all, but a good
+idea. He might have discovered, for instance, a mine of copper-ore in
+some colony. He would come to the banks and say: “I have not the money
+to pay labourers to dig for this ore, but if you will advance the money
+to me and go shares in the profit the ore can be got out.” The banks
+would look at the “proposition,” as it is called, and if they thought
+it a good thing they would advance the money and share the subsequent
+profits with the borrower. All over the world the banks were thus
+“financing,” as it is called, every kind of enterprise.
+
+The system went farther still--and here it is that we come upon the
+modern trouble. Hitherto when they gave an over-draft to anybody,
+whether with or without security, or even when they gave a loan to a
+man who had no capital at all, and “backed” him in his enterprise which
+they thought likely to prove successful, they had used the money which
+other clients had left with them. But it occurred to the banks after a
+certain time that there was no need to use anybody else’s money at all.
+_They could themselves offer to honour the cheques of the man to whom
+they lent the money, without having any real money with which to pay
+those cheques._
+
+Why was this? It was because, with the growth of the banking system,
+hardly any of the payments were, by this time, actually made in
+gold. Real money only passed in a very small degree. Of the myriad
+transactions all but a tiny proportion were “_instruments of credit_.”
+Just as a bank-note issued by the Bank of England is a promise to pay
+in gold, and yet a promise to pay a million pounds in bank-notes could
+always be made with much less than a million real pounds to redeem
+the notes so _the banks could create paper money, or its equivalent,
+in the form of over-drafts_. If they said to a man who had _no_ money
+deposited with them: “We will honour your cheques up to £1,000” _what
+they were really doing was increasing the paper currency to the extent
+of £1,000_. They were issuing promises to pay, exactly like bank-notes,
+knowing that of the total amount out only a small proportion at any
+moment would be required in real money.
+
+There was a check on this system of creating new artificial paper money
+by the banks (for this is what it came to), and the check consisted in
+the control of the Government over the National Bank--in England the
+Bank of England. There was a law preventing the Bank of England from
+issuing more than a certain number of notes in proportion to the gold
+lying behind them, and the private banks could not issue over-drafts,
+or loans, indefinitely, because they could not get more than a certain
+amount of paper money from the Bank of England to meet the payments
+they had to make, and the Bank, in its turn, could not issue more than
+a certain proportion of paper money against its gold.
+
+So ultimately the amount of real money, the gold, in the hands of the
+banks, both national and private, acted as a check upon this creation
+of false money by the banks. But when gold payments ceased with the
+Great War that check broke down, and even if gold payments had not
+ceased, the power of the banks thus to “create” as it is called,--in
+other words, their power to say to any individual enterprise: “You
+shall or you shall not have your cheques honoured: you shall or you
+shall not carry on”--gave them an immense and increasing power over
+the community.
+
+That is why the revolt against the banking system and its control over
+our lives in the modern state since the war is becoming so formidable.
+
+It has two chief forms against which men protest.
+
+1. The bankers can decide, of two competitors, which shall survive.
+As the great majority of enterprises lie in debt to the banks--that
+is, carrying on with loans allowed them by the banks working with
+money _made_ by the banks--any one of two competing industries can be
+killed by the bankers saying: “I will no longer lend you this money. I
+‘call it in’--that is, ask for it to be paid at once. But I will not
+exercise the same pressure upon the man who is competing against you.”
+This power makes the banks the masters of the greater part of modern
+industry. It is argued that the banks do not act from caprice, and will
+naturally only back a sound enterprise and only ruin an unsound one.
+That is, on the whole, true. But still, those who command them have the
+power, if they like, to act from caprice, and whenever you give a few
+human beings great power of this sort over millions of others it tends
+to be abused.
+
+2. The banks, especially in England, are all in one combination and
+keep detailed information upon all of us. Not only have they control
+over industry through their power to make or withhold the money which
+they alone can now create and hand out to those they favour, but they
+also keep indexes of detailed information as thorough and widespread
+as those of any Government office. They have a secret service more
+widespread and powerful than that of the State, and this hidden power
+of theirs, though private and concealed knowledge, irritates plain men
+more and more. People feel that they are not free, and that the banking
+system, which is international in essence, is a universal and hidden
+master.
+
+Therefore all over the world to-day people are saying: “The banking
+system, and the few men who direct it, are altogether too powerful.
+They control our lives. They are beginning to control the public policy
+of the State, especially in England, and there ought to be a national
+authority superior to them and keeping them in order.”
+
+A great many schemes have lately been on all sides proposed to
+establish such a superior authority. Thus, we have in England a very
+powerful movement in favour of what is called the “Douglas Scheme
+of Credit,” and of course the Socialists, with their ideas of State
+control of everything, would also put an end to the private power of
+the banking system. Then there are those who want to have a strong King
+who would be able to override any lesser power in the State, including
+the bankers.[5] But the points to seize in understanding the political
+economy of our time are those I have just been describing to you: what
+the banking system is, how it arose, how unnaturally powerful it has
+become, and why a universal revolt is arising against it.
+
+There will be a struggle inevitably between the banking, or financial,
+interest and the people all over civilised countries: but no one can
+tell which will win. In industrial countries the odds are in favour of
+the banks, or financiers. In peasant countries against them.
+
+
+
+
+NATIONAL LOANS AND TAXATION
+
+
+Every country must, to carry on its national services, raise taxes
+from its citizens, and those taxes, though levied in money, translate
+themselves, of course, into goods, that is, economic values attached to
+material objects.
+
+We say that the State “raises,” say, a hundred million pounds in
+taxation from its citizens a year, for “State Purposes”; and when you
+come to look into what is actually got by the State and how the State
+uses what it has got, it means that the State levies so many boots and
+so much bread, and so much housing material and so much clothing, and
+spends this again in maintaining State servants, that is, in clothing
+and housing and feeding soldiers and policemen, and civil servants and
+school teachers, and so on.
+
+But in the modern world, and for the last two hundred years or so,
+nearly all states have also had to raise taxation _in order to pay
+interest upon the State loans_.
+
+A State loan, or _national debt_, arises in this way. The State needs a
+great quantity of goods for a particular purpose--usually for the very
+unproductive purpose of waging a war. It has to get a lot of metal for
+its munitions and guns, and quantities of food to feed the soldiers,
+and coal to transport them. Now there are two ways in which a state
+gets these. The first is to get the whole amount, as it is needed,
+directly from the people, by a very heavy tax levied at the time. That
+was what was done for hundreds of years before the second method was
+attempted. The king of a country, wishing to wage war, would ask his
+subjects for contributions, and he could not wage war upon a scale more
+than these contributions would meet.
+
+But about two hundred years ago there began (and since then has very
+largely increased), the second method, which is that of _national
+loans_.
+
+The State is, let us say, taking in ordinary taxation from its citizens
+about one-tenth of their produce. Suddenly it finds itself involved in
+a much higher expenditure, amounting to, say, half the produce of the
+country. If it asked for half the produce right away as a tax people
+might refuse to pay it, or it might make the policy of the State--the
+war, for instance, which the Government wanted to wage--so unpopular
+that the State could not pursue that policy or wage that war. So the
+Government had recourse to _borrowing_ from the citizens, promising to
+pay, to those who lent, interest in proportion to what they borrowed,
+as well as the capital itself. Thus they would _take_ in taxation for
+a war money from a farmer equivalent to _ten_ loads of wheat; but they
+would also _borrow_ from him _one hundred loads_ of wheat, promising to
+give him as interest _five_ loads of wheat every year for any number of
+years until they should ultimately pay back the whole hundred loads as
+well.
+
+When these national loans began the Governments honestly intended
+to pay back what they borrowed. But the method was so fatally easy
+that, as time went on, the debt piled up and up until there could be
+no question of repaying it: all the State could do was to pay the
+interest out of taxation. It remained indebted to private rich men for
+the principal, that is, the whole original sum, and meanwhile, through
+further wars, this hold of the rich men upon all the rest of the
+community perpetually increased.
+
+The “National Debt”--as it came to be called--remained a permanent
+institution, in connection with which all the citizens had to be taxed
+in order to provide interest for the rich lenders. Latterly these
+burdens of national debt have become overwhelming, and at the present
+moment about a twelfth of everything that English people produce is
+taken from them and handed over as interest to the comparatively few
+wealthy residents in England and abroad who lent great sums to the
+Government during the war.
+
+It is true that whenever a loan is raised the Government provides not
+only interest but what is called a “sinking fund”--that is, an extra
+amount of taxation every year which is dedicated to paying back the
+whole of the loan slowly. But long before a loan is paid off some new
+occasion arises compelling the Government to borrow again on a large
+scale, and the total debt perpetually increases.
+
+The result is that all the great modern European nations are now
+loaded with a debt really larger than any of them can bear, and that
+therefore they have all taken steps to lighten that burden by various
+tricks not at all straightforward. Some of them pay back in money
+which appears the same as the money which they borrowed, but which has
+a very different value. They have borrowed for a war, say, £1,000,
+representing 100 tons of wheat. Then they debase the currency, so that
+a sum still called £1,000 will only buy 20 tons of wheat, and in this
+way they can pretend to pay the lender back, although they are really
+cheating him of four-fifths of what he lent. Two countries, Germany
+and Russia, have pushed this so far that the lenders are now not
+really paid anything at all. A man who lent the German Government, for
+carrying on the war, money which during the war would have bought a
+million tons of wheat, is now (October, 1923) paid back in money called
+by the same name but able only to purchase a tenth of a ton--which is
+the same as saying that he is not paid back at all.
