V. Of Profits…

V. Of Profits

§ 1. Profits include Interest and Risk; but, correctly speaking, do not include Wages of Superintendence.

Having treated of the laborer’s share of the produce, we next proceed to the share of the capitalist; the profits of capital or stock; the gains of the person who advances the expenses of production—who, from funds in his possession, pays the wages of the laborers, or supports them during the work; who supplies the requisite buildings, materials, and tools or machinery; and to whom, by the usual terms of the contract, the produce belongs, to be disposed of at his pleasure. After indemnifying him for his outlay, there commonly remains a surplus, which is his profit; the net income from his capital [and skill]; the amount which he can afford to expend in necessaries or pleasures, or from which by further saving he can add to his wealth.

As the wages of the laborer are the remuneration of labor, so [a part of] the profits of the capitalist are properly, according to Mr. Senior’s well-chosen expression, the remuneration of abstinence. They are what he gains by forbearing to consume his capital for his own uses, and allowing it to be consumed by productive laborers for their uses. For this forbearance he requires a recompense.

Of the gains, however, which the possession of a capital enables a person to make, (1) a part only is properly an equivalent for the use of the capital itself; namely, as much as a solvent person would be willing to pay for the loan of it. This, which as everybody knows is called interest, is all that a person is enabled to get by merely abstaining from the immediate consumption of his capital, and allowing it to be used for productive purposes by others. The remuneration which is obtained in any country for mere abstinence is measured by the current rate of interest on the best security; such security as precludes any appreciable chance of losing the principal. What a person expects to gain, who superintends the employment of his own capital, is always more, and generally much more, than this. The rate of profit greatly exceeds the rate of interest. (2.) The surplus is partly compensation for risk. By lending his capital on unexceptionable security he runs little or no risk. But if he embarks in business on his own account, he always exposes his capital to some, and in many cases to very great, danger of partial or total loss. For this danger he must be compensated, otherwise he will not incur it. (3.) He must likewise be remunerated for the devotion of his time and labor. The control of the operations of industry usually belongs to the person who supplies the whole or the greatest part of the funds by which they are carried on, and who, according to the ordinary arrangement, is either alone interested, or is the person most interested (at least directly), in the result. To exercise this control with efficiency, if the concern is large and complicated, requires great assiduity, and often no ordinary skill. This assiduity and skill must be remunerated.

The gross profits from capital, the gains returned to those who supply the funds for production, must suffice for these three purposes; and the three parts into which profit may be considered as resolving itself may be described respectively as interest, insurance, and wages of superintendence.

Inasmuch as risk is the cause affecting the rate of interest, it would be much simpler to consider the whole reward for abstinence as interest, the rate of which is affected by the risk; and to carefully exclude from the profits of capital the payment for “assiduity and skill,” which is distinctly wages of labor. The “wages of superintendence,” as every one on a moment’s reflection must admit, have no necessary connection whatever with the possession of capital. The thing with which the laborer is occupied does not give the reason for associating his wages with the name of that thing; because a highly-qualified manager supervises the operations of capital, it does not follow that he has capital, or should be regarded as being paid for the possession of capital. The man who shovels ashes is not paid wages of ashes, any more than a man who superintends other people’s capital is paid the reward of capital. The payment for services, in the one case as in the other, depends upon the skill of the manager, just as it does with an ordinary mechanic, rising or falling with his fitness for the peculiar work. Skill as a manager is the cause; the amount of the remuneration is the consequence. If so, then the wages of superintendence have no logical connection, in the economic sense, with capital as the thing which determines the amount of its reward, any more than it affects the wages of any and all labor. The payment for the use of capital, simply as capital, may be seen by the amount which a widow who is not engaged in active business receives from her property invested as trust funds. Moreover, it is less and less true that the manager of the operations of industry is necessarily the capitalist. To see this, mark the executive managers (called “treasurers” by custom) of cotton and woolen mills, who receive a remuneration entirely distinct from any capital they may have invested in the shares of the corporation; and the officials of the great mutual insurance companies, who receive the wages of managers, but for managing the capital of others. A large—by far the largest—part of what is usually called profit, therefore, should be treated as wages, and the forces which govern its amount are the same as those affecting the amounts of all other kinds of wages, such as are discussed in the preceding chapter. The acknowledgment of this distinction is of extreme importance, and affects, in a profound way, the whole question of distribution. To include “wages of superintendence” in profits of capital is to unnecessarily complicate one of the most serious economic questions—namely, the relations of capital and labor.

