diff options
| -rw-r--r-- | .gitattributes | 4 | ||||
| -rw-r--r-- | 75629-0.txt | 5894 | ||||
| -rw-r--r-- | 75629-h/75629-h.htm | 8025 | ||||
| -rw-r--r-- | 75629-h/images/cover.jpg | bin | 0 -> 392647 bytes | |||
| -rw-r--r-- | 75629-h/images/i_001.png | bin | 0 -> 4710 bytes | |||
| -rw-r--r-- | 75629-h/images/i_048.png | bin | 0 -> 59391 bytes | |||
| -rw-r--r-- | 75629-h/images/i_099.png | bin | 0 -> 47977 bytes | |||
| -rw-r--r-- | 75629-h/images/i_160.png | bin | 0 -> 38142 bytes | |||
| -rw-r--r-- | 75629-h/images/i_160b.png | bin | 0 -> 47086 bytes | |||
| -rw-r--r-- | LICENSE.txt | 11 | ||||
| -rw-r--r-- | README.md | 2 |
11 files changed, 13936 insertions, 0 deletions
diff --git a/.gitattributes b/.gitattributes new file mode 100644 index 0000000..d7b82bc --- /dev/null +++ b/.gitattributes @@ -0,0 +1,4 @@ +*.txt text eol=lf +*.htm text eol=lf +*.html text eol=lf +*.md text eol=lf diff --git a/75629-0.txt b/75629-0.txt new file mode 100644 index 0000000..bcbadca --- /dev/null +++ b/75629-0.txt @@ -0,0 +1,5894 @@ + +*** 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 *** diff --git a/75629-h/75629-h.htm b/75629-h/75629-h.htm new file mode 100644 index 0000000..365ad38 --- /dev/null +++ b/75629-h/75629-h.htm @@ -0,0 +1,8025 @@ +<!DOCTYPE html> +<html lang="en"> +<head> + <meta charset="UTF-8"> + <title> + Economics For Helen | Project Gutenberg + </title> + <link rel="icon" href="images/cover.jpg" type="image/x-cover"> + <style> /* <![CDATA[ */ + +body { + margin-left: 2.5em; + margin-right: 2.5em; +} +.x-ebookmaker body {margin: 0;} +.x-ebookmaker-drop {color: inherit;} + +h1, h2, h3 { + text-align: center; + clear: both; + margin-top: 2.5em; + margin-bottom: 1em; + word-spacing: .2em; +} + +h1 {line-height: 1;} + +h2.chap {margin-bottom: 0;} +h2+p {margin-top: 1.5em;} +h2+h3 {margin-top: 1.5em;} +h2 .subhead {display: block; margin-top: 1em; margin-bottom: 1em;} +.x-ebookmaker h1, .x-ebookmaker .chapter, .x-ebookmaker .section {page-break-before: always;} +.x-ebookmaker h1.nobreak, .x-ebookmaker h2.nobreak, .x-ebookmaker .nobreak {page-break-before: avoid; padding-top: 0;} + +.transnote h2 { + margin-top: .5em; + margin-bottom: 1em; +} + +.subhead { + text-indent: 0; + text-align: center; + font-size: smaller; +} +.subhead.larger {font-size: larger;} + +p { + text-indent: 1.75em; + margin-top: .51em; + margin-bottom: .24em; + text-align: justify; +} +.x-ebookmaker p { + margin-top: .5em; + margin-bottom: .25em; +} + +.caption p, .center p, p.center {text-align: center; text-indent: 0;} + +.p2 {margin-top: 2em;} +.p4 {margin-top: 4em;} +.vspace {line-height: 1.5;} + +.in0 {text-indent: 0;} + +.xsmall {font-size: 60%;} +.small {font-size: 70%;} +.smaller {font-size: 85%;} +.larger {font-size: 125%;} +.large {font-size: 150%;} +.xxlarge {font-size: 200%;} + +.center {text-align: center;} + +.smcap {font-variant: small-caps;} +.allsmcap {font-variant: small-caps; text-transform: lowercase;} +.firstword {font-variant: small-caps;} + +.bold {font-weight: bold;} + +hr { + width: 33%; + margin: 4em auto 4em auto; + clear: both; +} +.x-ebookmaker hr { + margin-top: .1em; + margin-bottom: .1em; + visibility: hidden; + color: white; + width: .01em; + display: none; +} + +.tb { + text-align: center; + padding-top: .76em; + padding-bottom: .24em; + letter-spacing: 1.5em; + margin-right: -1.5em; +} + +.x-ebookmaker .tb {letter-spacing: 1.25em; margin-right: -1.25em;} + +table { + margin-left: auto; + margin-right: auto; + max-width: 80%; + border-collapse: collapse; +} +.x-ebookmaker table {width: auto; max-width: 90%; margin: 1em auto 1em auto;} + +.tdl { + text-align: left; + vertical-align: top; + padding-right: 1em; + padding-left: 1.5em; + text-indent: -1.5em; +} +.x-ebookmaker .tdl { + padding-left: 1em; + text-indent: -1em; + padding-right: 0; +} + +.tdc {text-align: center;} +.tdc.chap, .tdc.chapsub { + font-size: 125%; + padding-top: .5em; + padding-bottom: .5em; +} +.tdc.chapsub {padding-top: .5em; padding-bottom: .5em; font-size: 110%;} + +.tdr { + text-align: right; + vertical-align: bottom; + padding-left: .3em; + white-space: nowrap; +} +.tdr.top {vertical-align: top; padding-left: 0; padding-right: 1em;} +#toc td {padding-bottom: .75em;} +#toc .xsmall td {padding-bottom: 0;} +#toc .tpad td {padding-top: 1em;} + +.pagenum { + position: absolute; + right: .25em; + text-indent: 0; + text-align: right; + font-size: 70%; + font-weight: normal; + font-variant: normal; + font-style: normal; + letter-spacing: normal; + line-height: normal; + color: #acacac; + border: .0625em solid #acacac; + background: #ffffff; + padding: .0625em .125em; +} + +.figcenter { + margin: 2em auto 2em auto; + text-align: center; + page-break-inside: avoid; +} + +img { + padding: 1em 0 0 0; + max-width: 100%; + height: auto; +} + +.caption {text-align: center; margin-top: 0;} + +ul {margin-left: 3em; padding-left: 0;} +li {list-style-type: none; padding-left: 2em; text-indent: -2.5em; text-align: left;} +.x-ebookmaker ul {margin-left: 1em; padding-left: 0;} +.x-ebookmaker li {list-style-type: none; padding-left: 1em; text-indent: -1.5em;} + +.footnotes { + border: thin dashed black; + margin: 4em 5% 1em 5%; + padding: .5em 1em .5em 1.5em; +} +.x-ebookmaker .footnotes {margin: 2em 0 1em 0;} + +.footnote {font-size: .95em;} +.footnote p {text-indent: 1em;} +.footnote p.in0 {text-indent: 0;} +.footnote p.fn1 {text-indent: -.7em;} + +.fnanchor, .footnote .label { + vertical-align: 60%; + line-height: .7; + font-size: smaller; + text-decoration: none; +} +.fnanchor {font-weight: bold; font-size: .8em;} +.footnote .label {font-size: .8em;} +h2 .fnanchor {font-size: .5em; vertical-align: text-top;} + +.index {margin-left: 1em; text-align: center; display: flex; justify-content: center;} +ul.index {padding-left: 0; display: block; max-width: 30em;} +li {list-style-type: none; text-align: left;} +li.indx, li.ifrst {list-style-type: none; padding-left: 3em; text-indent: -3em; padding-top: .2em;} +li.isub1 {padding-left: 3em; text-indent: -2em;} +li.ifrst {padding-top: 1em;} + +.blockquot {margin: 1.5em 5% 1.5em 5%;} + +.blockquot.hang p {padding-left: 1em; text-indent: -1em; padding-right: 1em;} +.x-ebookmaker .blockquot {margin: 1.5em 3% 1.5em 3%;} + +.hang { + text-align: justify; + padding-left: 1em; + text-indent: -1em; +} +.x-ebookmaker .hang {margin: .5em 3% 2em 3%;} + +.transnote { + border: .3em double gray; + font-family: sans-serif, serif; + margin-left: 5%; + margin-right: 5%; + margin-top: 4em; + margin-bottom: 2em; + padding: 1em; +} +.x-ebookmaker .transnote { + page-break-before: always; + page-break-after: always; + margin-left: 2%; + margin-right: 2%; + margin-top: 1em; + margin-bottom: 1em; + padding: .5em; +} + +.covernote {visibility: hidden; display: none;} +.x-ebookmaker .covernote {visibility: visible; display: block; text-align: justify} + +.wspace {word-spacing: .3em;} + +span.locked {white-space:nowrap;} +.pagenum br {display: none; visibility: hidden;} +.narrow {width: 60%; max-width: 20em; margin-left: auto; margin-right: auto;} + + /* ]]> */ </style> +</head> + +<body> +<div style='text-align:center'>*** START OF THE PROJECT GUTENBERG EBOOK 75629 ***</div> + +<div class="transnote section"> +<p class="center larger">Transcriber’s Note</p> + +<p>Larger versions of most illustrations may be seen by right-clicking them +and selecting an option to view them separately, or by double-tapping and/or +stretching them.</p> + +<p class="covernote">New original cover art included with this eBook is granted +to the public domain.</p> + +<p><a href="#Transcribers_Notes">Additional notes</a> will be found near the end of this ebook.</p> +<div> </div> +</div> + +<div class="section p4"> +<h1>ECONOMICS FOR HELEN</h1> +<hr class="chap x-ebookmaker-drop"> +<div> </div> +</div> + +<div class="chapter center wspace"> +<p class="xxlarge vspace bold"> +ECONOMICS FOR<br> +HELEN</p> + +<p class="p4 vspace"><span class="small">BY</span><br> + +<span class="large">HILAIRE BELLOC</span></p> + +<figure id="i_1" class="figcenter" style="max-width: 6em;"> + <img src="images/i_001.png" width="395" height="555" alt=""> +</figure> + +<p>J. W. ARROWSMITH (<span class="smcap">London</span>) <span class="smcap">Ltd.</span><br> +<span class="smaller">6 Upper Bedford Place, Russell Square, London</span> +</p> +<hr class="chap x-ebookmaker-drop"> +<div> </div> +</div> + +<div class="section p4"> +<div class="blockquot hang narrow"> + +<p><span class="smcap">The First Edition</span> <i>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.</i></p> + +<p><i>This</i>, <span class="smcap">The Second Edition</span> <i>(Crown 8vo), +was also published in March, 1924</i>.</p> +</div> + +<p class="p4 center vspace smaller"> +Printed in Great Britain by<br> +<span class="smcap">J. W. Arrowsmith Ltd.</span>, 11 Quay Street, Bristol +</p> +<hr class="chap x-ebookmaker-drop"> +<div> </div> +</div> + +<div class="chapter"> +<p><span class="pagenum" id="Page_5">5</span></p> + +<h2 class="nobreak" id="Contents">Contents</h2> +</div> + +<table id="toc"> +<tr> + <td class="tdc chapsub" colspan="3">PART I</td> +</tr> +<tr> + <td class="tdc chap" colspan="3">THE ELEMENTS</td> +</tr> +<tr class="xsmall"> + <td class="tdr"></td> + <td class="tdl"></td> + <td class="tdr">PAGE</td> +</tr> +<tr> + <td class="tdr top">I</td> + <td class="tdl"><span class="smcap">What is Wealth?</span></td> + <td class="tdr"><a href="#toclink_10">10</a></td> +</tr> +<tr> + <td class="tdr top">II</td> + <td class="tdl"><span class="smcap">The Three Things necessary to the Production of Wealth—Land, Labour and Capital</span></td> + <td class="tdr"><a href="#toclink_15">15</a></td> +</tr> +<tr> + <td class="tdr top">III</td> + <td class="tdl"><span class="smcap">The Process of Production</span></td> + <td class="tdr"><a href="#toclink_27">27</a></td> +</tr> +<tr> + <td class="tdr top">IV</td> + <td class="tdl"><span class="smcap">The Three Parts into which the Wealth Produced naturally divides itself—Rent, Interest, Subsistence</span></td> + <td class="tdr"><a href="#toclink_33">33</a></td> +</tr> +<tr> + <td class="tdr top">V</td> + <td class="tdl"><span class="smcap">Exchange</span></td> + <td class="tdr"><a href="#toclink_52">52</a></td> +</tr> +<tr> + <td class="tdr top">VI</td> + <td class="tdl"><span class="smcap">Free Trade and Protection</span></td> + <td class="tdr"><a href="#toclink_61">61</a></td> +</tr> +<tr> + <td class="tdr top">VII</td> + <td class="tdl"><span class="smcap">Money</span></td> + <td class="tdr"><a href="#toclink_66">66</a><span class="pagenum" id="Page_6">6</span></td> +</tr> +<tr> + <td class="tdc chapsub" colspan="3">PART II</td> +</tr> +<tr> + <td class="tdc chap" colspan="3">POLITICAL APPLICATIONS</td> +</tr> +<tr> + <td class="tdl" colspan="2"><span class="smcap">Introduction</span></td> + <td class="tdr"><a href="#toclink_87">87</a></td> +</tr> +<tr> + <td class="tdl" colspan="2"><span class="smcap">Property—The Control of Wealth</span></td> + <td class="tdr"><a href="#toclink_95">95</a></td> +</tr> +<tr> + <td class="tdl" colspan="2"><span class="smcap">The Servile State</span></td> + <td class="tdr"><a href="#toclink_109">109</a></td> +</tr> +<tr> + <td class="tdl" colspan="2"><span class="smcap">The Capitalist State</span></td> + <td class="tdr"><a href="#toclink_115">115</a></td> +</tr> +<tr> + <td class="tdl" colspan="2"><span class="smcap">The Distributive State</span></td> + <td class="tdr"><a href="#toclink_124">124</a></td> +</tr> +<tr> + <td class="tdl" colspan="2"><span class="smcap">Socialism</span></td> + <td class="tdr"><a href="#toclink_132">132</a></td> +</tr> +<tr> + <td class="tdl" colspan="2"><span class="smcap">International Exchange</span></td> + <td class="tdr"><a href="#toclink_141">141</a></td> +</tr> +<tr> + <td class="tdl" colspan="2"><span class="smcap">Free Trade and Protection as Political Issues</span></td> + <td class="tdr"><a href="#toclink_150">150</a></td> +</tr> +<tr> + <td class="tdl" colspan="2"><span class="smcap">Banking</span></td> + <td class="tdr"><a href="#toclink_167">167</a></td> +</tr> +<tr> + <td class="tdl" colspan="2"><span class="smcap">National Loans and Taxation</span></td> + <td class="tdr"><a href="#toclink_189">189</a></td> +</tr> +<tr> + <td class="tdl" colspan="2"><span class="smcap">The Social (or Historical) Value of Money</span></td> + <td class="tdr"><a href="#toclink_201">201</a></td> +</tr> +<tr> + <td class="tdl" colspan="2"><span class="smcap">Usury</span></td> + <td class="tdr"><a href="#toclink_217">217</a></td> +</tr> +<tr> + <td class="tdl" colspan="2"><span class="smcap">Economic Imaginaries</span></td> + <td class="tdr"><a href="#toclink_230">230</a></td> +</tr> +<tr class="tpad"> + <td class="tdl" colspan="2"><span class="smcap">Index</span></td> + <td class="tdr"><a href="#toclink_243">243</a></td> +</tr> +</table> + +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_7">7</span></p> + +<h2 class="nobreak" id="Part_I">Part I<br> + +<span class="subhead larger">THE ELEMENTS</span></h2> +<hr class="chap x-ebookmaker-drop"> +<div> </div> +</div> + + +<div class="chapter"> +<p><span class="pagenum" id="Page_9">9</span></p> + +<h2 class="nobreak" id="THE_ELEMENTS"><span id="toclink_9"></span>THE ELEMENTS</h2> +</div> + +<p class="in0"><span class="firstword">Economics</span> 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.</p> + +<p>Now as Economics is the study of Wealth, the +first thing we have to make certain of is, <em>What +Wealth is</em>.</p> +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_10">10</span></p> + +<h2 class="nobreak" id="I"><span id="toclink_10"></span>I<br> + +<span class="subhead">WHAT IS WEALTH?</span></h2> +</div> + +<p class="in0"><span class="firstword">The</span> 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.</p> + +<p>First, we must be clear as to what Wealth is <em>not</em>.</p> + +<p>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.</p> + +<p>Another and better, but still a wrong, answer is: +“Wealth is what a man possesses.”</p> + +<p>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<span class="pagenum" id="Page_11">11</span> +that answer will do well enough. But it will not +do for the strict science of Economics, for it is not +accurate.</p> + +<p>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 <em>it is not the +horse itself which constitutes his wealth, but something +attaching to the horse</em>, some quality or circumstance +which affects the horse and gives the horse what is +called its <em>value</em>. It is this <em>Value</em> which is wealth, +not the horse. To see how true this is consider +how the value changes while the horse remains the +same.</p> + +<p>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.” <em>It is this</em> <span class="smcap">Worth</span>, +<em>that is, this ability to get other wealth in exchange, +which constitutes true Economic Wealth</em>.</p> + +<p><span class="pagenum" id="Page_12">12</span></p> + +<p>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. <em>Wealth does not reside in the objects we possess, +but in the economic values attaching to those objects.</em></p> + +<p>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 <em>things</em>. Wealth is the sum total of the <em>values</em> +attaching to those things.</p> + +<p>That is the first and most important point.</p> + +<p>Here is the second: Wealth, for the purposes of +economic study, <em>is confined to those values attaching +to material objects through the action of man, which +values can be exchanged for other values</em>.</p> + +<p>I will explain what that sentence means.</p> + +<p>Here is a mountain country where there are +few people and plenty of water everywhere. That +water does not form part of the Economic <em>wealth</em> +of anyone living there. Everyone is the better +off for the water, but no one has <em>wealth</em> 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 <em>value in +exchange</em>. But in a town to which water has to be<span class="pagenum" id="Page_13">13</span> +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 <em>Economic Wealth</em>, while +in the country it usually does not.</p> + +<p>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 <em>more wealth</em> than +when he has to pay for it. He has more <em>wealth</em> +when he gets the water free than he has when he +has to pay for it.”</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_14">14</span> +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.</p> + +<p>That is the second difficult point at the very +beginning of our study. <em>Economic Wealth consists +in</em> <span class="allsmcap">EXCHANGEABLE</span> <em>values, and nothing else</em>.