+
+Of all European countries that fought in the war our own has been the
+most honest in this matter, but even in England a man who lent the
+equivalent of 1,000 sheep, say, and who was promised interest at the
+rate of 50 sheep a year, is only getting 25 sheep a year on account of
+the change in the value of money.
+
+In this matter of loans we must distinguish between _internal loans_
+and _external loans_. An _internal loan_ is borrowed from one’s own
+people. It involves taxing and impoverishing one set of citizens in
+order to pay interest to and enrich another set. But the country as a
+whole is no poorer. An _external_ loan is borrowed from foreigners, and
+the interest on it is dead loss to the country. Also, it cannot be paid
+in debased currency. A government can cheat its own nationals by paying
+them in false money. But it has to pay foreign lenders in real money. A
+foreign loan is real. It must be (as a rule) paid in gold. England thus
+pays millions a year to America.
+
+Now from State _loans_ let us turn to State _taxation_, which has
+to-day for its most permanent object the payment of interest on
+internal and external loans.
+
+How does the State tax its citizens?
+
+Taxation levied by the State is divided into two kinds--called _direct_
+and _indirect_.
+
+Direct taxation is the taxation levied upon the money which the person
+who pays it has at his disposal.
+
+For instance: If you have £1,000 a year and the State makes you declare
+that and then taxes you £100 every year, that is direct taxation.
+
+Indirect taxation takes the form of levying a tax on the manufacturer
+of an article or on the importer of an article, which tax he passes
+on to the person who consumes it, by an addition to the price of the
+article. Thus, when you buy a pound of tea or a bottle of wine you are
+paying indirect taxation. The price which you paid for the tea is so
+much for the real value of the tea and so much more (though you do not
+feel or know it at the time) which has been paid on the tea as it came
+into England at the ports. The brewers who make beer have got to pay
+the Government so much for every gallon they make, and this is passed
+on to the people who buy the beer by an extra amount put on to the
+price.
+
+The wisest men who have discussed how taxes should be levied laid
+down four rules which, unfortunately, no Government has kept to as it
+should. It is worth while knowing those rules, because they are a guide
+to what good taxation should be.
+
+These rules are:--
+
+
+1. A tax should fall in such a fashion that it is paid most easily.
+
+
+For instance: it is much easier to pay £100 a year in small sums which
+fall due at frequent intervals than to pay the whole £100 upon demand
+in one lump.
+
+
+2. The tax should be so arranged that the cost of collecting it should
+be as slight as possible.
+
+
+For instance: if I put a tax upon everyone who crosses a particular
+bridge, I shall have to appoint and pay someone to collect the tax at
+the bridge, and I shall probably have to pay inspectors to go round and
+see that these bridgemen do their duty and do not cheat. If I tried to
+levy a tax of this kind on a great many bridges that are not much used
+the cost of collecting would be very high compared with the revenue
+produced. But if I put a tax on every cheque issued by a bank, _that_
+tax is collected with hardly any expense. All the Government has to do
+is to say that no cheque will be valid unless it carries a stamp. The
+banks stamp all their cheques with this stamp, and when they sell a
+cheque book to a customer they take the value of the stamps from him.
+All the Government has to do is to find out the number of cheque books
+issued, and ask for the money from the banks.[6]
+
+
+3. Taxes are better in proportion as they fall on unnecessary things
+rather than on necessary things.
+
+
+It is much better, obviously, to make people pay for their luxuries
+than for their necessities. It is oppressive to make people pay for
+their necessities, which even the very poor must have, and it is juster
+and altogether better to make people pay for things which they need
+not have. Thus, when the tax was first levied upon tea it was a tax
+upon a luxury, for only rich people then drank tea. But to-day, when
+the poorest people must drink it, it is unjust to tax it, for it is a
+necessity.
+
+Unfortunately, it is very difficult to keep to this rule in any modern
+country, because the amount of taxes required is so large that unless
+one taxes the necessities one will not get enough money for the
+requirements of the State: thus tea and sugar, beer and tobacco, all
+of them _necessities_ of the poorest people, are enormously taxed. Our
+poor people in England are much more heavily taxed than any people in
+the world.
+
+4. Taxes should fall proportionately to the wealth of the taxed, that
+is, the sacrifice should be equally felt by all. This rule is easy
+enough to keep when taxation is light. For a very slight tax on poor
+men--who are the vast majority of the State, suffices to bring in the
+small revenue needed, and a severe tax on rich men is but an addition.
+But when taxation must be heavy to meet the requirements of the
+State--say more than a twentieth of poor men’s incomes--then the rule
+is difficult to keep. For either you get insufficient revenue if you
+spare the poor, or you must tax the poor on a scale which no increase
+of the taxation on the rich can really equal. When taxation is too
+heavy, you must either ruin the rich or crush the poor. And that is why
+heavy taxation has destroyed so many States.
+
+5. The last rule about taxation is that it should be _certain_; and
+this means that the State should be certain of getting what it ought to
+get, and that the people who pay should know what they have to pay and
+not be left in doubt and anxiety.
+
+For instance: the tax on tobacco in this country is a certain tax. It
+is levied on a comparatively small number of ships’ cargoes which enter
+the country with tobacco, because we do not grow tobacco in England,
+and the sum which the importers pay is automatically passed on to the
+purchasers. The State knows by experience how much tobacco the people
+will buy in the country in the year, and the people who buy tobacco
+know what they mean to spend, and can, if they choose, ascertain how
+much of this goes in taxation. But the same tax on tobacco in France
+is not a certain tax, because the French grow a lot of their own
+tobacco--in fact, most of it. The people who grow tobacco naturally try
+to hide the total amount of their crop from the Government inspectors,
+and a great number of these inspectors have to be going about the whole
+time actually counting each leaf on each plant and rummaging in the
+bins to see that none is gone.
+
+An example of a most uncertain and unjust tax for the taxpayer in our
+own country is the Income Tax, because it is difficult to prevent
+unfixed people from hiding their profits or from concealing from the
+tax collectors amounts which they have earned. Also the honest citizen
+with an established and known position can be bled to the full, while
+the rogue and adventurer, the speculator and dealer escapes. But it
+is a certain tax from the point of view of the Government, because
+they know on the average what a penny on the Income Tax will produce
+one year with another, and are not concerned with justice but with a
+calculable revenue.
+
+Before we leave this discussion it is worth while mentioning an odd
+idea which a few very earnest and active people have got hold of,
+called the “Single Tax.”
+
+It is really much more a part of the theory of Socialism than a system
+of taxation. Still, as it has come to be called the “Single Tax” we
+will treat it under that head.
+
+The idea of the single tax is this:--Rent, or the surplus value of a
+site, whether it be due to the extra fertility of farm land or to the
+extra convenience of town land, is, say the Single Taxers, not the
+product of the individual who owns the land.
+
+If I own a barren piece of heath on which I cannot get any rent for
+agriculture, and then a railway is built passing through it and a
+station is built on the heath, many town workers who want to live in
+the country will take houses which will be built near this station and
+live in these houses, running up and down from town for their work.
+In a few years this barren heath which brought me in nothing will be
+bringing in many thousands a year, for a little town will have sprang
+up, and I shall be able to charge rent to all the people who live there
+upon my land.
+
+The Single Taxers say that, since I did nothing towards making the
+extra value, but that extra value has been made by the growth of
+population and by the activity of the whole community, I have no right
+to these rents. In the same way they say that I have no right to the
+rent of a very fertile field compared with a bad field which pays
+little or no rent, because it was not I that made the soil fertile.
+
+So they propose that _all the rents of the country should be levied as
+a tax_. They say that no other taxes are needed. If I have money from
+dividends in an industrial concern I can keep all that without paying
+any taxes on it, and I can be let off taxes on tobacco and drink and
+everything else of that sort. But anything I get as rent for land I
+must pay over to the State. I may still be allowed to call myself the
+owner of the land, but I must be taxed an equivalent to the rent which
+it produces.
+
+These people have never been able to apply their theory, and the reason
+is pretty clear. It would work most unjustly, considering that people
+buy and sell land just as they do any other commodity, and that a man
+who had put all his money into rents in land would be ruined by this
+system, while another man with exactly the same amount of money, who
+had put it into a business, would go scot free. If you were starting a
+new country it might be possible to begin with the Single Tax system,
+but even then you would be up against the fact that people like owning
+land because such ownership gives them independence. But at any rate it
+is theoretically possible to apply this system in a new country. In an
+old country it is quite out of the question.
+
+
+
+
+THE SOCIAL (OR HISTORICAL) VALUE OF MONEY
+
+
+There is a special point in Economics which has been very little dealt
+with, or rather not properly dealt with at all, and which you will
+find interesting as a new piece of study, because it will help you to
+understand history as nothing else will: and that point is the _Social
+(or Historical) Value of Money_.