§ 2. The Minimum of Profits; what produces Variations in the Amount of Profits.

The lowest rate of profit that can permanently exist is that which is barely adequate, at the given place and time, to afford an equivalent for the abstinence, risk, and exertion implied in the employment of capital. From the gross profit has first to be deducted as much as will form a fund sufficient on the average to cover all losses incident to the employment. Next, it must afford such an equivalent to the owner of the capital for forbearing to consume it as is then and there a sufficient motive to him to persist in his abstinence. How much will be required to form this equivalent depends on the comparative value placed, in the given society, upon the present and the future (in the words formerly used): on the strength of the effective desire of accumulation. Further, after covering all losses, and remunerating the owner for forbearing to consume, there must be something left to recompense the labor and skill of the person who devotes his time to the business.

Such, then, is the minimum of profits: but that minimum is exceedingly variable, and at some times and places extremely low, on account of the great variableness of two out of its three elements. That the rate of necessary remuneration for abstinence, or in other words the effective desire of accumulation, differs widely in different states of society and civilization, has been seen in a former chapter. There is a still wider difference in the element which consists in compensation for risk.

The remuneration of capital in different employments, much more than the remuneration of labor, varies according to the circumstances which render one employment more attractive or more repulsive than another. The profits, for example, of retail trade, in proportion to the capital employed, exceed those of wholesale dealers or manufacturers, for this reason among others, that there is less consideration attached to the employment. The greatest, however, of these differences, is that caused by difference of risk. The profits of a gunpowder-manufacturer must be considerably greater than the average, to make up for the peculiar risks to which he and his property are constantly exposed. When, however, as in the case of marine adventure, the peculiar risks are capable of being, and commonly are, commuted for a fixed payment, the premium of insurance takes its regular place among the charges of production, and the compensation which the owner of the ship or cargo receives for that payment does not appear in the estimate of his profits, but is included in the replacement of his capital.

The minimum of profits can not properly include wages of superintendence, nor is it so included, practically, in Mr. Mill’s discussions on the minimum of profits in a later part of this volume. The operation of the various elements in changing the amount of profits might be expressed as follows: As between different countries and communities, who have a different effective desire of accumulation, profits may vary with the element of interest and risk; within the same district, where interest is generally the same on the same security, profits may vary with the risk attached to different industries; and, within the same occupations, interest and risk being given, the wages of superintendence may make a greater variation than either of the other two causes—since a skillful manager may make a large return, a poor one none at all. Or between two employments, interest and risk remaining the same, wages of superintendence sometimes produce a wide difference.

The portion, too, of the gross profit, which forms the remuneration for the labor and skill of the dealer or producer, is very different in different employments. This is the explanation always given of the extraordinary rate of apothecaries’ profit. There are cases, again, in which a considerable amount of labor and skill is required to conduct a business necessarily of limited extent. In such cases a higher than common rate of profit is necessary to yield only the common rate of remuneration.

All the natural monopolies (meaning thereby those which are created by circumstances, and not by law) which produce or aggravate the disparities in the remuneration of different kinds of labor, operate similarly between different employments of capital.

In this passage Mr. Mill points out distinctly that the movement up and down in the wages of a manager are governed by the same laws as those which regulate differences in the different rewards of labor, but yet he connects it improperly with capital. It will be seen that Mr. Mill uses the term “gross profit” on the next page in order to avoid the difficulty, which rises unconsciously in his mind, of the anomalous presence of the wages of the manager in the question of profit.

§ 3. General Tendency of Profits to an Equality.