</p> + +<p>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.</p> + +<p>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.</p> + +<p>We write down, then, two Formulæ:</p> + +<div class="blockquot"> + +<p>1. <strong>Wealth is made up, not of things, but of +economic values attaching to things.</strong></p> + +<p class="p2">2. <strong>Wealth, for the purposes of economic study, +means ONLY exchange values: that is, values +against which other values will be given in exchange.</strong></p> +</div> +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_15">15</span></p> + +<h2 class="nobreak" id="II"><span id="toclink_15"></span>II<br> + +<span class="subhead">THE THREE THINGS NECESSARY TO THE +PRODUCTION OF WEALTH—LAND, +LABOUR AND CAPITAL</span></h2> +</div> + +<p class="in0"><span class="firstword">You</span> will notice that all about you living beings +are occupied in changing the things around them +from a condition where they are <em>less</em> to a condition +where they are <em>more</em> useful to themselves.</p> + +<p>Man is a living being, and he is doing this kind of +thing all the time. If he were not he could not +live.</p> + +<p>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.</p> + +<p>Man is perpetually changing the things around +him from a condition in which they are <em>less</em> useful +to him into a condition where they are <em>more</em> useful +to him.</p> + +<p><span class="pagenum" id="Page_16">16</span></p> + +<p><em>Whenever a man does that he is said to be creating, +and adding to, Human Wealth</em>: part of which is +Economic Wealth, that is Wealth suitable for study +under the science of Economics.</p> + +<p>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.</p> + +<p>We must next go on to think out <em>how</em> 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 <em>Economic Wealth</em> attaching +to it (for instance, breathing in air does not produce +Economic Wealth), yet all Economic Wealth is +produced as <em>part</em> of this general process.</p> + +<p>Now when we come to examine the Production +of Wealth, we shall find that <em>three</em> great separate +forces come into it; and these we shall find to +be called conveniently “Land,” “Labour” and +“Capital.”</p> + +<p>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.</p> + +<p><span class="pagenum" id="Page_17">17</span></p> + +<h3>1. <span class="smcap">Land.</span></h3> + +<p>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.</p> + +<p>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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_18">18</span> +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 <em>place</em> from which he uses all other natural +forces.</p> + +<p>We say, then, that for the production of wealth +the first thing you need is the natural forces of the +world, or “Land.”</p> + +<h3>2. <span class="smcap">Labour.</span></h3> + +<p>But we next note that this possession of natural +forces, our knowledge of how they will work, and our +power of combining them, <em>is not enough to produce +wealth</em>.</p> + +<p>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, <em>the application of +human energy to natural forces</em>. 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<span class="pagenum" id="Page_19">19</span> +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, <em>that all wealth +comes from the combination of LAND and LABOUR: +That is</em>, of <em>natural forces</em> and <em>human energy</em>.</p> + +<h3>3. <span class="smcap">Capital.</span></h3> + +<p>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.</p> + +<p>But if we look closely into the matter we shall +see that Land and Labour alone are <em>not</em> 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.</p> + +<p>Let us see what this word “CAPITAL” means.</p> + +<p>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<span class="pagenum" id="Page_20">20</span> +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.</p> + +<p>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.</p> + +<p>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.</p> + +<p><span class="pagenum" id="Page_21">21</span></p> + +<p>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 <em>certain accumulations of wealth made +in the past</em>—an accumulation of food, clothing, +implements, etc.—without which the process of +production could not be undertaken. <em>This accumulation +of</em> <span class="allsmcap">ALREADY-MADE WEALTH</span>, <em>which is thus +absolutely necessary to production</em>, we call <em>CAPITAL</em>.</p> + +<p>It includes <em>all kinds of wealth whatsoever which +man uses</em> <span class="allsmcap">WITH THE OBJECT OF PRODUCING FURTHER +WEALTH</span>, <em>and without which the further wealth could +not be produced</em>. 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 <em>capital</em> 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.</p> + +<p>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) <em>Natural +Forces</em>, (2) <em>Human Energy</em>, and (3) <em>Accumulated +stores and implements</em>, which are called, generally, +for the sake of shortness: <em>LAND</em>, <em>LABOUR</em> and<span class="pagenum" id="Page_22">22</span> +<em>CAPITAL</em>. 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.</p> + +<h3>POINTS ABOUT CAPITAL.</h3> + +<p>There are <em>three</em> important things to remember +about Capital.</p> + +<p>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 +<em>intention</em> of using it as capital on the part of the +person who controls that object; that is, the +intention to use it for the <em>production of future wealth</em>. +Almost any object can be used as capital, but no +object is capital, however suitable it be for that +purpose, <em>unless there is the intention present of using +it as capital</em>. 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.</p> + +<p>But these things are not capital <em>in themselves</em>; +for if we do not use them for the production of<span class="pagenum" id="Page_23">23</span> +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.</p> + +<p>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.</p> + +<p>2. The second important thing to remember +about Capital is that, being Wealth, <em>it is at last +consumed, as all other Wealth is</em>. 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<span class="pagenum" id="Page_24">24</span> +harvest must be at least enough to replace all the +wastage of capital which goes on during the process +of production.</p> + +<p>3. The third thing to remember about Capital +is that Capital is <em>always the result of saving</em>: 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 +<em>controls</em> the capital is very often quite a different +person from the person who <em>really accumulated</em> it. +The owner of the capital is very often a person who +never thinks of saving. Nevertheless, the saving +has been done by <em>someone</em> 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.</p> + +<p>Suppose, for instance, a man inherits £10,000 +worth of Capital invested in a Steamship Company.</p> + +<p>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.</p> + +<p>All this capital has been saved by someone. +Not by the man himself; he has merely inherited +the wealth—but by someone.</p> + +<p>Someone at some time, his father or whoever +first got the capital together, must have forgone<span class="pagenum" id="Page_25">25</span> +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.</p> + +<p>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.</p> + +<p>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 <em>someone</em>, <em>somewhere</em>, +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;<span class="pagenum" id="Page_26">26</span> +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.</p> + +<p>Now let us sum up in some more Formulæ +what we have learnt so <span class="locked">far.—</span></p> + +<div class="blockquot"> + +<p>1. <strong>All production of Wealth needs three things: +(<i>a</i>) Natural forces, (<i>b</i>) Human energy, and (<i>c</i>) an +Accumulation of wealth made in the past and used +up in future production.</strong></p> + +<p class="p2">2. <strong>These three are called, for shortness: (<i>a</i>) Land, +(<i>b</i>) Labour, (<i>c</i>) Capital.</strong></p> + +<p class="p2">3. <strong>The last, Capital, (<i>a</i>) depends for its character +on the intention of the user, (<i>b</i>) is consumed in +production, (<i>c</i>) is always the result of saving.</strong></p> +</div> +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_27">27</span></p> + +<h2 class="nobreak" id="III"><span id="toclink_27"></span>III<br> + +<span class="subhead">THE PROCESS OF PRODUCTION</span></h2> +</div> + +<p class="in0"><span class="firstword">You</span> 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.</p> + +<p>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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_28">28</span> +process whereby it ultimately satisfies a human +need.</p> + +<p>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.</p> + +<p>We express this by saying that the ton of coal +<em>delivered</em> (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<span class="pagenum" id="Page_29">29</span> +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.</p> + +<p>Here is another case which shows how the process +of production will add values to a thing without +necessarily changing the thing itself.</p> + +<p>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<span class="pagenum" id="Page_30">30</span> +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 <em>exchange</em> is +a direct creator of wealth, and the transport effecting +the exchange is a creator of wealth.</p> + +<p>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<span class="pagenum" id="Page_31">31</span> +table. Every one of these actions is part of the +production of wealth.</p> + +<p>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:</p> + +<p><em>All wealth is consumed.</em></p> + +<p>This is universally true of all wealth whatsoever, +though the rate of consumption is very different in +different cases.</p> + +<p>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.</p> + +<p>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.</p> + +<p>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.</p> + +<p><span class="pagenum" id="Page_32">32</span></p> + +<p>The moment man’s effort ceases, deterioration, +that is, <em>the consumption of the wealth present</em>, 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 +<em>economic consumption</em>.</p> + +<p>We may sum up in the following <span class="locked">Formulæ:—</span></p> + +<div class="blockquot"> + +<p>1. <strong>Transport and Exchange, quite as much as +actual work on the original material, form part of +the Production of Wealth.</strong></p> + +<p class="p2">2. <strong>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.</strong></p> +</div> +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_33">33</span></p> + +<h2 class="nobreak" id="IV"><span id="toclink_33"></span>IV<br> + +<span class="subhead">THE THREE PARTS INTO WHICH THE +WEALTH PRODUCED NATURALLY DIVIDES +ITSELF—RENT, INTEREST, SUBSISTENCE</span></h2> +</div> + +<p class="in0"><span class="firstword">We</span> 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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_34">34</span> +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.</p> + +<p>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 <em>human</em> 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.</p> + +<p>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<span class="pagenum" id="Page_35">35</span> +in all wealth produced anywhere, <strong>and these three +divisions do not correspond to the moral claim +man has to the result of his labour</strong>. 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.</p> + +<p>These three divisions are called <strong>RENT</strong>, <strong>INTEREST</strong> +(or <strong>Profit</strong>) and <strong>SUBSISTENCE</strong>. In order to see +how these three divisions come about we must take +them in the order of <em>Subsistence</em> first, then <em>Interest</em>, +then <em>Rent</em>.</p> + +<h3>1. <span class="smcap">Subsistence.</span></h3> + +<p>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 <strong>THE STANDARD OF SUBSISTENCE</strong>.</p> + +<p><span class="pagenum" id="Page_36">36</span></p> + +<p>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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_37">37</span> +standard. We do not tolerate their living in holes +in the ground or mud huts.</p> + +<p>One way and another we have set up a certain +<em>standard of subsistence</em> even for the poorest; <em>and +every community in history has, at all times, lived +under this idea of a</em> <span class="allsmcap">MINIMUM STANDARD OF SUBSISTENCE</span>. +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.</p> + +<p>Well, this <em>Minimum Standard of Subsistence</em> 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.</p> + +<p>This “Standard of Subsistence,” which is to<span class="pagenum" id="Page_38">38</span> +be found in its various shapes in every civilisation, +may be called “<em>The Worth While of Labour</em>.” +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 <strong>set</strong> 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.</p> + +<p>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.</p> + +<p>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 <em>less</em> than this without the production +of wealth gradually coming to an end.</p> + +<p>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<span class="pagenum" id="Page_39">39</span> +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. <em>It must be satisfied or production +ceases.</em></p> + +<h3>2. <span class="smcap">Interest.</span></h3> + +<p>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.”</p> + +<p>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 <em>Real Capital</em> (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.</p> + +<p><span class="pagenum" id="Page_40">40</span></p> + +<p>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.</p> + +<p>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.</p> + +<p>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?</p> + +<p>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 +<em>keep up</em> my capital by continual saving to replace +what is consumed in production I shall gradually +get <em>less</em> income.”</p> + +<p>But here comes in a very important law of +Economics called “<em>The Law of Diminishing Returns</em>.”<span class="pagenum" id="Page_41">41</span> +After a certain point, capital as it accumulates, +does not produce a <em>corresponding</em> amount of extra +wealth. It produces <em>some</em> 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: <em>Four</em> times the original +amount of capital, and only <em>twice</em>, say, the old +income.</p> + +<p>So the process goes on; and in all forms of the +production of wealth this formula applies, and is +true: “<em>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.</em>”</p> + +<p>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<span class="pagenum" id="Page_42">42</span> +to the <em>same section</em> of natural forces and in the <em>same +manner</em>.</p> + +<p>Well, this advantage which a man gets by adding +to his capital at the expense of present enjoyment +can be measured.</p> + +<p>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.”</p> + +<p>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.</p> + +<p>Instead of being worth only <em>one</em> thousand sacks, +his capital is now worth <em>two</em> 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<span class="pagenum" id="Page_43">43</span> +old income of 100 sacks of wheat he is now getting +150 sacks of wheat. Thus though his income is +larger, the <em>proportion</em> 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.</p> + +<p>Now, although the 2,000 of capital invested is +thus bringing him in a smaller <em>proportion</em> of income +than the old 1,000 did, he thinks it worth while: +because he is at any rate getting more <em>income</em>; +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 <em>minimum profits of capital</em>. +A man is delighted, of course, to have <em>more</em> profit +than this if he can. But the point is, he will not +take <em>less</em>. 