+
+You read how, in the past, the King of England, wishing to wage a
+great war, managed to raise, say, a hundred thousand pounds; and how
+that was thought a most enormous sum: whereas to-day, for the same
+sized army, we should need thirty times as much. You read how Henry
+VIII. suppressed the Monastery at Westminster which had an income of
+four thousand pounds a year, and how this income was then regarded as
+something very large indeed--much as we to-day regard a half million a
+year or more--the income of some great shipping company. You read how
+the National Debt later on actually reached _one_ million, and people
+trembled lest the State could not bear the burden.
+
+Yet here we are to-day, raising hundreds of millions yearly in
+taxation, spending thousands of millions in our wars.
+
+What is the explanation of this apparently totally different meaning of
+money in different times? It puzzles nearly everybody who reads history
+intelligently, and it wants explanation. Most attempts to explain it
+have failed, or have been very insufficient; some of them quite vague,
+as: “The value of money was very different in those days from what it
+is now.” Or: “Money was then at least ten times as valuable as now”
+(whereas it is clear from the chronicle that it was _enormously_ more
+valuable!) Sentences like that leave the unfortunate reader as much in
+the dark as he was before. We need a more precise explanation, and that
+I think can be given.
+
+There are three things which, between them, decide the social value of
+money at any period, and unless we consider _all_ three we shall go
+wrong. The reason why most people have gone wrong in trying to solve
+the problem--or have abandoned it--is that they only consider the first
+of the three. These three things are as follows:--
+
+
+1. _The actual purchasing power of whatever is used as currency_--in
+our case, for nearly the whole of European history, gold[7]: the amount
+of wheat and leather and building materials and all the rest of it,
+which so much weight of gold (say an ounce) will purchase at any time.
+This varies in different periods according to the amount of gold
+present in circulation, and its efficiency in circulation. We saw how
+these were the factors of price, that is, of the purchasing power of
+money, when we spoke of money earlier in the book.
+
+2. _The number of kinds of things_ which money can be used to buy in
+any society--or, to put it in learned words, “the number of categories
+of purchasable economic values.”
+
+3. _The economic scale of the community_, that is, the number of its
+citizens and the amount of its total wealth at a given time.
+
+When we go into the full meaning of all these three things we shall
+see how, in combination, they make up the social value of money at any
+time, and why that value differs so very much between one historical
+period and another.
+
+
+1. _The actual purchasing power of the currency._
+
+Given the same currency (and in Western Europe it has, for all
+practical purposes, been gold for the last two thousand years), we can
+measure the purchasing value of such and such a weight of gold in any
+period by what is known as the _Index Number_ of that period.
+
+The Index Number is a thing important to understand, because it
+comes into a great deal of modern discussion as well as historical
+discussion; for instance: wages are nowadays largely based upon an
+Index Number.
+
+A particular year is taken, say the year 1900, and the records of what
+various commodities were fetching in gold in the market during that
+year are examined. Thus it is found that an ounce of gold in that year
+would buy (let us say) four hundred pounds weight of wheat, 600 pounds
+weight of barley, 80 pounds weight of bacon, 80 gallons of beer, a
+quarter of a ton of pig iron, and so on. A list is drawn up of all the
+principal commodities which are used in the community. Suppose that 100
+such commodities are taken and between them make up by far the great
+part--say seven-eighths--of all the values commonly consumed in that
+community. The next thing to do is what is called to “weight” each
+commodity, for it is evident that a commodity which is very largely
+bought--such as bread--must count more in estimating the purchasing
+power of money than a commodity of which very much less is used--such
+as tin.
+
+According to the value of each commodity used in any one period of time
+(say a year) the various commodities are “weighted.” Thus you count
+bread (let us say) as twelve times more important than lead, because
+the value of the bread used in the community for one year is twelve
+times as much as the value of the lead used in the community during
+that year. Then let us suppose that the value of the leather used is
+three times that of the lead, the value of the iron five times, etc.
+You put against each commodity these “weight” numbers.
+
+Next you find out what an ounce of gold would purchase of each of those
+commodities in that particular year. For instance: you find it would
+purchase a quarter of a ton of lead, 400 pounds weight of bread, and
+so on, only you multiply by your weight number the use of gold in each
+particular article. For instance: you count the gold used in buying
+bread as twelve times more important than the gold used in buying lead.
+
+You then add up all the prices measured in an ounce of gold in your
+column; you divide by the number of items in your column, each
+multiplied by its weight number, and the result is that your ounce
+of gold for the year 1900 will be found to have a certain _average
+purchasing power_ which you call, for the sake of further application,
+arbitrarily, “100.”
+
+Then you take another year, say 1920, and you find what the ounce of
+gold would purchase in the same conditions, similarly weighted, in the
+year 1920. You discover that the ounce of gold on the average in 1920
+would only purchase half the weight of stuff it purchased in 1900. In
+other words, prices have doubled, or, what is the same thing, gold has
+halved in value. You put down for the year 1920 the figure “200,”
+which means that average prices are twice as great as they were in
+1900, and the economist’s way of saying this is: “With the year 1900 as
+a base, the Index Number for 1920 is 200.”
+
+In the year 1921 he makes the calculation again, and finds that prices
+have fallen, that is, gold has become rather more valuable as compared
+with other things, and prices are only three-quarters more than they
+were in 1900. The economist writes down: “The Index Number for 1921 is
+175, with the prices of 1900 as a base.” He goes back to 1880 and finds
+that in 1880, after making a similar calculation, an ounce of gold
+would on the average buy five pounds of material where in 1900 it could
+only buy four. In other words, prices are lower in 1880 by one-fourth.
+So he writes down: “The Index Number for 1880, with 1900 as a base, is
+75.”
+
+These Index Numbers taken for each year with a particular year as a
+_base_, or year of reference, show the fluctuations in the purchasing
+value of gold.
+
+To make the process clearer, we will take a simple instance and imagine
+a community in which there were only three things purchased on a large
+scale by the citizens--wheat, bacon, and iron. We take for our year of
+reference, let us say, the year 1880, and we find that an ounce of gold
+would purchase one ton of wheat, half a ton of iron, and a quarter of a
+ton of bacon. But the amount spent on wheat was ten times the amount
+spent on bacon and twenty times the amount spent on iron.
+
+You add up the twenty tons of wheat, the half ton of iron and the half
+ton of bacon--half a ton of the latter because twice as much is spent
+on it as is spent on iron, and therefore though it is half the price of
+iron you must double the amount, because twice as much is bought.
+
+You get 21 tons. To buy this 21 tons of stuff 3 ounces of gold were
+needed. You divide the 21 tons by 3, and you get 7 tons of material on
+the average.
+
+Next, as you are taking this particular year for a “base” (or year of
+reference) you call the 7 “100,” so that you may compare in percentages
+the rise or fall of prices in other years. You then do exactly the
+same thing with these three staple commodities in another year--say
+1890--and you find that your ounce of gold purchases no longer 7 tons
+of stuff, but 14 tons of stuff. Taking the year 1800 as your base
+number, you will see that the Index Number for 1890 is “50.”
+
+Then you do the same thing for the year 1920, and you find that with
+the same ounce of gold you can only purchase 3½ tons of stuff. 7 is
+to 3½ as 100 is to 200, so the Index Number for 1920 will be 200 as
+compared with the base year--or year of reference--which is 1880.
+
+You cannot use the Index Numbers without knowing what your base year is
+and what average prices were in that base year, but, having settled
+that, your Index Number is nothing more than a statement of _average
+prices_, or again, the average purchasing power of a fixed weight of
+gold in the various epochs you examine.
+
+In reality the calculating of an Index Number involves a great
+many more difficult points than these, and of course the number of
+commodities taken is very much more than three; but that is the method
+in its general outline, and if you go over it carefully I think you
+will not find it difficult to understand.[8]
+
+The first thing, then, in finding out the social value of money at any
+historical period is to find out the purchasing value of a given weight
+of gold--say, one ounce. Supposing we are comparing the time when Henry
+VIII. dissolved the monasteries and took their wealth (1536–9) with our
+own time, before the War, when our currency was still normal and in
+gold, you will find that with 100 as your base for prices in 1536–9 the
+Index Number of 1913 is, according to different calculations, somewhere
+between 2,000 and 2,400. I have gone into it myself very carefully,
+and I make it out to be at least 2,400 (though historians some time
+ago, who had not gone into it very fully, used to make it lower); that
+is, where one ounce of gold would purchase the things which Englishmen
+regarded as their staple commodities in 1536, 24 ounces of gold would
+be necessary to-day.
+
+That is the first thing you have to consider when you are comparing the
+social value of money at that time with the social value of money in
+our own time. You multiply right away by 24. You hear, for instance,
+that a man had £100 a year paid him by the King for looking after the
+garrison at Dover. You translate it into modern money, and say that he
+had £2,400 a year paid him _in our money_.
+
+Most people stop there, and that is why they get their answer to the
+problem all wrong. In reality the _social_ value of money then was
+_very much more than_ 24 times what it is now, and £100 a year under
+Henry VIII. meant _a great deal more than_ what £2,400 means now.