After due allowance is made for these various causes of inequality, namely, difference in the risk or agreeableness of different employments, and natural or artificial monopolies [which give greater or less wages of superintendence], the rate of profit on capital in all employments tends to an equality. That portion of profit which is properly interest, and which forms the real remuneration for abstinence, is strictly the same at the same time and place, whatever be the employment. The rate of interest, on equally good security, does not vary according to the destination of the principal, though it does vary from time to time very much, according to the circumstances of the market.

It is far otherwise with gross profit, which, though (as will presently be seen) it does not vary much from employment to employment, varies very greatly from individual to individual, and can scarcely be in any two cases the same. It depends on the knowledge, talents, economy, and energy of the capitalist himself, or of the agents whom he employs; on the accidents of personal connection; and even on chance. Hardly any two dealers in the same trade, even if their commodities are equally good and equally cheap, carry on their business at the same expense, or turn over their capital in the same time. That equal capitals give equal profits, as a general maxim of trade, would be as false as that equal age or size gives equal bodily strength, or that equal reading or experience gives equal knowledge. The effect depends as much upon twenty other things as upon the single cause specified. On an average (whatever may be the occasional fluctuations) the various employments of capital are on such a footing as to hold out, not equal profits, but equal expectations of profit, to persons of average abilities and advantages. By equal, I mean after making compensation for any inferiority in the agreeableness or safety of an employment. If the case were not so; if there were, evidently, and to common experience, more favorable chances of pecuniary success in one business than in others, more persons would engage their capital in the business. If, on the contrary, a business is not considered thriving; if the chances of profit in it are thought to be inferior to those in other employments; capital gradually leaves it, or at least new capital is not attracted to it; and by this change in the distribution of capital between the less profitable and the more profitable employments, a sort of balance is restored.

This may be easily shown by a diagram in which the capital in one employment is represented by A B, and which exceeds C D, that in another employment, by the amount of A F. It is not necessary that the whole of the excess, A F should be transferred to C D to make the two capitals equal, but only A E, which, added to C D, brings C D to an equality with E B.

This equalizing process, commonly described as the transfer of capital from one employment to another, is not necessarily the onerous, slow, and almost impracticable operation which it is very often represented to be. In the first place, it does not always imply the actual removal of capital already embarked in an employment. In a rapidly progressive state of capital, the adjustment often takes place by means of the new accumulations of each year, which direct themselves in preference toward the more thriving trades. Even when a real transfer of capital is necessary, it is by no means implied that any of those who are engaged in the unprofitable employment relinquish business and break up their establishments. The numerous and multifarious channels of credit through which, in commercial nations, unemployed capital diffuses itself over the field of employment, flowing over in greater abundance to the lower levels, are the means by which the equalization is accomplished. The process consists in a limitation by one class of dealers or producers and an extension by the other of that portion of their business which is carried on with borrowed capital.

“Political economists say that capital sets toward the most profitable trades, and that it rapidly leaves the less profitable and non-paying trades. But in ordinary countries this is a slow process, and some persons, who want to have ocular demonstrations of abstract truths, have been inclined to doubt it because they could not see it. The process would be visible enough if you could only see the books of the bill-brokers and the bankers. If the iron-trade ceases to be as profitable as usual, less iron is sold; the fewer the sales the fewer the bills; and in consequence the number of iron bills [at the banks] is diminished. On the other hand, if, in consequence of a bad harvest, the corn trade becomes on a sudden profitable, immediately ‘corn bills’ are created in large numbers, and, if good, are discounted [at the banks]. Thus capital runs as surely and instantly where it is most wanted, and where there is most to be made of it, as water runs to find its level.”(177)

In the case of an altogether declining trade, in which it is necessary that the production should be, not occasionally varied, but greatly and permanently diminished, or perhaps stopped altogether, the process of extricating the capital is, no doubt, tardy and difficult, and almost always attended with considerable loss; much of the capital fixed in machinery, buildings, permanent works, etc., being either not applicable to any other purpose, or only applicable after expensive alterations; and time being seldom given for effecting the change in the mode in which it would be effected with least loss, namely, by not replacing the fixed capital as it wears out. There is besides, in totally changing the destination of a capital, so great a sacrifice of established connection, and of acquired skill and experience, that people are always very slow in resolving upon it, and hardly ever do so until long after a change of fortune has become hopeless.