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.</p> + +<p><span class="pagenum" id="Page_44">44</span></p> + +<p>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; <em>but +you must also produce enough more to keep capital +accumulating</em>. You must produce, over and above +subsistence, whatever happens to be the amount +of <em>profits</em> for which capital will accumulate in any +particular society (with us, to-day, it is about +5 per cent.).</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_45">45</span> +waste to accumulate capital at a heavy sacrifice +to himself and his subjects, unless it produced a +future reward.</p> + +<p>If the Despot said, “This year you must do without +<em>half</em> your usual amount of leisure and without <em>half</em> +your usual amounts, pay <em>double</em> 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.</p> + +<p>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.</p> + +<div class="blockquot"> + +<p class="smaller">(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.)</p> +</div> + +<p><span class="pagenum" id="Page_46">46</span></p> + +<h3>3. <span class="smcap">Rent.</span></h3> + +<p>We arrive through this at the third division, <em>Rent</em>.</p> + +<p>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.</p> + +<p>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.</p> + +<p>When the conditions are such that the capital +and labour applied to them <em>just</em> get their worth +while and no more, those conditions are said to be +“<em>on the margin of production</em>,” which means that +they are the worst conditions under which men in +a particular society will consent to produce wealth<span class="pagenum" id="Page_47">47</span> +at all. Put them on conditions still worse, and +they will not produce.</p> + +<p>Now the existence of this Margin of Production +creates the third division in Wealth, which is called +<strong>RENT</strong>.</p> + +<p><em>Rent is the surplus over and above the minimum +required by labour and capital out of the total produce.</em> +(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 <em>Capital</em> of its +bricks and mortar and building.)</p> + +<p>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.</p> + +<p>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 <em>just</em> 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, <em>just barely</em> gets the profit +below which it would not be worth while to use it.</p> + +<p>A shaft sunk at this depth, for instance, and the<span class="pagenum" id="Page_48">48</span> +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.”</p> + +<figure id="ip_48" class="figcenter" style="max-width: 45em;"> + <img src="images/i_048.png" width="2149" height="674" alt=""> +</figure> + +<p>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<span class="pagenum" id="Page_49">49</span> +£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 <em>after</em> 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.”</p> + +<p>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 <em>Rent</em>,” which is<span class="pagenum" id="Page_50">50</span> +something, of course, much more strictly defined +than, and different from, what we call Rent in +ordinary conversation.</p> + +<p>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 +<em>no</em> 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.</p> + +<div class="tb">* * * * *</div> + +<p>We can sum the whole thing up and say that on +the mass of all production there are three charges:</p> + +<div class="blockquot"> + +<p>1. <strong>First, the charge for the subsistence of labour.</strong></p> + +<p class="p2">2. <strong>Next, the charge of profits, or interest, for the +reward of capital, that is, of saving, and lastly</strong></p> + +<p class="p2">3. <strong>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.</strong></p> +</div> + +<p>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<span class="pagenum" id="Page_51">51</span> +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.</p> + +<p>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.</p> +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_52">52</span></p> + +<h2 class="nobreak" id="V"><span id="toclink_52"></span>V<br> + +<span class="subhead">EXCHANGE</span></h2> +</div> + +<p><strong>EXCHANGE</strong> 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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_53">53</span> +so it is with thousands upon thousands of exchanges +going on all over the world.</p> + +<p>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.</p> + +<p>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.</p> + +<p>Therefore, there is a double advantage to us and +to the people who live in the hot countries where +tea is grown if we <em>exchange</em>. 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.</p> + +<p>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 “<em>a potential of exchange</em>,” stronger or weaker +according to the amount of mutual advantage +derived.</p> + +<p>This word “potential” you will not find yet in<span class="pagenum" id="Page_54">54</span> +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 “<em>potential</em>” 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.</p> + +<p>Potentials of exchange come into existence not +only through difference of climate or differences of +habit, but also through what is called the +<em>Differentiation of Employment</em>, which is also called +Division of Labour.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_55">55</span> +makes a pair of boots with less expense of energy, +that is, <em>cheaper</em>, 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.</p> + +<p>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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_56">56</span> +around you has gone through many processes of +exchange.</p> + +<p>There are a few elementary Formulæ concerning +Exchange which it is important to remember.</p> + +<div class="blockquot"> + +<p>1. <strong>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.</strong></p> +</div> + +<p>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:</p> + +<p>It pays the exporting country, England, to sell +coal in Cadiz <em>at less than its English economic value</em>, +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.<span class="pagenum" id="Page_57">57</span> +But if you will look at it closely you will see that it +is so.</p> + +<p>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.</p> + +<div class="blockquot"> + +<p>2. The second Formula to remember about +Exchange is this: <strong>Goods do not directly exchange +always one against the other, but usually in a much +more complicated way, by what may be called</strong> +<em>Multiple Exchange</em>.</p> +</div> + +<p>Of course, the vehicle by which this is done is +a currency, or <em>money</em>, 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.</p> + +<p>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<span class="pagenum" id="Page_58">58</span> +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, <em>not</em> 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.</p> + +<p>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<span class="pagenum" id="Page_59">59</span> +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.</p> + +<p id="f3">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 <span class="locked">thus:—</span></p> + +<div class="blockquot"> + +<p><strong>Other things being equal, the greatest freedom of +exchange in any given area makes for the greatest +amount of wealth in that area.</strong></p> +</div> + +<p>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<span class="pagenum" id="Page_60">60</span> +in it are thus left free to be worked by the sense of +advantage.</p> + +<p>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.</p> + +<p>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.</p> + +<p>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.</p> +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_61">61</span></p> + +<h2 class="nobreak" id="VI"><span id="toclink_61"></span>VI<br> + +<span class="subhead">FREE TRADE AND PROTECTION</span></h2> +</div> + +<p class="in0"><span class="firstword">Nations,</span> 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.</p> + +<p>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 <em>protect</em> that object, and the system<span class="pagenum" id="Page_62">62</span> +of so doing is called <strong>Protection</strong>. 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.</p> + +<p>As opposed to this system of <em>Protection</em>, and +interfering with international exchange by a tariff, +intelligent people a long lifetime ago began to +agitate for what they called “<strong>FREE TRADE</strong>,” +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.</p> + +<p>Another principle of Free Trade was that if it<span class="pagenum" id="Page_63">63</span> +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 “<em>an equivalent excise</em>” 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.</p> + +<p>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.</p> + +<p>But if you will look closely at <a href="#f3">Formula No. 3</a> +written in the last division on <a href="#Page_59">page 59</a> 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<span class="pagenum" id="Page_64">64</span> +world, that is, complete Free Trade, would make the +world as a whole richer.</p> + +<p><em>But it does not follow that</em> <span class="allsmcap">EACH PART</span> <em>of the area +thus made richer is itself enriched</em>. That is the +important point which the Free Trade people missed, +and it is this which supports, in some cases, the +argument for Protection.</p> + +<p>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.</p> + +<div class="blockquot"> + +<p><strong>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.</strong></p> +</div> + +<p>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<span class="pagenum" id="Page_65">65</span> +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.</p> + +<p>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.</p> +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_66">66</span></p> + +<h2 class="nobreak" id="VII"><span id="toclink_66"></span>VII<br> + +<span class="subhead">MONEY</span></h2> +</div> + +<p class="in0"><span class="firstword">When</span> 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 <em>not</em> present.</p> + +<p>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.”</p> + +<p>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<span class="pagenum" id="Page_67">67</span> +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.</p> + +<p>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.</p> + +<p>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, <em>wheat</em> 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.</p> + +<p>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 +<em>wheat</em> in exchange, even if he did not want it for +the moment. For he would say to himself: “I<span class="pagenum" id="Page_68">68</span> +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 <strong>MONEY</strong>. 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.</p> + +<p>Mankind has found, in most cases, that where a +very large number of articles were being exchanged +<em>two</em> in particular naturally lent themselves to this +particular use, and those two were <span class="allsmcap">GOLD</span> and +<span class="allsmcap">SILVER</span>. 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.</p> + +<p>The reason for this is as follows:</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_69">69</span> +to place—for money has to be always moving from +one to another to effect purchases and sales.</p> + +<p>2. It must be easily divisible, for one is always +wanting to use it in all sorts of amounts, very little +and very large.</p> + +<p>3. It must keep. That is, it must not deteriorate +quickly, or it would have very little use as Money.</p> + +<p>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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_70">70</span> +easily divisible and can therefore be presented in +any amount, from a tenth of an ounce to a hundred +pounds weight.</p> + +<p>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 +<em>Buying and Selling</em>. That is, of exchanging his +produce, not against other produce, but against +gold and silver, with the object of <em>later</em> re-exchanging +that gold and silver for other things that he needed.</p> + +<p>Money, once thus established, is called <strong>A MEDIUM +OF EXCHANGE</strong> and also <strong>CURRENCY</strong> or <strong>THE +CIRCULATING MEDIUM</strong>. 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.”</p> + +<p>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<span class="pagenum" id="Page_71">71</span> +there is so much weight of gold in the round disc +of metal which it stamps.</p> + +<p>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 +“<strong>Prices</strong>.”</p> + +<p>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 <strong>price</strong> of the article.</p> + +<p>For instance, when you say that a house is worth +£500, that that is the “<em>price</em>” of the house, you<span class="pagenum" id="Page_72">72</span> +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.</p> + +<div class="tb">* * * * *</div> + +<p>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.</p> + +<p>There is a very interesting study in Economics +called “<em>The Theory of Prices</em>,” showing why <em>all +prices on the average</em> (what is called “General +Prices,” that is the value of all goods <em>in general</em> +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: <em>First</em>, +the amount of gold present to do the work of +exchange; <em>Secondly</em>, 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<span class="pagenum" id="Page_73">73</span> +as much work in helping exchanges to be carried +out as ten pieces moving ten times more slowly.</p> + +<p>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.</p> + +<p>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.</p> + +<p>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.</p> + +<p><span class="pagenum" id="Page_74">74</span></p> + +<p>Prices, then, depend upon the actual amount of +money that is present to do the work, <em>and</em> the pace +at which it is made to go the rounds: or (to put +it in technical terms), on the amount of the currency +<em>and</em> its “<em>efficiency in circulation</em>.”</p> + +<p>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.</p> + +<p>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.</p> + +<p>What is the result? <em>The result is a very rapid +increase in the pace at which the gold circulates.</em> +Every purchaser feels himself richer. The gold +is tendered for a much larger number of bargains,<span class="pagenum" id="Page_75">75</span> +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, <strong>Efficiency in Circulation</strong>, 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.</p> + +<p>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 <em>paper +money</em>.</p> + +<p>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<span class="pagenum" id="Page_76">76</span> +or place—that should have the effect, of course, +of making it more valuable, that is, of lowering +prices.</p> + +<p>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 <em>Paper Money</em>. +Paper money was a method of immensely increasing +Efficiency in Circulation.</p> + +<p>This is how it worked.</p> + +<p>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 <em>instead +of</em> the five sovereigns.</p> + +<p>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<span class="pagenum" id="Page_77">77</span> +you wanted the actual gold you had only to go +to the bank and get it.</p> + +<p>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.</p> + +<p>You can see that this dodge of paper money +had the effect of increasing the total <em>amount</em> 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.</p> + +<p><em>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.</em></p> + +<p>Unfortunately, Governments are under a great<span class="pagenum" id="Page_78">78</span> +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.”</p> + +<p>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.