+
+In order to see how true this is we have to consider the next two
+points which I mentioned.
+
+
+2. _The number of purchasable categories._
+
+Suppose you put a man into a little primitive place like Andorra (which
+is a tiny independent state shut off from the world in a valley of the
+Pyrenees), and he is paid there £1,000 a year. He cannot live in a
+house with more than a small rental, because there are no big houses
+to be had. Everybody lives in simple, little houses. He cannot spend
+his money on many things. There are no roads, no use for a motor car;
+no railways, so he cannot spend money on railway fares; no theatres
+or cinematographs--none of the hundred things which we have here on
+every side. He can buy bread and meat, and wine and clothing, and very
+little else--for there is nothing else to be bought. In other words,
+the number of _sets of things_ (that is what the word “categories”
+means--“sets of things”) on which he can spend money is a great deal
+less than what it would be in London. A man with £1,000 a year in
+London and a family to keep is, of course, very much better off than a
+labouring man, but still he is not rich, as rich people use the term.
+He will live in a house for which he must pay perhaps £200 a year,
+counting rent and taxes. Then he will--he usually must--travel, and
+that will cost him perhaps £50 a year. Then his friends will expect
+to meet him and he must have them at his house, and he will have to
+spend a good deal in postage and telegraphing--and so on. The man in
+Andorra with £1,000 a year simply would not know what to do with it. He
+would be so “well off” that he would have a very large surplus--more
+than half--to give away, or to help other people with, or to save and
+invest. But exactly the same sort of man, with the same ideas and
+bringing-up and necessities, put down in London would certainly not be
+able to save a penny of his £1,000 a year.
+
+So we see that the social value of £1,000 a year in Andorra is very
+different from the social value of the same sum in London. Some people
+might be inclined to laugh at this difference, and to say: “Oh,
+yes! but the man in London could, if he liked, save, simply by not
+spending on those various categories, as you call them.” Yes; he as an
+individual might choose to live an odd life of his own and not do what
+other people do. But _Society as a whole_--that is, all the community
+round him--in London is, as a fact, spending upon those various, very
+numerous, categories, while in Andorra he does not, for he _cannot_,
+spend upon them; they are not there to be purchased. Therefore it is
+true that the _social value_ of the same sum, with the same index
+number, is on the average very much higher in Andorra than in London.
+
+You cannot give this difference precisely in figures as you can an
+index number, because nobody can precisely calculate the number of
+categories nor the respective importance of each, but the least
+knowledge of history shows you that in Henry VIII.’s time, in 1536, the
+number of categories was very much smaller than it is to-day. So the
+man to whom Henry VIII. paid £100 a year as salary for looking after
+one of his castles, though the purchasing value of his income--the
+amount of rye or pork or what not that he could buy with it--was
+what we should call to-day £2,400 a year, had a much higher income
+_relatively to the people of the time_ than has a man with £2,400 a
+year to-day. He counted much more than a man to-day counts who has five
+thousand a year.
+
+But this second point is not all. There is again a third point, as we
+have seen, and we must next turn to that.
+
+
+3. _The purchasing value of the whole community._
+
+The third factor in the making up of the social value of money is the
+relation of any sum to the total wealth of the whole community. That of
+course depends upon two things: the average of wealth of each family in
+the community, and the number of those families.
+
+Supposing, for instance, with things at their present prices, you
+consider two communities: (1) the people of Iceland, (2) the people of
+Australia. In both countries you can get pretty much the same amount
+of stuff for an ounce of gold, and though there are less categories
+of purchasable things in Iceland than in Australia, yet most of the
+things a civilised man requires can be got in Iceland--at least in the
+capital, or can be imported there by the inhabitants if they need them
+or can afford to pay for them. Both communities are of our own race
+and of much the same standard of culture and the same idea of how one
+should live. But Iceland has only four thousand families, and these
+families are poor for the most part. Australia has a million families,
+that is, 250 times as many, and they are much richer than the families
+in Iceland on the average. There are much worse differences of rich
+and poor in Australia than there are in Iceland. There are far more
+miserable and starving people in Australia than there are in Iceland;
+but the _average_ wealth of a family in Australia is much higher than
+that in Iceland.
+
+Now suppose that the Government of Iceland were to want to build a
+new harbour for the capital, which is on the sea, and in order to get
+the money were either to confiscate the wealth of certain rich people
+or to tax all the people--supposing it wanted, for instance, £400,000
+in order to complete the work. And supposing the people of Australia
+similarly wanted to build a harbour and also wanted £400,000 to be
+got in the same way. The index number is the same in both places. An
+ounce of gold will roughly purchase the same amount of things in both
+places, for the index number at any moment is much the same all over
+the white world, measured in gold, and we may imagine the categories of
+purchasable things to be much the same in both places. Yet the social
+value of the £400,000 is quite different in Iceland from what it is in
+Australia. In Iceland it means taking an average of £100 from each of
+the poor families--if you get it by taxation--or the confiscation of
+all the wealth of the very few rich men there may be. But in Australia
+it means no more than the taking of about 8s. from each family, and
+that from an average family income much higher than the average family
+income in Iceland. Under this heading the social value of £400,000
+in Iceland is enormous and in Australia is small. If Iceland tried
+to build such a harbour it could hardly do so. The economic effort
+would be very great, and if it succeeded it would fill a big place in
+the history of the island. In Australian history it would pass almost
+unnoticed.
+
+Now let us add the influence of all these three points together, and we
+shall see that there is a vast difference between the social value of
+money in the time of Henry VIII., when the monasteries were dissolved,
+and the social value of the same amount of money to-day. We shall see,
+for instance, why the King, taking away the annual revenues of the
+Monastery of Westminster and keeping them for himself, made such a
+prodigious splash, although the actual amount in pounds, or weight of
+gold, in which the income of Westminster Abbey could then be measured
+was only £4,000 a year. In the first place, you must multiply by 24,
+so that the actual income or annual purchasing value in wheat, beef,
+rye, pork, beer, which was confiscated, was nearly £100,000 in our
+money. Then you must remember that it took place in a community where
+there was a very much smaller number of purchasable categories; that
+is, where people had a very much small number of “sets of things” upon
+which to spend money.
+
+And, lastly, you must remember that it took place in an England the
+population of which was hardly more than a sixth--some people would
+say it was hardly more than a tenth--of to-day’s, and that population
+actually a great deal poorer on the average than the present population
+of England. It is true that there was not then the great herd of
+starving or half-starving people which we have to-day in England, and
+that labouring people were then much better off than they are now;
+but, on the other hand, there was nothing like the same number of
+very rich people, and therefore the average family income was much
+smaller. Put all that together, and it is clear what a tremendous
+business the confiscation of this one Abbey meant. It was somewhat as
+though the Government to-day were to confiscate one of the smaller
+railway companies, or to take away the rentals now paid by a northern
+manufacturing town to the great landlords owning the soil, and put the
+money into its own pocket.
+
+From this example of the confiscation of the Abbey of Westminster you
+can argue to all the other expenditure of the time--expenditure on
+armies and navies, and so on--and in this way you can see _how, why and
+in what degree the social value of money differs between one period and
+another_.
+
+It is most important to get this point in Economics clear in your mind
+if you are reading history, because it helps to explain all manner of
+things which otherwise puzzle one in the past.
+
+
+
+
+USURY
+
+
+Usury, the last subject but one on which I am going to touch in this
+book, is one which modern people have almost entirely forgotten, and
+which you will not find mentioned in any book on Economics that I know.
+Yet its vital importance was recognised throughout all history until
+quite lately, and it is already forcing itself upon modern people’s
+notice whether they like it or no. So it is as well to understand it
+betimes, for it is going to be discussed very widely in the near future.
+
+All codes of law and all writers on morals from the beginning of
+anything we know about human society have denounced as wrong the
+practice of _Usury_.
+
+They have recognised that this practice does grave harm to the State
+and to society as a whole, and must, therefore, as far as possible, be
+forbidden.
+
+Now what is Usury, and why does it thus do harm?
+
+Modern people have so far forgotten this exceedingly important matter
+that they have come to use the word “usury” loosely for “the taking
+of high interest upon a loan.” That is very muddled thinking indeed,
+as you will see in a moment. The character of Usury _has nothing to
+do with the taking of high or low interest_. It is concerned with
+something quite different.
+
+_Usury is the taking of any interest whatever upon an_ UNPRODUCTIVE
+_loan_.
+
+A man comes to you and says: “Lend me this piece of capital which
+you possess” (for instance, a ship, and stores of food with which to
+feed the sailors during the voyage of the ship). “Using this piece
+of capital to transport the surplus goods from this country over the
+sea and to bring back foreign goods which we need here I shall make a
+profit so large that I can exchange it for at least one hundred tons of
+wheat. The voyage there and back will take a year.”
+
+You naturally answer: “It is all very well for you to make a profit of
+one hundred tons of wheat in one year by the use of _my_ ship and of
+_my_ stores of food for sailors who work the ship, but what about me?