In general, then, although profits are very different to different individuals, and to the same individual in different years, there can not be much diversity at the same time and place in the average profits of different employments (other than the standing differences necessary to compensate for difference of attractiveness), except for short periods, or when some great permanent revulsion has overtaken a particular trade. It is true that, to persons with the same amount of original means, there is more chance of making a large fortune in some employments than in others. But it would be found that in those same employments bankruptcies also are more frequent, and that the chance of greater success is balanced by a greater probability of complete failure.

§ 4. The Cause of the Existence of any Profit; the Advances of Capitalists consist of Wages of Labor.

The preceding remarks have, I hope, sufficiently elucidated what is meant by the common phrase, “the ordinary rate of profit,” and the sense in which, and the limitations under which, this ordinary rate has a real existence. It now remains to consider what causes determine its amount.

The cause of profit is, that labor produces more than is required for its support; the reason why capital yields a profit is, because food, clothing, materials, and tools last longer than the time which is required to produce them; so that if a capitalist supplies a party of laborers with these things, on condition of receiving all they produce, they will, in addition to reproducing their own necessaries and instruments, have a portion of their time remaining, to work for the capitalist. We thus see that profit arises, not from the incident of exchange, but from the productive power of labor; and the general profit of the country is always what the productive power of labor makes it, whether any exchange takes place or not. I proceed, in expansion of the considerations thus briefly indicated, to exhibit more minutely the mode in which the rate of profit is determined.

I assume, throughout, the state of things which, where the laborers and capitalists are separate classes, prevails, with few exceptions, universally; namely, that the capitalist advances the whole expenses, including the entire remuneration of the laborer. That he should do so is not a matter of inherent necessity; the laborer might wait until the production is complete for all that part of his wages which exceeds mere necessaries, and even for the whole, if he has funds in hand sufficient for his temporary support. But in the latter case the laborer is to that extent really a capitalist, investing capital in the concern, by supplying a portion of the funds necessary for carrying it on; and even in the former case he may be looked upon in the same light, since, contributing his labor at less than the market price, he may be regarded as lending the difference to his employer, and receiving it back with interest (on whatever principle computed) from the proceeds of the enterprise.

The capitalist, then, may be assumed to make all the advances and receive all the produce. His profit consists of the excess of the produce above the advances; his rate of profit is the ratio which that excess bears to the amount advanced.

For example, if A advances 8,000 bushels of corn to laborers in return for 10,000 yards of cloth (and if one bushel of corn sells for the same sum as one yard of cloth), his profit consists of 2,000 yards of cloth. The ratio of the excess, 2,000, to 8,000, the outlay, or 25 per cent, is the rate of profit. It is not the ratio of 2,000 to 10,000.

But what do the advances consist of? It is, for the present, necessary to suppose that the capitalist does not pay any rent; has not to purchase the use of any appropriated natural agent. The nature of rent, however, we have not yet taken into consideration; and it will hereafter appear that no practical error, on the question we are now examining, is produced by disregarding it.

If, then, leaving rent out of the question, we inquire in what it is that the advances of the capitalist, for purposes of production, consist, we shall find that they consist of wages of labor.

A large portion of the expenditure of every capitalist consists in the direct payment of wages. What does not consist of this is composed of materials and implements, including buildings. But materials and implements are produced by labor; and as our supposed capitalist is not meant to represent a single employment, but to be a type of the productive industry of the whole country, we may suppose that he makes his own tools and raises his own materials. He does this by means of previous advances, which, again, consist wholly of wages. If we suppose him to buy the materials and tools instead of producing them, the case is not altered: he then repays to a previous producer the wages which that previous producer has paid. It is true he repays it to him with a profit; and, if he had produced the things himself, he himself must have had that profit on this part of his outlay as well as on every other part. The fact, however, remains, that in the whole process of production, beginning with the materials and tools and ending with the finished product, all the advances have consisted of nothing but wages, except that certain of the capitalists concerned have, for the sake of general convenience, had their share of profit paid to them before the operation was completed.