<span class="pagenum" id="Page_79">79</span> +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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_80">80</span> +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 <em>would have been printed</em> when the notes +were redeemable, and when the currency was on +a true “<em>Gold Basis</em>,” 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.</p> + +<p>This kind of money, forced upon people, pretending +to be the same as real money but actually without +a Gold Basis, is called <em>Fiat</em><a id="FNanchor_1" href="#Footnote_1" class="fnanchor">1</a> 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.</p> +<p><span class="pagenum" id="Page_81">81</span></p> +<p>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 <em>their</em> +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) <em>ten +million</em> times less than the real metal coin which +it is supposed to represent.</p> + +<p>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!</p> + +<p>This piece of swindling, which has been the<span class="pagenum" id="Page_82">82</span> +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.</p> + +<p>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?</p> + +<p>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.</p> + +<p>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.</p> + +<p>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 +<strong>Capitalism</strong>; for other systems in the past such +as <strong>Slavery</strong>; for <strong>Private Property</strong>; for the various +theories of <strong>Socialism</strong>; for and against <strong>Usury</strong>, +and so on.</p> + +<p><span class="pagenum" id="Page_83">83</span></p> + +<p>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.</p> +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_85">85</span></p> + +<h2 class="nobreak" id="Part_II">Part II<br> + +<span class="subhead larger">POLITICAL APPLICATIONS</span></h2> +<hr class="chap x-ebookmaker-drop"> +<div> </div> +</div> + + +<div class="chapter"> +<p><span class="pagenum" id="Page_87">87</span></p> + +<h2 class="nobreak" id="INTRODUCTION"><span id="toclink_87"></span>INTRODUCTION</h2> +</div> + +<p class="in0"><span class="firstword">So</span> 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 <em>practical application</em>: if it were not +for this, there would be no real use in studying +Economics at all.</p> + +<p>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 <em>use</em> 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.</p> + +<p>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<span class="pagenum" id="Page_88">88</span> +that is where the theoretical elements of +Economics have practical importance.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_89">89</span> +these false arguments, to the great advantage of +our own souls and of our fellow-men.</p> + +<p>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.</p> + +<p>We have hitherto been following the statement +and examination of economic laws: that is, the +<em>theoretical</em> part of our study and its necessary +foundation. Now we go on to the <em>practical</em> part, +or “Applied Economics,” which is the effect of +those laws on the lives of men.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_90">90</span> +say it follows <em>theoretically</em> 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.</p> + +<p>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.</p> + +<p>But if you were to act upon that first principle +<em>only</em> in any one part of the world, and to say without +testing the thing in practice, “I can calculate the<span class="pagenum" id="Page_91">91</span> +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.</p> + +<p>Now it is just the same with Economics. Your +economic first principle makes you come to such +and such a <em>theoretical</em> conclusion. But there are +a lot of other first principles at work, and they may +modify the effect <em>in practice</em> 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.</p> + +<p>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<span class="pagenum" id="Page_92">92</span> +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.</p> + +<p>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.</p> + +<div class="tb">* * * * *</div> + +<p>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 <strong>Property</strong>.</p> + +<p><span class="pagenum" id="Page_93">93</span></p> + +<p>The very first governing condition of economic +production and distribution in the real world is +the condition of <em>control</em>. Who <em>controls</em> 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 <em>Property</em>, and as +the first thing we have to study in practical +Economics is the character of <em>Property</em>, we will +make that the first division of our political +applications.</p> +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_95">95</span></p> + +<h2 class="nobreak" id="PROPERTY"><span id="toclink_95"></span>PROPERTY<br> + +<span class="subhead"><span class="smcap">The Control of Wealth</span></span></h2> +</div> + +<p class="in0"><span class="firstword">All</span> 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.</p> + +<p>The first thing to grasp is that <em>someone</em> 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<span class="pagenum" id="Page_96">96</span> +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 <em>control</em> 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 <em>Property</em> in it.</p> + +<div class="tb">* * * * *</div> + +<p>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 <em>he</em> 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.</p> + +<p>When people say that they want to “abolish +property,” or that “There ought to be no property,” +they mean <em>Private</em> property: the right of individuals, +or families, or corporations to control wealth. +Property in the full sense, meaning the control of +wealth by <em>someone</em>, whether the State, or private<span class="pagenum" id="Page_97">97</span> +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.</p> + +<p>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.</p> + +<p>The wealth which will be consumed in producing +future wealth is, as we have seen, called <em>Capital</em>. +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 <em>Capital</em>. 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.</p> + +<p>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, <em>though they are not<span class="pagenum" id="Page_98">98</span> +wealth</em>,<a id="FNanchor_2" href="#Footnote_2" class="fnanchor">2</a> 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.</p> + +<p>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.”<a id="FNanchor_3" href="#Footnote_3" class="fnanchor">3</a> +Natural forces may be grouped, as we +<span class="pagenum" id="Page_99">99</span>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 +<span class="locked">thus:—</span></p> + +<figure id="ip_99" class="figcenter" style="max-width: 33em;"> + <img src="images/i_099.png" width="1579" height="571" alt=""> +</figure> + +<p>In studying the social effects of Property it is +convenient to group together <em>Land</em> and that part +of wealth which is used for further production and +is called <em>Capital</em>, and to call the two “<em>the means of +production</em>”: 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.</p> + +<p>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<span class="pagenum" id="Page_100">100</span> +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 <em>labourers</em> the important +thing is that someone else owns the “Means of +Production,” <em>without which they cannot live</em>, and +they are equally dependent whether one or many +control or own the <em>Means of Production</em> in any +particular case. <em>Their</em> condition has for its main +character <em>the fact that they do not own the “Means +of Production.”</em></p> + +<p>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 +<em>is</em> wealth) may be controlled.</p> + +<p>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 <span class="locked">are:—</span></p> + +<div class="blockquot"> + +<p>1. <strong>The Servile State</strong>: that is, the state in +which the material Means of Production are the<span class="pagenum" id="Page_101">101</span> +property of men who also own the human agents +of Production.</p> + +<p class="p2">2. <strong>The Capitalist State</strong>: 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.</p> + +<p class="p2">3. <strong>The Distributive State</strong>: that is, the state +in which the material means of Production are +owned by the free human agents of Production.</p> +</div> + +<p>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 <em>actual</em> states of which +we know anything in history and can deal with +as real human experiences, are these three just +described: the <em>Servile</em> State, the <em>Capitalist</em> State, +and the <em>Distributive</em> State.</p> + +<p>But, before going farther, we must get hold of +a very important principle, which is <span class="locked">this:—</span></p> + +<div class="blockquot"> + +<p><strong>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</strong> <em>The Determining Number</em> <strong>of the families of +the State: that is, in so great a proportion as to +colour and give its form to the whole society.</strong></p> +</div> + +<p>No one can exactly define the amount of this +“determining number,” but we all know in practice<span class="pagenum" id="Page_102">102</span> +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 <em>determining</em> 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.</p> + +<p>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 <em>determining</em> proportion of property<span class="pagenum" id="Page_103">103</span> +is not owned by the State but by private people. +The general effect produced is one of private ownership +and not of State ownership.</p> + +<p>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.</p> + +<p>But, though only a <em>determining number</em> is required +to mark the character of a particular society, and +though every society is <em>mixed</em> 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.</p> + +<p>The definition of these three systems is as +<span class="locked">follows:—</span></p> + +<p>1. In the Slave-owning Society, or <span class="allsmcap">SERVILE +STATE</span>, 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<span class="pagenum" id="Page_104">104</span> +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.</p> + +<p>2. In the <span class="allsmcap">CAPITALIST STATE</span> 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.</p> + +<p>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<span class="pagenum" id="Page_105">105</span> +starve, and they will not be able to get housing +against the weather or clothes to wear.</p> + +<p>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 <em>the +great majority, though free, are dispossessed of the +means of production, and therefore of livelihood, and +that a small minority controls these things</em>.</p> + +<p>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.</p> + +<p>3. The <span class="allsmcap">DISTRIBUTIVE STATE</span> 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<span class="pagenum" id="Page_106">106</span> +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.</p> + +<p>However, a name it must have; so let us agree +to call that kind of society in which most men are +<em>really</em> free and dignified and full citizens, not only +possessing rights before the law, but <em>owning</em>, so that +they are at no other man’s orders but can live +independently, “The Distributive State.”</p> + +<p>Then we have these three main types of Society +within human experience: the Servile, the Capitalist, +the Distributive.</p> + +<p>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.</p> + +<p><span class="pagenum" id="Page_107">107</span></p> + +<p>In the <em>Servile State</em>, 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.</p> + +<p>If you were in a <em>Capitalist State</em> (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 <em>capital</em>, and therefore +called <em>The Capitalist</em>. If you asked any one of +these men who were working whether he were +<em>compelled</em> 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<span class="pagenum" id="Page_108">108</span> +to work for another, but he is compelled by the +necessity of living to work for another.</p> + +<p>Lastly, if you were travelling through a +<em>Distributive State</em> (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.</p> + +<p>This is what we mean by the three types of State. +In each you would find many exceptions, but each +has its <em>determining number</em>—of slaves in the one +case, wage earners in the other, and independent +men in the third.</p> + +<div class="tb">* * * * *</div> + +<p>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.</p> +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_109">109</span></p> + +<h2 class="nobreak" id="THE_SERVILE_STATE"><span id="toclink_109"></span>THE SERVILE STATE</h2> +</div> + +<p class="in0"><span class="firstword">The</span> 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.</p> + +<p>Since we are talking of the political applications +of political economy, we have to consider <em>human +happiness</em>, 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.</p> + +<p>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<span class="pagenum" id="Page_110">110</span> +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 <em>were</em> very unhappy.</p> + +<p>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.</p> + +<p>That is a great mistake. The Servile State had—and, +if it comes back, will have again—two great +advantages: which were <em>personal security</em> and +<em>general stability</em>.</p> + +<p><em>Personal security</em> means a condition in which +everybody, master and man, is free from grave +anxiety upon the future: can expect regular food<span class="pagenum" id="Page_111">111</span> +and lodging and a continuance of his regular way +of life.</p> + +<p><em>General stability</em> 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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_112">112</span> +valuable effect, which is, the presence of <em>leisure</em>. +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.</p> + +<p>One alleged <em>economic</em> disadvantage of slave-owning +must be looked at narrowly before we leave this +description of the Servile State.</p> + +<p>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<span class="pagenum" id="Page_113">113</span> +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,<a id="FNanchor_4" href="#Footnote_4" class="fnanchor">4</a> and the +process of production cannot be as minutely and +absolutely directed by the small and leisured class as +can slave labour. <em>There is no reason why a free man +working for another’s profit should do his best.</em> On +the contrary, he has every reason to work as little +as possible, while a slave can be compelled to work +hard.</p> + +<p>But whether slave labour be more or less productive +is not so important as the two points mentioned<span class="pagenum" id="Page_114">114</span> +above, of advantage and disadvantage. The <em>disadvantages</em>, +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 <em>advantages</em> 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.</p> +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_115">115</span></p> + +<h2 class="nobreak" id="THE_CAPITALIST_STATE"><span id="toclink_115"></span>THE CAPITALIST STATE</h2> +</div> + +<p class="in0"><span class="firstword">The</span> 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 <em>wage</em> to keep them alive: that is, a part only of +the wealth they produce, the rest going as rent +and profit to the owners.</p> + +<p>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.</p> + +<p>Here again we can tabulate the advantages and +disadvantages.</p> + +<p>The chief moral advantage of Capitalism as +compared with the Slave-owning State is that <em>every +man, however poor, feels himself to be free and to +that extent saves his honour</em>. He may be compelled +by poverty to suffer a very hard bargain;<span class="pagenum" id="Page_116">116</span> +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 <em>proletariat</em>”) +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.