+I grant you ought to have part of this profit for yourself, as you are
+taking all the trouble. But I ought to have _some_, because the ship
+and stores of food are mine; and unless I lent them to you (since you
+have none of your own) you would not be able to make that profit by
+trading of which you speak. Let us go half shares. You shall have fifty
+tons of wheat and I will take fifty, out of the total profit of one
+hundred tons.”
+
+The man who proposed to borrow your ship agrees. The bargain is
+struck, and when the year is over you make a fifty tons profit of wheat
+on your capital.
+
+That is _the earning of interest on a productive loan_.
+
+There is nothing morally wrong about that transaction at all. It does
+no one any harm. It does not weaken the State or society, or even hurt
+any individual. There is a sheer gain due to wise exchange (which is
+equivalent to production); everybody is benefited--you that own the
+capital, the man who uses it, and all society, which benefits by the
+foreign exchange. Supposing your ship and stores of food were worth
+a hundred tons of wheat, then your profit of fifty tons of wheat is
+a profit of fifty per cent., which is very high indeed. But you have
+a perfect right to it: your capital has produced a real increase of
+wealth to that extent. If your capital be worth ten times as much, then
+your profit is only five per cent. instead of fifty. But your moral
+right to the fifty per cent. is just as great as your moral right to
+the five per cent. No one can blame you, and you are doing no harm.
+
+Now supposing that, instead of coming to ask you for the loan of your
+ship, the man came and asked you for the loan of a sum of money which
+you happened to have by you and which would be sufficient to buy and
+stock the ship. It is clear that the transaction remains exactly the
+same. The loan is _productive_. He makes a true profit, that is, there
+is a real increase of wealth for the community, and you and he have
+a right to take your shares out of it--you because you are the owner
+of the capital, and he because he took the trouble of organising and
+overlooking the expedition.
+
+These are examples of profit on a _productive_ loan.
+
+Now suppose a man to come to you if you were a baker and say: “Lend me
+half a dozen loaves. My family have no bread and I cannot see my way to
+earning anything for a day or two. But when I begin to earn I will get
+another half dozen loaves and see that you are not out of pocket.” Then
+if you were to reply: “I will not let you have half a dozen loaves on
+those terms. I will let you owe me the bread for a month if you like,
+but at the end of the month you must give me back _seven_ loaves”: that
+would be usury.
+
+The man is not using the loan productively; he is consuming the loaves
+immediately. No more wealth is created by the act. The world is not the
+richer, nor are you the richer, nor is society in general the richer.
+No more wealth at all has appeared through the transaction. Therefore
+the extra loaf that you are claiming is claimed out of nothing. It has
+to come out of the wealth of the community--in this particular case out
+of the wealth of the man who borrowed the loaves--instead of coming out
+of an increment or excess or new wealth. That is why usury is called
+“usury”--which means: “wearing down,” “gradually dilapidating.”
+
+It is clear that if the whole world practised usury and nothing but
+usury, if wealth were never lent to be used productively, but only to
+be consumed unproductively, and yet were to demand interest on the
+unproductive transaction, then the wealth that was lent would soon eat
+up all the other wealth in the community until you came to a situation
+in which there was no more to take. Everyone would be ruined except
+those who lent; then these, having no more blood to suck, would die
+themselves, and society would end.
+
+As in the case of the ship, it matters not in the least whether the
+actual thing, the loaves of bread, are lent, or money is lent with
+which to buy them. _The test is whether the loan is productive or not._
+The _intention_ of Usury is present _when the money is lent at interest
+on what the lender_ KNOWS _will be an unproductive purpose_, and the
+actual _practice_ of usury is present _when the loan, having as a fact
+been used unproductively, interest is none the less demanded_.
+
+As in every other case of right and wrong whatsoever, there is, of
+course, a broad margin in which it is very difficult to draw the line.
+A man guilty of usury and trying to excuse himself might say, even
+in the case of food lent to a starving man: “The loan may not look
+directly productive, but indirectly it _was_ productive, for it saved
+the man’s life and thus later on he was able to work and produce
+wealth.”
+
+The other way about (though there is not much danger of that nowadays),
+a man trying to get out of interest on a productive loan might say in
+many cases: “The loan was not really productive. It is true I made
+a profit on it, but that profit was not additional wealth for the
+community. It only represented what I got out of somebody else on a
+bargain.”
+
+In this margin of uncertainty we have only common sense to guide us,
+as in every other similar case. We know pretty well in each particular
+example we come across whether a loan is productive of not; whether we
+are borrowing or lending for a productive purpose, or for a charitable
+or luxurious one, or for one in every way unproductive.
+
+The proof that this feeling about usury is right is to be found in the
+private conduct of individuals in their social relations. If a poor
+man in distress goes to a rich friend and borrows ten pounds, he pays
+it back when he can; and the rich man would think it dishonourable
+to charge interest. But if a man borrowed ten pounds of one for the
+purpose of doing something which was likely to increase its value,
+and we knew that this was his purpose, we should have a perfect right
+to share the results with him, and no one would think the claim
+dishonourable.
+
+Usury, then, is essentially a claim to increment, or extra wealth,
+_which is not there to be claimed_. It is a practice which diminishes
+the capital wealth of the needy and eats it up to the profit of the
+lender; so that, if usury go unchecked, it must end in the absorption
+of all private property into the hands of a few money brokers.
+
+Now, these things being so, the nature of usury being pretty clear,
+and both the moral wrong of it and the injury it does to society being
+equally clear, how is it that the modern world for so long forgot all
+about it, and how is it that it is forcing itself upon the attention of
+the modern world again in spite of that forgetfulness?
+
+I will answer both of those questions.
+
+The wrong and the very nature of usury came to be forgotten with the
+great expansion of financial dealings which arose in the middle and end
+of the seventeenth century--that is, about 250 years ago--in Europe.
+In the simpler times, when commercial transactions were open and upon
+a comparatively small scale, and done between men who knew each other,
+you could pretty usually tell, as you can in private life, whether a
+loan were a loan required for a productive or an unproductive purpose.
+The burden of proof lay upon the lender. It was no excuse in lending
+a man money to say: “I did not know what he wanted to do with it, so
+I charged him 10 per cent., thinking that very probably he was going
+to use it productively.” The courts of justice would not admit such a
+plea, and they were quite right. For under the simple conditions of
+the old days the judge would answer: “It was your business to know.
+A man does not come borrowing money unless he is in either personal
+necessity or has some productive scheme for which he wants to use the
+money. If you thought it was a productive scheme you would certainly
+have asked him about it in order to share the profits, and the fact
+that you did not trouble to find out whether it were productive or no
+shows that you are indifferent to the wrong of usury, and willing to do
+that wrong under the pretence that it was not your business to inquire.”
+
+The attitude of the law on money-lending in the old days was very much
+what it is to-day with regard to certain poisonous chemicals which may
+be used well or ill. The seller of those chemicals has to ask what they
+are going to be used for, and is responsible if he fails to inquire.
+In the same way the old Christian law said a lender was bound to find
+out if his loan were intended for production or not. If the law had not
+done this, then usury would have been universal and would have eaten up
+the State, to the profit of the few people who lent out their money: as
+it is doing now.
+
+But as trade became more and more complicated and much larger and lost
+its personal character, as the banking system arose on a large scale
+and great companies with any number of shareholders, and as it became
+impossible to lay the weight of proof upon the lender--when, indeed,
+most lenders could not know for what their money was being lent, but
+only that they had put it into some financial institution with the
+object of fructifying it--then the opportunity for Usury came in, and
+it soon permeated all commerce.
+
+Suppose a man to-day, for instance, to put money into an Insurance
+Company. It pays him, let us say, 5 per cent. interest on his money.
+He does not know, and cannot know--no one can know--exactly how that
+particular bit of money is being used. It is merged in the whole lump
+of the funds the Insurance Company has to deal with. A great deal of it
+will be used productively. It will go to the purchase of steam engines
+and stores of food, ships, and so on, which in use increase the wealth
+of the world; and the money spent in buying these things has a perfect
+right to profit and does no harm to anyone by taking profit. But a
+certain proportion will be used unproductively. The original investor
+knows nothing about that, and even the managers of the company know
+nothing about it.
+
+A client comes to them and says: “I want a loan of a thousand pounds.”
+They are quite unable, under modern conditions, to go into an
+examination of what he is going to do with it. He gives security and
+gets his loan. He may be a man in distress who gets it in order to pay
+his debts, or he may be a man who is going to start a business. The
+company cannot go into that. It has to make a general rule of so much
+interest upon what it lends, under the implied supposition, of course,
+that the loan is normally productive. But the borrower _can_ use it
+unproductively, and often does and intends to do so.
+
+Thus, with a very large volume of impersonal business, the presence of
+usury is inevitable. But though inevitable, and though therefore the
+practice of it, being indirect and distant, cannot be imputed to this
+man or that, usury inevitably produces its disastrous effects, and the
+modern world is at last coming to feel those effects very sharply.
+
+A few pence lent out at usury some twenty centuries ago would amount
+now, at compound interest, to more wealth than there is in the whole
+world; which is a sufficient proof that usury is unjust and, as a
+permanent trade method, impossible.
+
+The large proportion of usurious payments which are now being made
+on account of the impersonal and indirect character of nearly all
+transactions, is beginning to lay such a burden upon the world as a
+whole that there is danger of a breakdown.