This idea may be more clear, perhaps, if we imagine a large corporation, not only making woolen cloth, but owning sheep-ranches, where the raw materials are produced; the shops where all machinery is made; and who even produce on their own property all the food, clothing, shelter, and consumption of the laborers employed by them. A line of division may be passed through the returns in all these branches of the industry, separating what is wages from what is profit. Then it can be easily imagined that all the returns on one side, representing profits, go to capitalists, no matter whether they are thousands in number, or only one capitalist typifying the rest, or a single corporation acting for many small capitalists.

§ 5. The Rate of Profit depends on the Cost of Labor.

It thus appears that the two elements on which, and which alone, the gains of the capitalists depend, are, first, the magnitude of the produce, in other words, the productive power of labor; and secondly, the proportion of that produce obtained by the laborers themselves; the ratio which the remuneration of the laborers bears to the amount they produce.

We thus arrive at the conclusion of Ricardo and others, that the rate of profits depends upon wages; rising as wages fall, and falling as wages rise. In adopting, however, this doctrine, I must insist upon making a most necessary alteration in its wording. Instead of saying that profits depend on wages, let us say (what Ricardo really meant) that they depend on the cost of labor.

This is an entirely different question from that concerning the rate of wages before discussed (Book II, Chap. II). That had to do with the amount of the capital which each laborer, on an average, received as real wages, and this average rate was affected by the number of competitors for labor, as compared with the existing capital, taking into account the nature of the industries in a country. An increase of population, bringing more laborers to compete for employment, will lower the average amount of real wages received by each one; and a decrease of population will bring about the reverse. The rate of wages, however, now that we are considering the matter from the point of view of the capitalist, is but one of the things to be considered affecting cost of labor. The former question was one as to the distribution of capital; the latter is one as to the amount by which the total production is greater than the total capital advanced. Since all capital consists of advances to labor, the present inquiry is one in regard to the quantity of advances compared with the quantity returned; that is, the relation of the total capital to the total production arising from the use of that capital. In the diagram before used (p. 179) the question is not how the contents of circle B are to be distributed, but the relative size of circle B to circle A. In order to produce circle A, it is necessary to advance what is represented by circle B.

Wages and the cost of labor; what labor brings in to the laborer and what it costs to the capitalist are ideas quite distinct, and which it is of the utmost importance to keep so. For this purpose it is essential not to designate them, as is almost always done, by the same name. Wages, in public discussions, both oral and printed, being looked upon from the same point of view of the payers, much oftener than from that of the receivers, nothing is more common than to say that wages are high or low, meaning only that the cost of labor [to the capitalist] is high or low. The reverse of this would be oftener the truth: the cost of labor is frequently at its highest where wages are lowest. This may arise from two causes. (1.) In the first place, the labor, though cheap, may be inefficient.

The facts presented by Mr. Brassey(178) very fully illustrate this principle. Although French workmen in their ship-yards receive less wages for the same kind of work than the English workmen in English yards, yet it costs less per ton to build ships in England than in France. The same correspondence between high wages and efficient work was found to be true of railway construction in different parts of the world. With different character, varying amounts of industrial energy, varying intelligence, and endurance, different people do not have the same efficiency of labor. It is ascertained that inefficiency is, as a rule, accompanied by low wages. Even though wages paid for ordinary labor in constructing railways were in India only from nine to twelve cents a day, and in England from seventy-five to eighty-seven cents a day, yet it cost as much to build a mile of railway in India as in England. The English laborer gave a full equivalent for his higher wages. Moreover, while an English weaver tends from two to three times as many looms as his Russian competitor, the workman in the United States, it is said, will tend even more than the Englishman. In American sailing-vessels, also, a less number of sailors, relatively to the tonnage, is required than in English sailing-ships. Mr. Brassey, besides, came to the conclusion that the working power, or efficiency, of ordinary English laborers was to the French as five to three.