</p> + +<p>Another advantage of Capitalism, purely economic, +is the <em>effectiveness of human energy</em> under this system, +at least, <em>in the first part of its development</em>. We spoke +of this in the last section.</p> + +<p>But the disadvantages are very grave indeed.</p> + +<p>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<span class="pagenum" id="Page_117">117</span> +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.</p> + +<p>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<span class="pagenum" id="Page_118">118</span> +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.</p> + +<p>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 <em>not</em> feel if they were slaves, +accustomed to a regular and fixed status in society), +and, what is worse, Capitalism <em>in its later stages</em> +need not provide for the livelihood of the mass of +citizens, and, in effect, <em>does not</em> so provide.</p> + +<p>The magnitude of these evils is obvious. A man<span class="pagenum" id="Page_119">119</span> +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?</p> + +<p>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<span class="pagenum" id="Page_120">120</span> +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.</p> + +<p>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.</p> + +<p>I have said that Capitalism, in its later stages, +<em>does not provide for the maintenance of the mass of +the people</em>.</p> + +<p>To see how true this is, consider an extreme case.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_121">121</span> +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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_122">122</span> +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.</p> + +<p>Now this gradual lessening of purchasing power +on the part of the working masses under Capitalism +is <em>the destruction of the home market</em>. 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 <em>gradual destruction of the foreign market</em>. +You get in the long run the full working of what +we will call the “<em>Capitalist Paradox</em>,” 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.</p> + +<p>There is no doubt that, on the balance, the disadvantages +of Capitalism have proved, even after +its short trial, overwhelmingly greater than the +advantages.</p> + +<p>Capitalism arose in small beginnings rather more +than 250 years ago. It grew strong and covered the<span class="pagenum" id="Page_123">123</span> +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.</p> + +<p>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.</p> +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_124">124</span></p> + +<h2 class="nobreak" id="THE_DISTRIBUTIVE_STATE"><span id="toclink_124"></span>THE DISTRIBUTIVE STATE</h2> +</div> + +<p class="in0"><span class="firstword">A state</span> 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.</p> + +<p>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.</p> + +<p>The advantages are <span class="locked">these:—</span></p> + +<p>It gives freedom: that is, the exercise of one’s<span class="pagenum" id="Page_125">125</span> +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.”</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_126">126</span> +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.</p> + +<p>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.</p> + +<p>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.</p> + +<p><span class="pagenum" id="Page_127">127</span></p> + +<p>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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_128">128</span> +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.</p> + +<p>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.</p> + +<p>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 <em>the difficulty of getting a very large number +of small owners to put their money together for any +great purpose</em>. 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<span class="pagenum" id="Page_129">129</span> +countries more rapidly, and will get possession of +the best markets.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_130">130</span> +a much larger margin, the loss of which he does not +really feel.</p> + +<p>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.</p> + +<p>The money raised by taxation is spent on +State servants—many of them inefficient and +idle.</p> + +<p>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.</p> + +<p>No one suspected this until taxation rose to +its present height, but now it is clearly +apparent; and we in England might perhaps be<span class="pagenum" id="Page_131">131</span> +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.</p> +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_132">132</span></p> + +<h2 class="nobreak" id="SOCIALISM"><span id="toclink_132"></span>SOCIALISM</h2> +</div> + +<p class="in0"><span class="firstword">It</span> 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 <em>Socialism</em>, and Socialism, as we +shall see in a moment, must mean ultimately +<em>Communism</em>.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_133">133</span> +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.</p> + +<div class="tb">* * * * *</div> + +<p>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.</p> + +<p>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.</p> + +<p>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 <span class="locked">this:—</span></p> + +<p>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<span class="pagenum" id="Page_134">134</span> +might consume that portion of produced wealth +allotted them by the State after it had been produced, +<em>but they might not use it for making future wealth</em>. +<span class="smcap">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.</span> That scheme is +Socialism, and from that principle all Socialist ideas +flow.</p> + +<p>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.</p> + +<p>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.”</p> + +<p><span class="pagenum" id="Page_135">135</span></p> + +<p>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.</p> + +<p>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.</p> + +<p>The reason I have called Communism the logical<span class="pagenum" id="Page_136">136</span> +and only possible ultimate form of Socialism is +that there could be under Socialism no reason for +any other form of distribution.</p> + +<p>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.</p> + +<p>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.</p> + +<p><span class="pagenum" id="Page_137">137</span></p> + +<p>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 <em>first</em> of running +production in the interest of all, <em>next</em> of distributing +the resultant wealth equally to all.</p> + +<p>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 <em>own</em>, +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<span class="pagenum" id="Page_138">138</span> +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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_139">139</span> +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 <em>everyone</em> 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.</p> + +<p>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.</p> + +<p>It is no reply to this to say that the State always +has owned, and actually can and does own, <em>some</em> +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<span class="pagenum" id="Page_140">140</span> +<em>all</em> 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 <em>plus</em> and <em>minus</em>. +A partial State ownership working in a society +the determining character of which is private +ownership is an utterly different thing, even +an <em>opposite</em> thing to general State ownership +determining the character of Society and allowing +only exceptional private ownership. Socialism can +only be (<i>a</i>) good (<i>b</i>) 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.</p> +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_141">141</span></p> + +<h2 class="nobreak" id="INTERNATIONAL_EXCHANGE"><span id="toclink_141"></span>INTERNATIONAL EXCHANGE</h2> +</div> + +<p class="in0"><span class="firstword">International</span> 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.</p> + +<p>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.</p> + +<p><span class="pagenum" id="Page_142">142</span></p> + +<p>In the first place, international trade is always +subject to a certain interference which domestic +trade does not suffer. All countries have a <em>tariff</em>, +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 +<em>all</em> 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.</p> + +<p>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<span class="pagenum" id="Page_143">143</span> +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.</p> + +<p>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.</p> + +<p>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.</p> + +<p>We saw, in the first part of this book, that exchange +even within one country, was not simple barter +but <em>multiple exchange</em>.</p> + +<p>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,<span class="pagenum" id="Page_144">144</span> +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.</p> + +<p>It is the same with international exchanges; as +we saw in the earlier part of this book. There is +an international chain of exchanges.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_145">145</span> +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 <em>in an English +ship</em>. 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.</p> + +<p>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 <em>interest upon loans</em>. 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.</p> + +<p>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<span class="pagenum" id="Page_146">146</span> +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.</p> + +<p>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.</p> + +<p>But the point to remember is, that <em>the mere volume +of trade</em> (that is, <em>the total of things imported and of +things exported</em>) <em>is no indication of the wealth or +prosperity of the country importing and exporting</em>.</p> + +<p>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) <em>nothing increases the +wealth of a country except the imports</em>.</p> + +<p>It ought to be quite clear, especially in the case +of an island like Great Britain, that it <em>loses</em> what it +sends out and <em>gains</em> 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,<span class="pagenum" id="Page_147">147</span> +£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, <em>regarded in itself, and +apart from the import which it assumed</em>, a loss to +the country of £10,000 worth of wealth.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_148">148</span> +is obvious that the excess of imports over exports +is a gain and that the excess of exports over imports +is a loss.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_149">149</span> +similarly interested, for Belgium also needs to +import four-fifths of its bread-stuffs. Almost every +country except the United States <em>must</em> 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.</p> + +<p>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.</p> +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_150">150</span></p> + +<h2 class="nobreak" id="FREE_TRADE_AND_PROTECTION"><span id="toclink_150"></span>FREE TRADE AND PROTECTION +AS POLITICAL ISSUES</h2> +</div> + +<p class="in0"><span class="firstword">In</span> this matter of international trade there rose +up, about a hundred years ago, a great political +discussion in England between what was called +<em>Free Trade</em> and what was called <em>Protection</em>.</p> + +<p>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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_151">151</span> +something to exchange with a <em>foreign</em> 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.</p> + +<p>“In this way,” said the Free Traders, “we shall +get the maximum of wealth for the whole country.”</p> + +<p>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<span class="pagenum" id="Page_152">152</span> +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 +<em>protected</em>. 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.”</p> + +<p>The Protectionist even said: “Let us make +this tariff so high that the foreign goods are sold +at a <em>dis</em>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 <em>higher</em> 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.”</p> + +<p>Such were the two political theories, standing +one against the other.</p> + +<p>Now let us look into the economic principles +underlying these two opposing parties, and see which +of them had the best of the argument.</p> + +<p>We have already seen, in the first part of<span class="pagenum" id="Page_153">153</span> +this book, the elementary economic principle that +Exchange is only the last stage in the process of +production.</p> + +<p>And we have also had fixed the principle that +<em>freedom of exchange tends to produce a maximum of +wealth within the area to which it applies</em>, 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 <em>within +their own boundaries</em>.</p> + +<p>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 +<em>within</em> the country the total wealth of the country +would necessarily be diminished.</p> + +<p>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<span class="pagenum" id="Page_154">154</span> +foreigner’s goods we shall get much more of the +things which the foreigner can make more easily +than we can.”</p> + +<p>If we take a concrete example we shall see what +the Free Traders’ argument means.</p> + +<p>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<span class="pagenum" id="Page_155">155</span> +coal and richer in wine. Our total wealth will be +increased.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_156">156</span> +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.”</p> + +<p>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 <em>were</em> 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.</p> + +<p>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.</p> + +<p>These arguments were of two <span class="locked">kinds:—</span></p> + +<p>(<i>a</i>) 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<span class="pagenum" id="Page_157">157</span> +landlords will vanish. You will thus ruin English +wealth altogether.”</p> + +<p>(<i>b</i>) There was another kind of Protectionist who +said: “You Free Traders take for granted, and +depend upon, one capital point, to wit, <em>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</em>. But we, the +Protectionists, say that, in the particular case in +question, they would <em>not</em> 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. <em>We</em> 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.”</p> + +<p>These two kinds of arguments on the Protectionist +side are still to be heard everywhere to-day.</p> + +<p>It ought to be perfectly clear to anyone who +thinks about the matter at all that argument (<i>a</i>) +was nonsense, for people and capital driven out of +an industry ill suited to our present conditions are<span class="pagenum" id="Page_158">158</span> +not thereby destroyed. They may very well find +employment producing more total wealth in another. +But argument (<i>b</i>) was a good argument <em>if the +statement about the impossibility of changing from +one trade to another were in practice true</em>. The whole +discussion really turned upon the last point.</p> + +<p>Unfortunately for the Protectionists, those who +defended their cause in this country nearly all used +argument (<i>a</i>), and were very properly derided as +fools by the Free Traders. Argument (<i>b</i>) 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.</p> + +<p>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<span class="pagenum" id="Page_159">159</span> +agriculture, and that would have meant dearer food +for the wage-earners in the towns.</p> + +<p>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.</p> + +<p>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 <em>economic</em> 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 <em>reason</em> that Protection itself, in particular cases, +increases the total national wealth. With the proof +of this I will end the present chapter.