+
+If you keep on taking wealth as though from an increase, when really
+there is no increase out of which that wealth can come, the process
+must, sooner or later, come to an end. It is as though you were to
+claim a hundred bushels of apples every year from an orchard after the
+orchard had ceased to bear, or as though you were to claim a daily
+supply of water from a spring which had dried up. The man who would
+have to pay the apples would have to get them as best he could, but by
+the time the claim was being made on all the orchards of the world,
+by the time that usury was asking a million bushels of apples a year,
+though only half a million were being produced, there would be a jam.
+The interest would not be forthcoming, and the machinery for collecting
+it would stop working. Long before it actually stopped, of course,
+people would find increasing difficulty in getting their interest and
+increasing trouble would appear in all the commercial world.
+
+Now that is exactly what is beginning to happen to-day after about
+two centuries of usury and one century of unrestricted usury. So far
+we have got out of it by all manner of makeshifts. Those who have
+borrowed the money and have promised to pay, say, 5 per cent., are
+allowed to change and to pay only 2½ per cent. Or, by the process of
+debasing currency, which I described earlier in this book, the value
+of the money is changed, so that a man who has been set down to pay,
+say, a hundred sheep a year, is really only paying 50 or 30 sheep
+a year. A more drastic method is the method of “writing off” loans
+altogether--simply saying: “I simply cannot get my interest, and so I
+must stop asking for it.” That is what happens when a Government goes
+bankrupt, as the Government of Germany has done.
+
+If you look at the Usury created by the Great War, you will see this
+kind of thing going on on all sides. The Governments that were fighting
+borrowed money from individuals and promised interest upon it. Most
+of that money was not used productively: it was used for buying wheat
+and metal, and machinery and the rest, but the wheat was not used
+to feed workmen who were producing more wealth. It was used to feed
+soldiers who were producing no wealth, and so were the ships and the
+metal and the machinery, etc. Therefore when the individuals who had
+lent the money began collecting from the Government interest upon what
+they had lent they were asking every year for wealth which simply was
+not there, and the Governments have got out of their promise to pay a
+usurious interest in all sorts of ways--some by repudiating, that is
+saying that they _would_ not pay (the Russians have done that), others
+by debasing currency in various degrees. The English Government has cut
+down what it promised to pay to about half, and by taxing this it has
+further reduced it to rather less than a third. The French Government,
+by inflation and by taxation, have reduced it much more--to less than a
+fourth, or perhaps more like a sixth or an eighth.
+
+The Germans have reduced it by inflation to pretty well nothing, which
+is the same really as repudiating the debt altogether.
+
+So what we see in a general survey is this:--
+
+1. Usury is both wrong morally and bad for society, _because it is the
+claim for an increase of wealth which is not really present at all_. It
+is trying to get something where there is nothing out of which that
+something can be paid.
+
+2. This action must therefore progressively and increasingly soak up
+the wealth which men produce into the hands of those who lend money,
+until at last all the wealth is so soaked up and the process comes to
+an end.
+
+3. That is what has happened in the case of the modern world, largely
+through unproductive expenditure on war, which expenditure has been met
+by borrowing money _and promising interest upon it although the money
+was not producing any further wealth_.
+
+4. The modern world has therefore reached a limit in this process and
+the future of usurious investment is in doubt.
+
+Though these conclusions are perfectly clear, it is unfortunately not
+possible to say that this or that is a way out of our difficulties;
+that by this or that law we can stop usury in the future and can go
+back to healthier conditions. Trade is still spread all over the world.
+It is still impersonal and money continues to be lent out at interest
+unproductively, with the recurring necessity of repaying the debt and
+failing to keep up payments which have been promised. Things will not
+get right again in this respect until society becomes as simple as it
+used to be, and we shall have to go through a pretty bad time before we
+get back to that.
+
+
+
+
+ECONOMIC IMAGINARIES
+
+
+I am going to end with a rather difficult subject on which I hesitated
+whether I should put it into this book or no. If you find it too
+difficult leave it out; but if you find as you read that you can
+understand it it is worth going into, because it is quite new (you will
+not find it in any other book), and it is very useful in helping one to
+understand certain difficult problems which have arisen in our modern
+society and which have become a danger to-day. This subject is what I
+call “Economic Imaginaries.”
+
+An imaginary is a term taken from mathematics, and means a value which
+appears on paper but has no real existence. It would be too long and
+much too puzzling to explain what imaginaries in mathematics are, but I
+can give you a very simple example of what they are in Economics. They
+mean economic values or lumps of wealth which appear on paper when you
+are making calculations, so that one would think the wealth was really
+there, but which when you go closely into their nature you find do not
+really exist.
+
+The first example I will give you is that of a man who, having a
+large income, gives an allowance to his son living somewhere abroad.
+Supposing a man in England has £10,000 a year, and he has put his son
+into business in Paris, but because the young man has not yet learned
+his business, and is still being helped from home, he allows that son
+£1,000 a year to spend.
+
+When the Income Tax people go round finding out what everybody has they
+put down the rich man in England, quite rightly, as having £10,000
+a year, and when the value of all incomes in England is _assessed_,
+_i.e._, when a table is drawn up showing what the total income of all
+Englishmen is, this man appears, quite properly, as having £10,000
+a year. But when the people in France make a similar _assessment_,
+to find out what the incomes are of all the people living in France,
+the rich man’s son in Paris appears as having £1,000 a year. So when
+the assessments of England and France are added together and some
+Government economist is calculating what the total income of the
+citizens of both countries may be, _that £1,000 a year appears twice_.
+One of these appearances is an _economic imaginary_. In other words, by
+the method of calculation used, £1,000 every year appears on the total
+assessment of England and also of France, making £2,000 of £1,000. The
+extra £1,000, though appearing on paper, does not really exist at all:
+it is an “Economic Imaginary.”
+
+This is the simplest case of an economic imaginary. It is the case
+overlap, or counting of the same money twice, and we may put down this
+case in general terms by saying: “Every unchecked overlap creates an
+economic imaginary to the extent of that unchecked overlap.”
+
+It looks so simple that one might say, “Well, surely everybody would
+notice that!” But it is very much the other way--even in this simple
+case. The more complicated society becomes, the more payments there are
+back and forth, allowances and pensions and all sorts of arrangements
+which grow up with increased travel and means of communication and,
+in general, with the development of society, the more these overlaps
+come into being and remain unchecked, that is, uncorrected, the
+greater number there are in which people are not aware that there is
+an overlap, or if it is an overlap do not remember to mention it, or
+if they do mention it are not believed. In general the more society
+increases in complexity the more this kind of economic imaginary by
+mere overlap increases in proportion to the total real wealth, and the
+more the total “assessment” of the community is exaggerated.
+
+I will give you one instance, to prove this, which is very striking and
+which happened in my own experience. A man I knew gave in his income
+tax returns a few years ago. He had a secretary at home to whom he paid
+a fairly large salary, and he also used a secretary in town. Their
+salaries came out of money which he had earned in business but appeared
+in his taxable general income, for he was not allowed to take it off
+as an expense. Meanwhile, both the secretary in the country and the
+secretary in town were paying tax on _their_ salaries, though they came
+out of a total income which had already paid taxes, and anyone making
+an assessment of the total income of England would certainly have
+written down from the official books: “Mr. Blank, so much a year; his
+secretary A--, so much a year; his secretary B--, so much a year,” and
+added up the total. Yet it is clear that the money put down to A and B
+was imaginary.
+
+I cannot tell you the thousands of ways in which this simple case of
+overlapping goes on in modern England, for it would be too long to
+explain, and I have only given you very simple instances, but you may
+be certain that the economic imaginaries of this kind form at least a
+quarter of the supposed income of the country.
+
+If there were no other form of imaginaries than this it would be
+very simple to understand them, and perhaps allow for them in making
+an estimate of total wealth. Unfortunately, there are any number of
+different forms much more difficult to seize and cropping up like
+mushrooms everywhere more and more in a complicated and active society.
+
+For instance: you have (2) the economic imaginary due to _luxurious
+expenditure_.
+
+All over the world where you have rich people spending money foolishly
+they are asked, for things that they buy, prices altogether out of
+keeping with the real value of the things. If you go into one of the
+big hotels in London or Paris and have a dinner the _economic values_
+you consume are anything from a quarter to a tenth of the sum you are
+asked to pay. Thus people who buy a bottle of champagne in this sort
+of place pay from a pound to thirty shillings. The economic values
+contained in a bottle of champagne, that is the economic values which
+are built up by the labour of all sorts which has been expended in
+producing it, come to about two shillings and sixpence. So when people
+pay from a pound to thirty shillings for a bottle of champagne they
+are paying from eight to twelve times the real economic values which
+are destroyed in consumption. There is an extra margin of anything
+from seventeen shillings and sixpence to twenty-seven shillings and
+sixpence, which is an _economic imaginary_ in that one case alone.