(2.) The other cause which renders wages and the cost of labor no real criteria of one another is the varying costliness of the articles which the laborer consumes. If these are cheap, wages, in the sense which is of importance to the laborer, may be high, and yet the cost of labor may be low; if dear, the laborer may be wretchedly off, though his labor may cost much to the capitalist. This last is the condition of a country over-peopled in relation to its land; in which, food being dear, the poorness of the laborer’s real reward does not prevent labor from costing much to the purchaser, and low wages and low profits coexist. The opposite case is exemplified in the United States of America. The laborer there enjoys a greater abundance of comforts than in any other country of the world, except some of the newest colonies; but owing to the cheap price at which these comforts can be obtained (combined with the great efficiency of the labor), the cost of labor to the capitalist is considerably lower than in Europe. It must be so, since the rate of profit is higher; as indicated by the rate of interest, which is six per cent at New York when it is three or three and a quarter per cent in London.

The cost of labor, then, is, in the language of mathematics, a function of three variables: (1) the efficiency of labor; (2) the wages of labor (meaning thereby the real reward [or real wages] of the laborer); and (3) the greater or less cost(179) at which the articles composing that real reward can be produced or purchased. It is plain that the cost of labor to the capitalist must be influenced by each of these three circumstances, and by no others. These, therefore, are also the circumstances which determine the rate of profit; and it can not be in any way affected except through one or other of them.

The efficiency of labor, in this connection, is highly important in its practical aspects, and as affecting the labor question, because as a function of cost of labor, that is, as an element affecting the quantity of things advanced to the laborers in comparison with the quantity of things returned to the employer, it includes the whole influence of machinery, labor-saving devices, and the results of invention. The quantity of produce depends, for a given advance, on the kind of machinery, the speed with which it is run, and on the general state of the arts and industrial inventions. The extent to which the productive capacity of a single laborer has been increased in the United States has been almost incredible. Instead of weaving cloth by hand, as was done a hundred years ago, “one operative in Lowell, working one year, can produce the cotton fabric needed for the year’s supply of 1,500 to 1,800 Chinese.” Moreover, there is no question as to the fact that no nation in the world compares with ours in the power to invent, construct, and manage the most ingenious and complicated machinery. The inventive faculty belongs to every class in our country; and, in studying cost of labor, it must be well borne in mind that the efficiency of American labor, particularly as combined with mechanical appliances, is one of the great causes of our enormous production. The result of this, for instance, has been that, without lowering profits, although the price of cloth has been greatly reduced, employers have been able to raise the wages of operatives, and shorten their hours of labor, because machinery has so vastly increased the production for a given outlay. As one of a few facts showing this tendency in the last fifty years, note the following table, taken from the books of the Namquit cotton-mill in Bristol, Rhode Island:

Kind Of Labor. 1841. 1884. Card-room help, per week $3.28 $5.40 Card-strippers, per week 4.98 6.00 Weavers, per week 4.75 6.00 Carding-room overseer, per week 7.00 13.50

The hours per week have decreased in the same time from 84 to 66, while the product of the mill in pounds has increased 25 per cent. It may be unnecessary, perhaps, to say that these figures represent the current wages in other mills at the same periods; and that these facts can be sustained by the records of other mills.

In its economic effect we must also consider, under efficiency, the whole question of natural advantages of soil, climate, and natural resources. Laborers of the same skill, paid the same real wages, of the same cost, will produce a vastly greater amount of wheat in Dakota than in Vermont or England. This is the chief reason why profits are so high in the United States. In many industries we have very marked natural advantages, which permits a high reward to labor, and yet yields a high profit to the capitalist. This applies not merely to agriculture, but to all the extractive industries, such as the production of petroleum, wood, copper, etc.

In short, the whole matter of ease and difficulty of production, of high or low cost of production, taking it in the sense of great or little sacrifice (compare carefully Book III, Chap. II, § 4), comes in under the element of efficiency, in cost of labor. The reader can not be too strongly urged to connect different parts of the economic system together. And the questions of Cost of Labor and Cost of Production are of paramount importance to a proper understanding of political economy.