</p> + +<p>We have seen that the following formula is true:—<em>Freedom +of exchange tends to increase the total amount +of wealth of all that area which it covers.</em></p> + +<p>But what gives the argument for Protection, +in special cases, its value is, as we saw on <a href="#Page_64">page 64</a>, a +second Formula equally true. Though freedom of +exchange tends to increase the total wealth of an<span class="pagenum" id="Page_160">160</span> +area over which it extends, <em>yet it does not tend to +increase the wealth of every part of that area</em>. 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.</p> + +<p>Therein lies the whole argument for Protection in +particular cases.</p> + +<p>Let us take for example three islands, two close +together and one far away and prove the case +by figures.</p> + +<figure id="ip_160" class="figcenter" style="max-width: 45em;"> + <img src="images/i_160.png" width="2162" height="660" alt=""> + <figcaption class="caption"><span class="smcap">Fig. 1.</span> + </figcaption> +</figure> + +<figure id="ip_160b" class="figcenter" style="max-width: 45em;"> + <img src="images/i_160b.png" width="2162" height="756" alt=""> + <figcaption class="caption"><span class="smcap">Fig. 2.</span> + </figcaption> +</figure> + +<p><span class="pagenum" id="Page_161">161</span></p> + +<p>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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_162">162</span> +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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_163">163</span> +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.</p> + +<p>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.</p> + +<p>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. <em>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.</em> 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<span class="pagenum" id="Page_164">164</span> +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 <em>increasing</em> the wealth of their +common country at the expense of foreigners.</p> + +<p>In that example lies the argument for Protection. +<em>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.</em> 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.”</p> + +<p>One ought to be able to see quite clearly from +an example like this how true it is that <em>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</em>.</p> + +<p>We have an excellent, though small, example<span class="pagenum" id="Page_165">165</span> +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.</p> + +<p>Protection ought to take the form of <span class="locked">saying:—</span></p> + +<p>“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, <em>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</em>, 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 <em>on +condition that the higher price really did make the +farmers breed enough pigs, without lessening their<span class="pagenum" id="Page_166">166</span> +production of other things</em>. 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.</p> +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_167">167</span></p> + +<h2 class="nobreak" id="BANKING"><span id="toclink_167"></span>BANKING</h2> +</div> + +<p class="in0"><span class="firstword">During</span> the last two hundred and fifty years +there has arisen, among other modern economic +institutions, the institution of <em>Banking</em>.</p> + +<p>It has origins much older; indeed, people did +something of the kind at <em>all</em> 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.</p> + +<p>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.</p> + +<p><span class="pagenum" id="Page_168">168</span></p> + +<p>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 <em>may</em> 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.</p> + +<p>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.</p> + +<p>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 <em>or of part of +them</em> at any moment from the man to whom he gave +custody of the original sum he is satisfied.</p> + +<p>A good many other people feel the same necessity. +The man who has special opportunities for looking +after <em>all</em> 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<span class="pagenum" id="Page_169">169</span> +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 <em>depositor</em> (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; <em>and will not be annoyed +to find that the person in whose custody he left the +money has been using it in the meantime</em>.</p> + +<p>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.”</p> + +<p>In that case I should naturally answer: “No<span class="pagenum" id="Page_170">170</span> +one gave you leave to use my money. You have +embezzled it, and you have acted like a thief.”</p> + +<p>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 <em>very many</em> people are thus “banking” their +money with one safe custodian only a certain +proportion will <em>at any one time</em> 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.</p> + +<p>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<span class="pagenum" id="Page_171">171</span> +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, <em>on the average</em>, +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.”</p> + +<p>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<span class="pagenum" id="Page_172">172</span> +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.</p> + +<p>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.<span class="pagenum" id="Page_173">173</span> +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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_174">174</span> +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.</p> + +<p>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.</p> + +<p><span class="pagenum" id="Page_175">175</span></p> + +<p>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 +<em>his</em> order for payment has been met.”</p> + +<p>For instance: I have £1,000 deposited with my +banker, Mr. Smith. I write a letter: “Pay £20 +to John Jones <em>or order</em>.” 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 <em>order</em> 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 <em>by my order</em>. 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.</p> + +<p>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<span class="pagenum" id="Page_176">176</span> +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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_177">177</span> +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, +<em>his</em> 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.</p> + +<p>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.</p> + +<p>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.”</p> + +<p>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<span class="pagenum" id="Page_178">178</span> +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.</p> + +<p>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.</p> + +<p>When dozens of bankers came to be established +with thousands of clients, or “depositors,” the +convenience of this system was overwhelming.<span class="pagenum" id="Page_179">179</span> +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.”</p> + +<p>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.</p> + +<p>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.</p> + +<p>So far so good. The banking system up to this<span class="pagenum" id="Page_180">180</span> +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.</p> + +<p>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.</p> + +<p>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.</p> + +<p>That state of affairs lasted to within the memory +of men now living, and, as I have said, the banking<span class="pagenum" id="Page_181">181</span> +system during that time was an advantage to everybody. +There was nothing to be said against it.</p> + +<p>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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_182">182</span> +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 ‘<em>interest</em>’ +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.”</p> + +<p>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.</p> + +<p>But it was obviously convenient and useful when<span class="pagenum" id="Page_183">183</span> +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.”</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_184">184</span> +banks were thus “financing,” as it is called, every +kind of enterprise.</p> + +<p>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. +<em>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.</em></p> + +<p>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 “<em>instruments of credit</em>.” 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 <em>the banks could create paper money, or its +equivalent, in the form of over-drafts</em>. If they said +to a man who had <em>no</em> money deposited with +them: “We will honour your cheques up to +£1,000” <em>what they were really doing was increasing<span class="pagenum" id="Page_185">185</span> +the paper currency to the extent of £1,000</em>. 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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_186">186</span> +on”—gave them an immense and increasing power +over the community.</p> + +<p>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.</p> + +<p>It has two chief forms against which men protest.</p> + +<p>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 <em>made</em> 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.</p> + +<p>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<span class="pagenum" id="Page_187">187</span> +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.</p> + +<p>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.”</p> + +<p>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.<a id="FNanchor_5" href="#Footnote_5" class="fnanchor">5</a><span class="pagenum" id="Page_188">188</span> +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.</p> + +<p>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.</p> +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_189">189</span></p> + +<h2 class="nobreak" id="NATIONAL_LOANS_AND_TAXATION"><span id="toclink_189"></span>NATIONAL LOANS AND TAXATION</h2> +</div> + +<p class="in0"><span class="firstword">Every</span> 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.</p> + +<p>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.</p> + +<p>But in the modern world, and for the last two +hundred years or so, nearly all states have also had +to raise taxation <em>in order to pay interest upon the +State loans</em>.</p> + +<p>A State loan, or <em>national debt</em>, arises in this way. +The State needs a great quantity of goods for a<span class="pagenum" id="Page_190">190</span> +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.</p> + +<p>But about two hundred years ago there began +(and since then has very largely increased), the second +method, which is that of <em>national loans</em>.</p> + +<p>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 <em>borrowing</em> from the citizens, promising +to pay, to those who lent, interest in proportion +to what they borrowed, as well as the capital itself.<span class="pagenum" id="Page_191">191</span> +Thus they would <em>take</em> in taxation for a war money +from a farmer equivalent to <em>ten</em> loads of wheat; +but they would also <em>borrow</em> from him <em>one hundred +loads</em> of wheat, promising to give him as interest +<em>five</em> loads of wheat every year for any number of +years until they should ultimately pay back the +whole hundred loads as well.</p> + +<p>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.</p> + +<p>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.</p> + +<p>It is true that whenever a loan is raised the Government<span class="pagenum" id="Page_192">192</span> +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.</p> + +<p>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.</p> + +<p>Of all European countries that fought in the war<span class="pagenum" id="Page_193">193</span> +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.</p> + +<p>In this matter of loans we must distinguish +between <em>internal loans</em> and <em>external loans</em>. An +<em>internal loan</em> 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 +<em>external</em> 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.</p> + +<p>Now from State <em>loans</em> let us turn to State <em>taxation</em>, +which has to-day for its most permanent object +the payment of interest on internal and external +loans.</p> + +<p>How does the State tax its citizens?</p> + +<p>Taxation levied by the State is divided into two +kinds—called <em>direct</em> and <em>indirect</em>.</p> + +<p>Direct taxation is the taxation levied upon the +money which the person who pays it has at his +disposal.</p> + +<p><span class="pagenum" id="Page_194">194</span></p> + +<p>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.</p> + +<p>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.</p> + +<p>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.</p> + +<p>These rules <span class="locked">are:—</span></p> + +<div class="blockquot"> + +<p>1. A tax should fall in such a fashion that it +is paid most easily.</p> +</div> + +<p>For instance: it is much easier to pay £100 +a year in small sums which fall due at frequent<span class="pagenum" id="Page_195">195</span> +intervals than to pay the whole £100 upon demand +in one lump.</p> + +<div class="blockquot"> + +<p>2. The tax should be so arranged that the cost +of collecting it should be as slight as possible.</p> +</div> + +<p>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, <em>that</em> +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.<a id="FNanchor_6" href="#Footnote_6" class="fnanchor">6</a></p> + +<div class="blockquot"> + +<p>3. Taxes are better in proportion as they fall on +unnecessary things rather than on necessary things.</p> +</div> + +<p><span class="pagenum" id="Page_196">196</span></p> + +<p>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.</p> + +<p>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 <em>necessities</em> of the +poorest people, are enormously taxed. Our poor +people in England are much more heavily taxed +than any people in the world.</p> + +<p>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<span class="pagenum" id="Page_197">197</span> +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.</p> + +<p>5. The last rule about taxation is that it should +be <em>certain</em>; 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.</p> + +<p>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.</p> + +<p><span class="pagenum" id="Page_198">198</span></p> + +<p>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.</p> + +<p>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.”</p> + +<p>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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_199">199</span> +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.</p> + +<p>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.</p> + +<p>So they propose that <em>all the rents of the country +should be levied as a tax</em>. 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.</p> + +<p>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<span class="pagenum" id="Page_200">200</span> +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.</p> +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_201">201</span></p> + +<h2 class="nobreak" id="THE_SOCIAL_OR_HISTORICAL_VALUE"><span id="toclink_201"></span>THE SOCIAL (OR HISTORICAL) VALUE +OF MONEY</h2> +</div> + +<p class="in0"><span class="firstword">There</span> 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 <em>Social (or Historical) Value of Money</em>.</p> + +<p>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 <em>one</em> million, +and people trembled lest the State could not bear +the burden.</p> + +<p><span class="pagenum" id="Page_202">202</span></p> + +<p>Yet here we are to-day, raising hundreds of +millions yearly in taxation, spending thousands of +millions in our wars.</p> + +<p>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 <em>enormously</em> +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.