+And remember that this economic imaginary goes the rounds. It appears
+in the profits of the hotel-keeper, which are assessed in the total
+national income for taxation. It appears in the rent for his hotel,
+since a man will pay much more rent for a house in which he can get
+people to pay these sums than for a humbler hotel of the same size and
+of the same true economic value in bricks and mortar. It appears in the
+rates which the hotel pays to the local authorities, and which in their
+turn appear in the income of humble officials living in the suburbs.
+That economic imaginary created by the silly person who is willing to
+pay from a pound to thirty shillings for a thing worth two shillings
+and sixpence appears over and over again in the various assessments of
+the country.
+
+Here is another case (3): _economic imaginaries due to inequality of
+income_.
+
+Supposing you have a thousand families with £1,000 a year each; that
+is, a total income among them of £1,000,000 a year. Supposing you put
+up for competition among those families a very beautiful picture which
+everybody would like to have; painted, say, by Van Dyck. None of these
+people with £1,000 a year each could afford to give more than a certain
+sum for the picture, and probably, when they had competed for it, it
+would fetch no more than £100. An official estimating that community
+would say that it had £1,000,000 a year income, such and such values in
+houses, etc., and that there was a picture present worth £100, and all
+that would go down in his estimates or “Assessment.”
+
+Now supposing all but two of these thousand families to be impoverished
+by having to pay rents and interest to these two men. Supposing they
+were all reduced to just under £500 a year, and that the balance of
+£500,000 were paid to those other two. Then each of these would have
+£250,000 a year. The Van Dyck is put up for auction in this community.
+The poor families, of course, have no show at all. Not one of them can
+afford more than £50 at the most, however much he wanted the Van Dyck.
+But the two rich men can compete one against the other recklessly. They
+have an enormous margin of wealth with which to do what they like, and
+the Van Dyck between them may be rushed up to £50,000.
+
+There is not a penny more of real wealth in the community than there
+was before. Yet your Government assessor would come down and assess the
+community in a very different fashion from the way in which he would
+have assessed the first community. He will put down the total income at
+£1,000,000, and the houses, furniture, etc., at so much, and he will
+add: “Also a Van Dyck valued at £50,000.” Of course in real life, where
+are great differences of income, this sort of thing is multiplied by
+the thousand. It is another example of the way in which, as communities
+get more complicated in a high civilisation, economic imaginaries
+appear.
+
+I am only introducing this subject as a very simple addition to this
+little book, and I will not multiply instances too much, though one
+might go on giving examples almost indefinitely.
+
+Here, then, is a last one (4): _economic imaginaries due to the
+confusion between services and economic values attached to material
+things_.
+
+We saw at the beginning of this book that wealth did not consist in
+_things_, such as coal, chairs, tables, etc., but in the _economic
+values attached to those things_; that is, their added use for the
+purposes of human beings up to the point where they were beginning to
+be consumed. We saw how the coal in the earth has no economic value,
+how it begins to be of value when it begins to be mined, and how each
+piece of additional labour put into it to bring it nearer to the point
+of consumption adds to its economic value, until at last, when it gets
+into your cellar, from being worth nothing a ton (when it was still in
+the earth) it is worth thirty shillings or forty shillings a ton.
+
+But when people assess wealth for the purpose of taxation, and in order
+to find what (in their judgment) the total yearly income of a nation
+is, they count not only the economic values attached to things consumed
+by the nation, but also _services_.
+
+For instance: if Jones is a good card player, the rich man Smith may
+pay him £500 a year to live in his house and amuse his loneliness by
+perpetually playing cards with him. I knew a case of a man in South
+Wales who did exactly that. It is an extreme case, but we all of us,
+all day long, are paying money for services which do not add economic
+values to things at all, and which yet must appear in assessment.
+
+All the money I earn by writing is of this kind. Now assessment of
+these services creates an enormous body of economic imaginaries, and to
+show you how they may do so I will give you an extreme and ludicrous
+case.
+
+Supposing two men, one of whom, Smith, has a loaf of bread, and the
+other of whom, Brown, has nothing. Smith says to Brown: “If you will
+sing me a song I will give you my loaf of bread.” Brown sings his song
+and Smith hands over the bread. A little later Brown wants to hear
+Smith sing and he says to him: “If you will sing me a song I will give
+you this loaf of bread.” A little later Smith again wants to have a
+song from Brown. Brown sings his song (let us hope a new one!) and the
+loaf of bread again changes hands and so on all day.
+
+Supposing each of these transactions to be recorded in a book of
+accounts. There will appear in Smith’s book: “Paid to Brown for singing
+songs two hundred loaves of bread,” and in Brown’s book: “Paid to Smith
+for singing songs two hundred loaves of bread.” The official who has to
+assess the national income will laboriously copy these figures into his
+book and will put down: “Daily income of Smith, 200 loaves of bread.
+Daily income of Brown, 200 loaves of bread. Total 400 loaves of bread.”
+Yet there is only one _real_ loaf of bread there all the time! The
+other 399 are imaginary.
+
+Now with a ludicrous and extreme example of this sort you may say:
+“That is all very well as a joke, but it has no bearing on real life.”
+It has. That is exactly the sort of thing which is going on the whole
+time in a highly-developed economic society. I go to a matinee and
+pay 10s. for a man to amuse me. He goes off himself in the evening
+and pays 10s. to hear a man sing at a concert. Next morning that man
+(I sincerely hope) buys one of my books, and a big part of the price
+is not paid for the economic values attaching to the material of it,
+but for the services of writing it, which is not a creation of wealth
+at all. The publisher pays me my royalty, and I spend part of it in
+looking at an acrobat in a music hall. The acrobat pays 10s. to keep up
+his chapel; and the minister of the chapel, in a fit of fervour, pays a
+subscription of 10s. to a political party.
+
+And so on. Here is a short chain of economic imaginaries: 50s.--five
+ten-shilling notes--all appearing one after the other in the assessment
+of the national income and corresponding to no real wealth.
+
+It is exactly the same thing in principle as the case of the two men
+singing for one loaf of bread. And the same principle applies to the
+expenditure of rates and taxes. A great part of this expenditure goes
+in empty services, not in services which add economic values to things.
+
+We must, of course, distinguish between two things which many of the
+older economists muddled up. A thing may be of the highest temporal use
+to humanity in the production of happiness, such as good singing, or
+of high spiritual value, such as good conduct, and yet that thing must
+not be confounded with economic values. When one says, for instance,
+that good singing, or a good picture, or a good book has no economic
+value, or only a very slight material economic value (the best picture
+ever painted has probably not a true economic value of more than 20s.
+outside its frame, unless the painter used expensive paints or a quite
+enormous canvas) one does not mean, as too many foolish people imagine,
+that _therefore_ one ought not to have good singing, or good pictures,
+or the rest of it.
+
+What _is_ meant is that the examination of any one set of things must
+be kept separate from the examination of another, and when you put down
+the money spent on these things as though it represented real economic
+values you are making a false calculation.
+
+Well, this is only a hint of quite a new subject in Economics, which
+I have put in at the end in the hope that it may be of some value
+to you. Meditate upon it. As societies get more and more luxurious,
+more and more complicated, more and more “civilised” (as we call
+it), so do these economic imaginaries grow out of all proportion to
+the real wealth of the society. If on the top of their growth you
+suddenly impose high taxation, based upon your assessment, you may
+think that you are only taking a fifth or a third or a fourth of the
+whole community’s real yearly wealth, when in reality you are taking
+a half or more than a half. And this is probably the main reason why
+so many highly developed societies have broken down towards the end
+of their brilliance through the demands of their tax-gatherers who
+worked on assessment inflated out of all reality by a mass of economic
+imaginaries.
+
+
+FINIS
+
+
+
+
+FOOTNOTES
+
+
+[1] From the Latin word “Fiat” = “Let it be so.” As though the
+Government had said: “This is not a piece of gold, only a piece of
+paper. But I say it is to be taken as gold. So I order. _Let it be so._”
+
+[2] It is important to keep our ideas rigidly clear on this point. You
+can exchange a piece of fertile land for some set of values. Yet it is
+not _wealth_. It is not matter transposed from a condition where it
+is less useful to a condition where it is more useful to man. See the
+definitions in the first chapter, “What is wealth?”
+
+[3] “Enjoyment” does not mean, in this connection, pleasure, happiness.
+It is a conventional phrase to mean “consumption _not_ directed to the
+making of further wealth?” Thus the wealth consumed at a boring dinner
+party is consumed in “enjoyment.”
+
+[4] A _Strike_ is a modern English word (only used where the English
+language is spoken), and signifying the refusal of the Free labourers
+to sell their labour for the amount hitherto given. They cease work,
+thereby interrupting the profits of the Capitalist who furnishes them
+with food, clothing, etc., in the shape of wages. They do so in the
+hope of compelling him, by loss of profits during their idleness, to
+pay them more.
+
+A _Lock-out_ is a modern English word now used all over the world to
+signify an action of the Capitalist refusing to pay his workmen what
+they have hitherto received, and hoping to starve them into accepting
+lower wages by “locking them out” of his factory until they submit.
+
+Strikes are only possible when the labourers have accumulated some
+capital on which to live during the struggle. This they accumulate by
+contributions to the common fund of a “Trades Union” while still in
+employment. A Lock-out is only possible from the fact that such funds
+are small and soon exhausted.