If labor generally became more efficient, without being more highly rewarded; if, without its becoming less efficient, its remuneration fell, no increase taking place in the cost of the articles composing that remuneration; or if those articles became less costly, without the laborers obtaining more of them; in any one of these three cases, profits would rise. If, on the contrary, labor became less efficient (as it might do from diminished bodily vigor in the people, destruction of fixed capital, or deteriorated education); or if the laborer obtained a higher remuneration, without any increased cheapness in the things composing it; or if, without his obtaining more, that which he did obtain became more costly; profits, in all these cases, would suffer a diminution. And there is no other combination of circumstances in which the general rate of profit of a country, in all employments indifferently, can either fall or rise.

The connection of profit with the three constituents of cost of labor may probably be better seen by aid of the following illustration; it being premised that as yet money is not used, and that the laborers are paid in the articles which their money wages would have bought had money been used. For simplicity we will suppose that all articles of the laborer’s consumption are represented by corn. Imagine a large woolen-mill employing 500 men, and paying them in corn; and suppose that one yard of woolen cloth exchanges for one bushel of corn in the open market. In the beginning, with a given condition of efficiency, suppose that each man produces on an average 1,200 yards of cloth, for which he is paid 1,000 bushels of corn:

500 men, each producing 1,200 yards, give a total product of 600,000 yards. 500 men, each paid 1,000 bushels, cause an outlay of 500,000 yards. Profit: 100,000 yards.

(1.) Now suppose a change increasing the efficiency of labor to such an extent that each laborer produces 1,300 instead of 1,200 yards, then the account will stand, if the other elements remain unchanged:

500 men, each producing 1,300 yards, give a total product of 650,000 yards. 500 men, each paid 1,000 bushels, cause an outlay of 500,000 yards. Profit: 150,000 yards.

(2.) If efficiency and the cost of producing food remain the same as at first, suppose a change to occur which raises the quantity of corn each laborer receives from 1,000 to 1,100, or, as it is called, increases his real wages—then the account will be:

500 men, each producing 1,200 yards, give a total product of 600,000 yards. 500 men, each paid 1,100 bushels, cause an outlay of 550,000 yards. Profit: 50,000 yards.

(3.) If efficiency and real wages remain the same, suppose such an increase in the cost to the employers of obtaining corn that they are obliged to give one and one tenth yard of their goods for one bushel of corn (1,000 bushels of corn costing them 1,100 yards of cloth), then the statement will read:

500 men, each producing 1,200 yards, give a total product of 600,000 yards. 500 men, each paid 1,000 bushels, cause an outlay of 550,000 yards. Profit: 50,000 yards.

VI. Of Rent

§ 1. Rent the Effect of a Natural Monopoly.

The requisites of production being labor, capital, and natural agents, the only person, besides the laborer and the capitalist, whose consent is necessary to production, and who can claim a share of the produce as the price of that consent, is the person who, by the arrangements of society, possesses exclusive power over some natural agent. The land is the principal of the natural agents which are capable of being appropriated, and the consideration paid for its use is called rent. Landed proprietors are the only class, of any numbers or importance, who have a claim to a share in the distribution of the produce, through their ownership of something which neither they nor any one else have produced. If there be any other cases of a similar nature, they will be easily understood, when the nature and laws of rent are comprehended.

It is at once evident that rent is the effect of a monopoly. The reason why land-owners are able to require rent for their land is, that it is a commodity which many want, and which no one can obtain but from them. If all the land of the country belonged to one person, he could fix the rent at his pleasure. This case, however, is nowhere known to exist; and the only remaining supposition is that of free competition; the land-owners being supposed to be, as in fact they are, too numerous to combine.