</p> + +<p>There are three things which, between them, decide +the social value of money at any period, and unless +we consider <em>all</em> 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 <span class="locked">follows:—</span></p> + +<div class="blockquot"> + +<p>1. <em>The actual purchasing power of whatever is +used as currency</em>—in our case, for nearly the whole +of European history, gold<a id="FNanchor_7" href="#Footnote_7" class="fnanchor">7</a>: the amount of wheat<span class="pagenum" id="Page_203">203</span> +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.</p> + +<p class="p2">2. <em>The number of kinds of things</em> 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.”</p> + +<p class="p2">3. <em>The economic scale of the community</em>, that is, +the number of its citizens and the amount of its +total wealth at a given time.</p> + +<p>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.</p> +</div> + +<h3>1. <i>The actual purchasing power of the currency.</i></h3> + +<p>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 <em>Index Number</em> +of that period.</p> + +<p><span class="pagenum" id="Page_204">204</span></p> + +<p>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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_205">205</span> +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.</p> + +<p>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.</p> + +<p>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 <em>average purchasing power</em> which you +call, for the sake of further application, arbitrarily, +“100.”</p> + +<p>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<span class="pagenum" id="Page_206">206</span> +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.”</p> + +<p>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.”</p> + +<p>These Index Numbers taken for each year with a +particular year as a <em>base</em>, or year of reference, +show the fluctuations in the purchasing value of +gold.</p> + +<p>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<span class="pagenum" id="Page_207">207</span> +was ten times the amount spent on bacon and +twenty times the amount spent on iron.</p> + +<p>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.</p> + +<p>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.</p> + +<p>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.”</p> + +<p>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.</p> + +<p>You cannot use the Index Numbers without +knowing what your base year is and what average<span class="pagenum" id="Page_208">208</span> +prices were in that base year, but, having settled +that, your Index Number is nothing more than +a statement of <em>average prices</em>, or again, the average +purchasing power of a fixed weight of gold in the +various epochs you examine.</p> + +<p>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.<a id="FNanchor_8" href="#Footnote_8" class="fnanchor">8</a></p> + +<p>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<span class="pagenum" id="Page_209">209</span> +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.</p> + +<p>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 <em>in our money</em>.</p> + +<p>Most people stop there, and that is why they get +their answer to the problem all wrong. In reality +the <em>social</em> value of money then was <em>very much more +than</em> 24 times what it is now, and £100 a year under +Henry VIII. meant <em>a great deal more than</em> what +£2,400 means now.</p> + +<p>In order to see how true this is we have to consider +the next two points which I mentioned.</p> + +<h3>2. <i>The number of purchasable categories.</i></h3> + +<p>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<span class="pagenum" id="Page_210">210</span> +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 <em>sets of things</em> (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<span class="pagenum" id="Page_211">211</span> +London would certainly not be able to save a penny +of his £1,000 a year.</p> + +<p>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 <em>Society +as a whole</em>—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 <em>cannot</em>, spend upon them; they +are not there to be purchased. Therefore it is true +that the <em>social value</em> of the same sum, with the same +index number, is on the average very much higher +in Andorra than in London.</p> + +<p>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<span class="pagenum" id="Page_212">212</span> +should call to-day £2,400 a year, had a much higher +income <em>relatively to the people of the time</em> 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.</p> + +<p>But this second point is not all. There is again +a third point, as we have seen, and we must next +turn to that.</p> + +<h3>3. <i>The purchasing value of the whole community.</i></h3> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_213">213</span> +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 +<em>average</em> wealth of a family in Australia is much higher +than that in Iceland.</p> + +<p>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<span class="pagenum" id="Page_214">214</span> +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.</p> + +<p>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<span class="pagenum" id="Page_215">215</span> +categories; that is, where people had a very much +small number of “sets of things” upon which to +spend money.</p> + +<p>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.</p> + +<p>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 +<em>how, why and in what degree the social value of money +differs between one period and another</em>.</p> + +<p><span class="pagenum" id="Page_216">216</span></p> + +<p>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.</p> +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_217">217</span></p> + +<h2 class="nobreak" id="USURY"><span id="toclink_217"></span>USURY</h2> +</div> + +<p class="in0"><span class="firstword">Usury,</span> 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.</p> + +<p>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 +<em>Usury</em>.</p> + +<p>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.</p> + +<p>Now what is Usury, and why does it thus do +harm?</p> + +<p>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<span class="pagenum" id="Page_218">218</span> +thinking indeed, as you will see in a moment. The +character of Usury <em>has nothing to do with the taking +of high or low interest</em>. It is concerned with something +quite different.</p> + +<p><em>Usury is the taking of any interest whatever upon an</em> +<span class="allsmcap">UNPRODUCTIVE</span> <em>loan</em>.</p> + +<p>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.”</p> + +<p>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 <em>my</em> ship and of <em>my</em> 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 <em>some</em>, 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.”</p> + +<p>The man who proposed to borrow your ship agrees.<span class="pagenum" id="Page_219">219</span> +The bargain is struck, and when the year is over +you make a fifty tons profit of wheat on your +capital.</p> + +<p>That is <em>the earning of interest on a productive +loan</em>.</p> + +<p>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.</p> + +<p>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.<span class="pagenum" id="Page_220">220</span> +The loan is <em>productive</em>. 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.</p> + +<p>These are examples of profit on a <em>productive</em> +loan.</p> + +<p>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 <em>seven</em> loaves”: +that would be usury.</p> + +<p>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<span class="pagenum" id="Page_221">221</span> +why usury is called “usury”—which means: +“wearing down,” “gradually dilapidating.”</p> + +<p>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.</p> + +<p>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. +<em>The test is whether the loan is productive or not.</em> +The <em>intention</em> of Usury is present <em>when the money +is lent at interest on what the lender</em> <span class="allsmcap">KNOWS</span> <em>will be +an unproductive purpose</em>, and the actual <em>practice</em> +of usury is present <em>when the loan, having as a fact +been used unproductively, interest is none the less +demanded</em>.</p> + +<p>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 <em>was</em> productive, for it saved the man’s<span class="pagenum" id="Page_222">222</span> +life and thus later on he was able to work and produce +wealth.”</p> + +<p>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.”</p> + +<p>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.</p> + +<p>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.</p> + +<p>Usury, then, is essentially a claim to increment, or +extra wealth, <em>which is not there to be claimed</em>. It<span class="pagenum" id="Page_223">223</span> +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.</p> + +<p>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?</p> + +<p>I will answer both of those questions.</p> + +<p>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<span class="pagenum" id="Page_224">224</span> +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.”</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_225">225</span> +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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_226">226</span> +normally productive. But the borrower <em>can</em> use +it unproductively, and often does and intends to +do so.</p> + +<p>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.</p> + +<p>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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_227">227</span> +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.</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_228">228</span> +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 <em>would</em> 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.</p> + +<p>The Germans have reduced it by inflation to +pretty well nothing, which is the same really as +repudiating the debt altogether.</p> + +<p>So what we see in a general survey is <span class="locked">this:—</span></p> + +<p>1. Usury is both wrong morally and bad for +society, <em>because it is the claim for an increase of +wealth which is not really present at all</em>. It is<span class="pagenum" id="Page_229">229</span> +trying to get something where there is nothing +out of which that something can be paid.</p> + +<p>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.</p> + +<p>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 <em>and promising interest +upon it although the money was not producing any +further wealth</em>.</p> + +<p>4. The modern world has therefore reached a +limit in this process and the future of usurious +investment is in doubt.</p> + +<p>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.</p> +<hr class="chap x-ebookmaker-drop"> + +<div class="chapter"> +<p><span class="pagenum" id="Page_230">230</span></p> + +<h2 class="nobreak" id="ECONOMIC_IMAGINARIES"><span id="toclink_230"></span>ECONOMIC IMAGINARIES</h2> +</div> + +<p class="in0"><span class="firstword">I am</span> 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.”</p> + +<p>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.</p> + +<p>The first example I will give you is that of a man +who, having a large income, gives an allowance<span class="pagenum" id="Page_231">231</span> +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.</p> + +<p>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 <em>assessed</em>, <i>i.e.</i>, 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 <em>assessment</em>, 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, <em>that £1,000 a year appears +twice</em>. One of these appearances is an <em>economic +imaginary</em>. 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.”</p> + +<p>This is the simplest case of an economic imaginary. +It is the case overlap, or counting of the same money<span class="pagenum" id="Page_232">232</span> +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.”</p> + +<p>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.</p> + +<p>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<span class="pagenum" id="Page_233">233</span> +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 <em>their</em> 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.</p> + +<p>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.</p> + +<p>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.</p> + +<p>For instance: you have (2) the economic imaginary +due to <em>luxurious expenditure</em>.</p> + +<p>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<span class="pagenum" id="Page_234">234</span> +the real value of the things. If you go into one of +the big hotels in London or Paris and have a dinner +the <em>economic values</em> 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 +<em>economic imaginary</em> 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<span class="pagenum" id="Page_235">235</span> +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.</p> + +<p>Here is another case (3): <em>economic imaginaries +due to inequality of income</em>.</p> + +<p>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.”</p> + +<p>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<span class="pagenum" id="Page_236">236</span> +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.</p> + +<p>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.</p> + +<p>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.</p> + +<p>Here, then, is a last one (4): <em>economic imaginaries +due to the confusion between services and economic +values attached to material things</em>.</p> + +<p>We saw at the beginning of this book that wealth +did not consist in <em>things</em>, such as coal, chairs, tables, +etc., but in the <em>economic values attached to those +things</em>; that is, their added use for the purposes of<span class="pagenum" id="Page_237">237</span> +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.</p> + +<p>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 +<em>services</em>.</p> + +<p>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.</p> + +<p>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.</p> + +<p><span class="pagenum" id="Page_238">238</span></p> + +<p>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.</p> + +<p>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 <em>real</em> loaf of bread there all the time! The +other 399 are imaginary.</p> + +<p>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<span class="pagenum" id="Page_239">239</span> +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.</p> + +<p>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.</p> + +<p>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.</p> + +<p>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,<span class="pagenum" id="Page_240">240</span> +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 <em>therefore</em> one ought not to have good singing, +or good pictures, or the rest of it.</p> + +<p>What <em>is</em> 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.</p> + +<p>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<span class="pagenum" id="Page_241">241</span> +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.</p> + +<p class="p4 center"><span class="smaller">FINIS</span></p> + +<div class="chapter footnotes"> +<p><span class="pagenum" id="Page_242">242</span></p> + +<h2 class="nobreak" id="FOOTNOTES">FOOTNOTES</h2> + +<div class="footnote"> + +<p class="fn1"><a id="Footnote_1" href="#FNanchor_1" class="label">1</a> 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. <em>Let it be so.</em>”</p> + +</div> + +<div class="footnote"> + +<p class="fn1"><a id="Footnote_2" href="#FNanchor_2" class="label">2</a> 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 <em>wealth</em>. 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?”</p> + +</div> + +<div class="footnote"> + +<p class="fn1"><a id="Footnote_3" href="#FNanchor_3" class="label">3</a> “Enjoyment” does not mean, in this connection, +pleasure, happiness. It is a conventional phrase to mean +“consumption <em>not</em> directed to the making of further +wealth?” Thus the wealth consumed at a boring dinner +party is consumed in “enjoyment.”</p> + +</div> + +<div class="footnote"> + +<p class="fn1"><a id="Footnote_4" href="#FNanchor_4" class="label">4</a> A <em>Strike</em> 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.