+
+[5] In theory Parliament is stronger than the banks, but Parliament
+no longer counts as a real governing power. The banks are far more
+powerful than Parliament.
+
+[6] This very sensible tax was invented by Disraeli in England about a
+lifetime ago.
+
+[7] Silver and gold were used together, but gold alone will serve as a
+test.
+
+[8] A simple daily example of an amateur index number is the
+housewife’s idea of “cost of living.” She finds that, for the purchase
+of her home, a great deal of bread, a little butter, more cheese, so
+much for clothing, rent, etc., 40s. to-day go about as far as 20s. in
+1913 before the war. In other words she is “taking 1913 as a base and
+establishing an index number of 200 for 1923.”
+
+
+
+
+Index
+
+
+  Banking, how arose, 168–173;
+    its machinery, 173–179.
+
+  Banking system, its advantage in concentrating capital, 180;
+    begins to invest money, 183–186;
+    great modern power of, 186–188.
+
+  Blanc, creator of modern socialism, 133;
+    its definition, 134.
+
+
+  Capital, Character of, 19–26.
+
+  “Capitalism,” term for Capitalist Society, 105;
+    “Paradox,” 120, 122.
+
+  Capitalist State, 101, 104–5;
+    advantages and disadvantage, 115–123.
+
+  Categories, Purchasable, 209–210.
+
+  Circulation, Efficiency in, 72–75.
+
+  Clearing House, 179.
+
+  Coal, Example of addition of values to, 27–28.
+
+  Coal Mine, example of how rent arises as a surplus, 47–49.
+
+  Communism, only logical and necessary form of Socialism, 135.
+
+  Consumption of Capital inevitable, 23.
+
+  Consumption of wealth is universal, 31–32.
+
+  Currency, Debasement of, 79–83.
+
+  Currency, Meaning of, 70.
+
+
+  Denmark, example of distributive state, 108, 126.
+
+  Diminishing Returns, Law of, 40–44.
+
+  Distributive State, 105–6;
+    advantages and disadvantages, 124–131.
+
+  Division of Labour, 54.
+
+  Douglas Scheme of Credit, 187.
+
+
+  Economic Imaginaries, examples of, 231–240.
+
+  Exchange, a true form of production, 52.
+
+  Exchange, Free, Formulæ of maximum wealth through, 59–60.
+
+  Exchange, International, factor of National Currencies in, 142, 143.
+
+  Exchange, Medium of, or currency, 70.
+
+  Exchange, Multiple, 57–58.
+
+  Exchange, Multiple, in International trade, 143–144.
+
+  Exchange, Potential of, 53–54.
+
+  Exchange value, necessary condition of wealth, 12–14.
+
+  Expenditure, Luxurious, productive of Economic Imaginaries, 233.
+
+  Exports not a test of wealth, 146–149.
+
+
+  Formulæ defining production of wealth, 26.
+
+  Formula, defining wealth, 14.
+
+  Formula of Consumption, 32.
+
+  Formula of Maximum Wealth through freedom of exchange, 59.
+
+  Formula, of Production by Transport and Exchange, 32.
+
+  Formula of Protection, 64.
+
+  Formula of Potential of Exchange, 56.
+
+  Formulæ of Subsistence, Interest and Rent, 50.
+
+  Free Trade, arguments for, 153–155.
+
+  Free Trade and Protection, detailed consideration of, 150–166.
+
+  Free Trade and Protection, Elements of, 61–65.
+
+
+  Gold and Silver, Natural advantages of, as money, 69–70.
+
+  Great War, its effect in destroying value of currency, 79–83.
+
+
+  Human energy in production of wealth, conventionally called “Labour,”
+        18–19.
+
+
+  Imaginaries, Economic, examples of, 231–240.
+
+  Imports test of wealth, not exports, 146–149.
+
+  Incomes, Inequality of, productive of Economic Imaginaries, 235.
+
+  Index Number, 204–208.
+
+  Inequality of Incomes, productive of Economic Imaginaries, 235.
+
+  Intention, a necessary adjunct to Capital, 22.
+
+  Interest, high, not connected with though often confused with Usury,
+        217, 218.
+
+  Interest, Nature of, 39–45.
+
+  International Exchange, factor of National Currencies in, 142, 143.
+
+  International Trade, why vital to England, 148–149.
+
+  Islands, Three, Example of in proof of Protectionist Theory, 160–165.
+
+
+  Labour, Division of, 54.
+
+  Labour, term for all human energy in production of wealth, 18–19.
+
+  Labour “worth while of” or Standard of Subsistence, 30–38.
+
+  Land, conventional term for all natural forces used in production of
+        wealth, 17–18.
+
+  Land, Labour, Capital, Conventional terms for three factors of
+        wealth, 16.
+
+  Law of Diminishing Returns, 40–44.
+
+  Loan, Unproductive, the test of Usury, 218–221.
+
+  Luxurious Expenditure, productive of Economic Imaginaries, 233.
+
+
+  “Marx,” assumed name of Mordecai, 134.
+
+  Material objects, not wealth, 11–12.
+
+  Means of Production, 99–100.
+
+  Medium of Exchange, or currency, meaning of, 70.
+
+  Money, how it arises, 66–69;
+    Qualities of, 68–69.
+
+  Money, Paper, its function, 75–78;
+    its corruption, 78–83.
+
+  Money, Social value of, three factors in, 202–203.
+
+  Mordecai, or “Marx,” principal propagator of Socialism, 134.
+
+  Multiple Exchange, 57–58.
+
+  Multiple Exchange in International trade, 143–144.
+
+
+  Natural forces used in production of wealth, called “Land,” 17–18.
+
+  National loans and debt, how arise, 189–191;
+    method of shirking interest on, 192–193.
+
+
+  Overlap, example of an Economic Imaginaries, 231–232.
+
+
+  Potential of Exchange, 53–54;
+    formulæ of, 56.
+
+  Prices, Names for exchange value in gold, 71–72.
+
+  Production, Means of, definition, 99–100.
+
+  Production of wealth, three necessary factors in, Land, Labour and
+        Capital, 15–26.
+
+  Production, Process of, 27–32.
+
+  Property, Nature of, 95–97;
+    private, 96.
+
+  Protection and Free Trade, detailed consideration of, 150–166;
+    arguments advanced for, 152, 156–157;
+    example of the Three Islands, 160–165;
+    of Pig Meal in England, 165–166.
+
+  Protection and Free Trade, Elements of, 61–65.
+
+  Protection, Economic, Formula of, 64.
+
+
+  Rent, a surplus, 47.
+
+  Rent, Example of Coal Mine, 48.
+
+  Rent, Interest, Subsistence, the three divisions of wealth produced,
+        33–51.
+
+  Rent, Nature of, 46–51.
+
+
+  Saving, a necessary process in formation of Capital, 24–25.
+
+  Services and Wealth, confusion between productive of Economic
+        Imaginaries, 236–238.
+
+  Servile State, 100, 103;
+    advantages and disadvantages, 109–114.
+
+  Silver and Gold, Natural advantages of, as money, 69–70.
+
+  Single Tax, theory of, 198–200.
+
+  Socialism, its creator in modern terms. Blanc, 133;
+    its definition, 134.
+
+  Socialism, only conceivable as Communism, 135;
+    failure of, 135–140.
+
+  Standard of subsistence, 36–38.
+
+  State, Capitalist, 101, 104–5;
+    advantages and disadvantages, 115–123.
+
+  State, Distributive, 105–106;
+    advantages and disadvantages, 124–131.
+
+  State, Servile, 100, 103;
+    advantages and disadvantages, 109, 114.
+
+  Subsistence, Nature of, 35–39.
+
+  Subsistence, Standard of, 36–38.
+
+
+  Taxation, direct and indirect, 193–194;
+    rules of, 194–197.
+
+  Taxes, law in distributive state, 129.
+
+  Tribute paid to wealthy countries by poor ones, 145–146.
+
+
+  Unproductive Loan, the test of Usury, 218–221.
+
+  Usury, definition of, 221;
+    why neglected, 223–227.
+
+
+  Values, Economic, attached to material objects, 12.
+
+
+  Wealth, Definition of, 10–14.
+
+  Wealth, production of, three necessary factors in, Land, Labour and
+        Capital, 15–26.
+
+
+
+
+Transcriber’s Notes
+
+
+Punctuation, hyphenation, and spelling were made consistent when a
+predominant preference was found in the original book; otherwise they
+were not changed.
+
+Simple typographical errors were corrected; unbalanced quotation
+marks were remedied when the change was obvious, and otherwise left
+unbalanced.
+
+Illustrations in this eBook have been positioned between paragraphs
+and outside quotations. In versions of this eBook that support
+hyperlinks, the page references in the List of Illustrations lead to
+the corresponding illustrations.
+
+Footnotes, originally at the bottoms of the pages that referenced them,
+have been collected, sequentially renumbered, and placed near the end
+of the book, just before the index.
+
+The index was not checked for proper alphabetization or correct page
+references.
+
+Page 164: “Island B cannot do.” perhaps should be “Island A cannot do.”
+
+
+
+*** END OF THE PROJECT GUTENBERG EBOOK 75629 ***