</p> + +<p>A <em>Lock-out</em> 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.</p> + +<p>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.</p> + +</div> + +<div class="footnote"> + +<p class="fn1"><a id="Footnote_5" href="#FNanchor_5" class="label">5</a> 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.</p> + +</div> + +<div class="footnote"> + +<p class="fn1"><a id="Footnote_6" href="#FNanchor_6" class="label">6</a> This very sensible tax was invented by Disraeli in +England about a lifetime ago.</p> + +</div> + +<div class="footnote"> + +<p class="fn1"><a id="Footnote_7" href="#FNanchor_7" class="label">7</a> Silver and gold were used together, but gold alone +will serve as a test.</p> + +</div> + +<div class="footnote"> + +<p class="fn1"><a id="Footnote_8" href="#FNanchor_8" class="label">8</a> 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.”</p> + +</div> +</div> + +<div class="chapter"> +<p><span class="pagenum" id="Page_243">243</span></p> + +<h2 class="nobreak" id="Index"><span id="toclink_243"></span>Index</h2> + +<div class="index"> +<ul class="index"> +<li class="ifrst">Banking, how arose, <a href="#Page_168">168–173</a>;</li> +<li class="isub1">its machinery, <a href="#Page_173">173–179</a>.</li> + +<li class="indx">Banking system, its advantage in concentrating capital, <a href="#Page_180">180</a>;</li> +<li class="isub1">begins to invest money, <a href="#Page_183">183–186</a>;</li> +<li class="isub1">great modern power of, <a href="#Page_186">186–188</a>.</li> + +<li class="indx">Blanc, creator of modern socialism, <a href="#Page_133">133</a>;</li> +<li class="isub1">its definition, <a href="#Page_134">134</a>.</li> + +<li class="ifrst">Capital, Character of, <a href="#Page_19">19–26</a>.</li> + +<li class="indx">“Capitalism,” term for Capitalist Society, <a href="#Page_105">105</a>;</li> +<li class="isub1">“Paradox,” <a href="#Page_120">120</a>, <a href="#Page_122">122</a>.</li> + +<li class="indx">Capitalist State, <a href="#Page_101">101</a>, <a href="#Page_104">104–5</a>;</li> +<li class="isub1">advantages and disadvantage, <a href="#Page_115">115–123</a>.</li> + +<li class="indx">Categories, Purchasable, <a href="#Page_209">209–210</a>.</li> + +<li class="indx">Circulation, Efficiency in, <a href="#Page_72">72–75</a>.</li> + +<li class="indx">Clearing House, <a href="#Page_179">179</a>.</li> + +<li class="indx">Coal, Example of addition of values to, <a href="#Page_27">27–28</a>.</li> + +<li class="indx">Coal Mine, example of how rent arises as a surplus, <a href="#Page_47">47–49</a>.</li> + +<li class="indx">Communism, only logical and necessary form of Socialism, <a href="#Page_135">135</a>.</li> + +<li class="indx">Consumption of Capital inevitable, <a href="#Page_23">23</a>.</li> + +<li class="indx">Consumption of wealth is universal, <a href="#Page_31">31–32</a>.</li> + +<li class="indx">Currency, Debasement of, <a href="#Page_79">79–83</a>.</li> + +<li class="indx">Currency, Meaning of, <a href="#Page_70">70</a>.</li> + +<li class="ifrst">Denmark, example of distributive state, <a href="#Page_108">108</a>, <a href="#Page_126">126</a>.</li> + +<li class="indx">Diminishing Returns, Law of, <a href="#Page_40">40–44</a>.</li> + +<li class="indx">Distributive State, <a href="#Page_105">105–6</a>;</li> +<li class="isub1">advantages and disadvantages, <a href="#Page_124">124–131</a>.</li> + +<li class="indx">Division of Labour, <a href="#Page_54">54</a>.</li> + +<li class="indx">Douglas Scheme of Credit, <a href="#Page_187">187</a>.</li> + +<li class="ifrst">Economic Imaginaries, examples of, <a href="#Page_231">231–240</a>.</li> + +<li class="indx">Exchange, a true form of production, <a href="#Page_52">52</a>.</li> + +<li class="indx">Exchange, Free, Formulæ of maximum wealth through, <a href="#Page_59">59–60</a>.</li> + +<li class="indx">Exchange, International, factor of National Currencies in, <a href="#Page_142">142</a>, <a href="#Page_143">143</a>.</li> + +<li class="indx">Exchange, Medium of, or currency, <a href="#Page_70">70</a>.</li> + +<li class="indx">Exchange, Multiple, <a href="#Page_57">57–58</a>.</li> + +<li class="indx"><span class="pagenum" id="Page_244">244</span>Exchange, Multiple, in International trade, <a href="#Page_143">143–144</a>.</li> + +<li class="indx">Exchange, Potential of, <a href="#Page_53">53–54</a>.</li> + +<li class="indx">Exchange value, necessary condition of wealth, <a href="#Page_12">12–14</a>.</li> + +<li class="indx">Expenditure, Luxurious, productive of Economic Imaginaries, <a href="#Page_233">233</a>.</li> + +<li class="indx">Exports not a test of wealth, <a href="#Page_146">146–149</a>.</li> + +<li class="ifrst">Formulæ defining production of wealth, <a href="#Page_26">26</a>.</li> + +<li class="indx">Formula, defining wealth, <a href="#Page_14">14</a>.</li> + +<li class="indx">Formula of Consumption, <a href="#Page_32">32</a>.</li> + +<li class="indx">Formula of Maximum Wealth through freedom of exchange, <a href="#Page_59">59</a>.</li> + +<li class="indx">Formula, of Production by Transport and Exchange, <a href="#Page_32">32</a>.</li> + +<li class="indx">Formula of Protection, <a href="#Page_64">64</a>.</li> + +<li class="indx">Formula of Potential of Exchange, <a href="#Page_56">56</a>.</li> + +<li class="indx">Formulæ of Subsistence, Interest and Rent, <a href="#Page_50">50</a>.</li> + +<li class="indx">Free Trade, arguments for, <a href="#Page_153">153–155</a>.</li> + +<li class="indx">Free Trade and Protection, detailed consideration of, <a href="#Page_150">150–166</a>.</li> + +<li class="indx">Free Trade and Protection, Elements of, <a href="#Page_61">61–65</a>.</li> + +<li class="ifrst">Gold and Silver, Natural advantages of, as money, <a href="#Page_69">69–70</a>.</li> + +<li class="indx">Great War, its effect in destroying value of currency, <a href="#Page_79">79–83</a>.</li> + +<li class="ifrst">Human energy in production of wealth, conventionally called “Labour,” <a href="#Page_18">18–19</a>.</li> + +<li class="ifrst">Imaginaries, Economic, examples of, <a href="#Page_231">231–240</a>.</li> + +<li class="indx">Imports test of wealth, not exports, <a href="#Page_146">146–149</a>.</li> + +<li class="indx">Incomes, Inequality of, productive of Economic Imaginaries, <a href="#Page_235">235</a>.</li> + +<li class="indx">Index Number, <a href="#Page_204">204–208</a>.</li> + +<li class="indx">Inequality of Incomes, productive of Economic Imaginaries, <a href="#Page_235">235</a>.</li> + +<li class="indx">Intention, a necessary adjunct to Capital, <a href="#Page_22">22</a>.</li> + +<li class="indx">Interest, high, not connected with though often confused with Usury, <a href="#Page_217">217</a>, <a href="#Page_218">218</a>.</li> + +<li class="indx">Interest, Nature of, <a href="#Page_39">39–45</a>.</li> + +<li class="indx">International Exchange, factor of National Currencies in, <a href="#Page_142">142</a>, <a href="#Page_143">143</a>.</li> + +<li class="indx">International Trade, why vital to England, <a href="#Page_148">148–149</a>.</li> + +<li class="indx">Islands, Three, Example of in proof of Protectionist Theory, <a href="#Page_160">160–165</a>.</li> + +<li class="ifrst">Labour, Division of, <a href="#Page_54">54</a>.</li> + +<li class="indx">Labour, term for all human energy in production of wealth, <a href="#Page_18">18–19</a>.</li> + +<li class="indx"><span class="pagenum" id="Page_245">245</span>Labour “worth while of” or Standard of Subsistence, <a href="#Page_30">30–38</a>.</li> + +<li class="indx">Land, conventional term for all natural forces used in production of wealth, <a href="#Page_17">17–18</a>.</li> + +<li class="indx">Land, Labour, Capital, Conventional terms for three factors of wealth, <a href="#Page_16">16</a>.</li> + +<li class="indx">Law of Diminishing Returns, <a href="#Page_40">40–44</a>.</li> + +<li class="indx">Loan, Unproductive, the test of Usury, <a href="#Page_218">218–221</a>.</li> + +<li class="indx">Luxurious Expenditure, productive of Economic Imaginaries, <a href="#Page_233">233</a>.</li> + +<li class="ifrst">“Marx,” assumed name of Mordecai, <a href="#Page_134">134</a>.</li> + +<li class="indx">Material objects, not wealth, <a href="#Page_11">11–12</a>.</li> + +<li class="indx">Means of Production, <a href="#Page_99">99–100</a>.</li> + +<li class="indx">Medium of Exchange, or currency, meaning of, <a href="#Page_70">70</a>.</li> + +<li class="indx">Money, how it arises, <a href="#Page_66">66–69</a>;</li> +<li class="isub1">Qualities of, <a href="#Page_68">68–69</a>.</li> + +<li class="indx">Money, Paper, its function, <a href="#Page_75">75–78</a>;</li> +<li class="isub1">its corruption, <a href="#Page_78">78–83</a>.</li> + +<li class="indx">Money, Social value of, three factors in, <a href="#Page_202">202–203</a>.</li> + +<li class="indx">Mordecai, or “Marx,” principal propagator of Socialism, <a href="#Page_134">134</a>.</li> + +<li class="indx">Multiple Exchange, <a href="#Page_57">57–58</a>.</li> + +<li class="indx">Multiple Exchange in International trade, <a href="#Page_143">143–144</a>.</li> + +<li class="ifrst">Natural forces used in production of wealth, called “Land,” <a href="#Page_17">17–18</a>.</li> + +<li class="indx">National loans and debt, how arise, <a href="#Page_189">189–191</a>;</li> +<li class="isub1">method of shirking interest on, <a href="#Page_192">192–193</a>.</li> + +<li class="ifrst">Overlap, example of an Economic Imaginaries, <a href="#Page_231">231–232</a>.</li> + +<li class="ifrst">Potential of Exchange, <a href="#Page_53">53–54</a>;</li> +<li class="isub1">formulæ of, <a href="#Page_56">56</a>.</li> + +<li class="indx">Prices, Names for exchange value in gold, <a href="#Page_71">71–72</a>.</li> + +<li class="indx">Production, Means of, definition, <a href="#Page_99">99–100</a>.</li> + +<li class="indx">Production of wealth, three necessary factors in, Land, Labour and Capital, <a href="#Page_15">15–26</a>.</li> + +<li class="indx">Production, Process of, <a href="#Page_27">27–32</a>.</li> + +<li class="indx">Property, Nature of, <a href="#Page_95">95–97</a>;</li> +<li class="isub1">private, <a href="#Page_96">96</a>.</li> + +<li class="indx">Protection and Free Trade, detailed consideration of, <a href="#Page_150">150–166</a>;</li> +<li class="isub1">arguments advanced for, <a href="#Page_152">152</a>, <a href="#Page_156">156–157</a>;</li> +<li class="isub1">example of the Three Islands, <a href="#Page_160">160–165</a>;</li> +<li class="isub1">of Pig Meal in England, <a href="#Page_165">165–166</a>.</li> + +<li class="indx">Protection and Free Trade, Elements of, <a href="#Page_61">61–65</a>.</li> + +<li class="indx">Protection, Economic, Formula of, <a href="#Page_64">64</a>.</li> + +<li class="ifrst">Rent, a surplus, <a href="#Page_47">47</a>.</li> + +<li class="indx">Rent, Example of Coal Mine, <a href="#Page_48">48</a>.</li> + +<li class="indx"><span class="pagenum" id="Page_246">246</span>Rent, Interest, Subsistence, the three divisions of wealth produced, <a href="#Page_33">33–51</a>.</li> + +<li class="indx">Rent, Nature of, <a href="#Page_46">46–51</a>.</li> + +<li class="ifrst">Saving, a necessary process in formation of Capital, <a href="#Page_24">24–25</a>.</li> + +<li class="indx">Services and Wealth, confusion between productive of Economic Imaginaries, <a href="#Page_236">236–238</a>.</li> + +<li class="indx">Servile State, <a href="#Page_100">100</a>, <a href="#Page_103">103</a>;</li> +<li class="isub1">advantages and disadvantages, <a href="#Page_109">109–114</a>.</li> + +<li class="indx">Silver and Gold, Natural advantages of, as money, <a href="#Page_69">69–70</a>.</li> + +<li class="indx">Single Tax, theory of, <a href="#Page_198">198–200</a>.</li> + +<li class="indx">Socialism, its creator in modern terms. Blanc, <a href="#Page_133">133</a>;</li> +<li class="isub1">its definition, <a href="#Page_134">134</a>.</li> + +<li class="indx">Socialism, only conceivable as Communism, <a href="#Page_135">135</a>;</li> +<li class="isub1">failure of, <a href="#Page_135">135–140</a>.</li> + +<li class="indx">Standard of subsistence, <a href="#Page_36">36–38</a>.</li> + +<li class="indx">State, Capitalist, <a href="#Page_101">101</a>, <a href="#Page_104">104–5</a>;</li> +<li class="isub1">advantages and disadvantages, <a href="#Page_115">115–123</a>.</li> + +<li class="indx">State, Distributive, <a href="#Page_105">105–106</a>;</li> +<li class="isub1">advantages and disadvantages, <a href="#Page_124">124–131</a>.</li> + +<li class="indx">State, Servile, <a href="#Page_100">100</a>, <a href="#Page_103">103</a>;</li> +<li class="isub1">advantages and disadvantages, <a href="#Page_109">109</a>, <a href="#Page_114">114</a>.</li> + +<li class="indx">Subsistence, Nature of, <a href="#Page_35">35–39</a>.</li> + +<li class="indx">Subsistence, Standard of, <a href="#Page_36">36–38</a>.</li> + +<li class="ifrst">Taxation, direct and indirect, <a href="#Page_193">193–194</a>;</li> +<li class="isub1">rules of, <a href="#Page_194">194–197</a>.</li> + +<li class="indx">Taxes, law in distributive state, <a href="#Page_129">129</a>.</li> + +<li class="indx">Tribute paid to wealthy countries by poor ones, <a href="#Page_145">145–146</a>.</li> + +<li class="ifrst">Unproductive Loan, the test of Usury, <a href="#Page_218">218–221</a>.</li> + +<li class="indx">Usury, definition of, <a href="#Page_221">221</a>;</li> +<li class="isub1">why neglected, <a href="#Page_223">223–227</a>.</li> + +<li class="ifrst">Values, Economic, attached to material objects, <a href="#Page_12">12</a>.</li> + +<li class="ifrst">Wealth, Definition of, <a href="#Page_10">10–14</a>.</li> + +<li class="indx">Wealth, production of, three necessary factors in, Land, Labour and Capital, <a href="#Page_15">15–26</a>.</li> +</ul> +</div></div> + +<div class="chapter transnote"> +<h2 class="nobreak" id="Transcribers_Notes">Transcriber’s Notes</h2> + +<p>Punctuation, hyphenation, and spelling were made +consistent when a predominant preference was found +in the original book; otherwise they were not changed.</p> + +<p>Simple typographical errors were corrected; unbalanced +quotation marks were remedied when the change was +obvious, and otherwise left unbalanced.</p> + +<p>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.</p> + +<p>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.</p> + +<p>The index was not checked for proper alphabetization +or correct page references.</p> + +<p><a href="#Page_164">Page 164</a>: “Island B cannot do.” perhaps should be “Island A cannot do.”</p> +<div> </div> +</div> + +<div style='text-align:center'>*** END OF THE PROJECT GUTENBERG EBOOK 75629 ***</div> +</body> +</html> + diff --git a/75629-h/images/cover.jpg b/75629-h/images/cover.jpg Binary files differnew file mode 100644 index 0000000..11dfb4d --- /dev/null +++ b/75629-h/images/cover.jpg diff --git a/75629-h/images/i_001.png b/75629-h/images/i_001.png Binary files differnew file mode 100644 index 0000000..2540684 --- /dev/null +++ b/75629-h/images/i_001.png diff --git a/75629-h/images/i_048.png b/75629-h/images/i_048.png Binary files differnew file mode 100644 index 0000000..259ac47 --- /dev/null +++ b/75629-h/images/i_048.png diff --git a/75629-h/images/i_099.png b/75629-h/images/i_099.png Binary files differnew file mode 100644 index 0000000..ab35b3a --- /dev/null +++ b/75629-h/images/i_099.png diff --git a/75629-h/images/i_160.png b/75629-h/images/i_160.png Binary files differnew file mode 100644 index 0000000..b006287 --- /dev/null +++ b/75629-h/images/i_160.png diff --git a/75629-h/images/i_160b.png b/75629-h/images/i_160b.png Binary files differnew file mode 100644 index 0000000..c5bc127 --- /dev/null +++ b/75629-h/images/i_160b.png diff --git a/LICENSE.txt b/LICENSE.txt new file mode 100644 index 0000000..6312041 --- /dev/null +++ b/LICENSE.txt @@ -0,0 +1,11 @@ +This eBook, including all associated images, markup, improvements, +metadata, and any other content or labor, has been confirmed to be +in the PUBLIC DOMAIN IN THE UNITED STATES. + +Procedures for determining public domain status are described in +the "Copyright How-To" at https://www.gutenberg.org. + +No investigation has been made concerning possible copyrights in +jurisdictions other than the United States. Anyone seeking to utilize +this eBook outside of the United States should confirm copyright +status under the laws that apply to them. diff --git a/README.md b/README.md new file mode 100644 index 0000000..b5897af --- /dev/null +++ b/README.md @@ -0,0 +1,2 @@ +Project Gutenberg (https://www.gutenberg.org) public repository for +eBook #75629 (https://www.gutenberg.org/ebooks/75629) |