The ratio of the land to the cultivators shows the limited quantity of land. It is very desirable to keep the connection of one part of the subject with another wherever possible. “Agricultural rent, as it actually exists,” says Mr. Cairnes,(180) truly, “is not a consequence of the monopoly of the soil, but of its diminishing productiveness.” The doctrine of rent depends upon the law of diminishing returns; and it is only by the pressure of population upon land that the lessened productiveness of land, whether because of poorer qualities or poorer situations, is made apparent. Or, to take things in their natural sequence, an increase of population necessitates more food; and this implies a resort to more expensive methods, or poorer soils, so soon as land is pushed to the extent that it will not yield an increased crop for the same application of labor and capital as formerly. Different qualities of land, then, being in cultivation at the same time, the better qualities must, of course, yield a greater return than the poorer, and the conditions then exist under which land pays rent. Those, therefore, who admit the law of diminishing returns are inevitably led to the doctrine of rent.

§ 2. No Land can pay Rent except Land of such Quality or Situation as exists in less Quantity than the Demand.

A thing which is limited in quantity, even though its possessors do not act in concert, is still a monopolized article. But even when monopolized, a thing which is the gift of nature, and requires no labor or outlay as the condition of its existence, will, if there be competition among the holders of it, command a price only if it exist in less quantity than the demand.

If the whole land of a country were required for cultivation, all of it might yield a rent. But in no country of any extent do the wants of the population require that all the land, which is capable of cultivation, should be cultivated. The food and other agricultural produce which the people need, and which they are willing and able to pay for at a price which remunerates the grower, may always be obtained without cultivating all the land; sometimes without cultivating more than a small part of it; the more fertile lands, or those in the more convenient situations, being of course preferred. There is always, therefore, some land which can not, in existing circumstances, pay any rent; and no land ever pays rent unless, in point of fertility or situation, it belongs to those superior kinds which exist in less quantity than the demand—which can not be made to yield all the produce required for the community, unless on terms still less advantageous than the resort to less favored soils. (1.) The worst land which can be cultivated as a means of subsistence is that which will just replace the seed and the food of the laborers employed on it, together with what Dr. Chalmers calls their secondaries; that is, the laborers required for supplying them with tools, and with the remaining necessaries of life. Whether any given land is capable of doing more than this is not a question of political economy, but of physical fact. The supposition leaves nothing for profits, nor anything for the laborers except necessaries: the land, therefore, can only be cultivated by the laborers themselves, or else at a pecuniary loss; and, a fortiori, can not in any contingency afford a rent. (2.) The worst land which can be cultivated as an investment for capital is that which, after replacing the seed, not only feeds the agricultural laborers and their secondaries, but affords them the current rate of wages, which may extend to much more than mere necessaries, and leaves, for those who have advanced the wages of these two classes of laborers, a surplus equal to the profit they could have expected from any other employment of their capital. (3.) Whether any given land can do more than this is not merely a physical question, but depends partly on the market value of agricultural produce. What the land can do for the laborers and for the capitalist, beyond feeding all whom it directly or indirectly employs, of course depends upon what the remainder of the produce can be sold for. The higher the market value of produce, the lower are the soils to which cultivation can descend, consistently with affording to the capital employed the ordinary rate of profit.

As, however, differences of fertility slide into one another by insensible gradations; and differences of accessibility, that is, of distance from markets do the same; and since there is land so barren that it could not pay for its cultivation at any price; it is evident that, whatever the price may be, there must in any extensive region be some land which at that price will just pay the wages of the cultivators, and yield to the capital employed the ordinary profit, and no more. Until, therefore, the price rises higher, or until some improvement raises that particular land to a higher place in the scale of fertility, it can not pay any rent. It is evident, however, that the community needs the produce of this quality of land; since, if the lands more fertile or better situated than it could have sufficed to supply the wants of society, the price would not have risen so high as to render its cultivation profitable. This land, therefore, will be cultivated; and we may lay it down as a principle that, so long as any of the land of a country which is fit for cultivation, and not withheld from it by legal or other factitious obstacles, is not cultivated, the worst land in actual cultivation (in point of fertility and situation together) pays no rent.

§ 3. The Rent of Land is the Excess of its Return above the Return to the worst Land in Cultivation.

If, then, of the land in cultivation, the part which yields least return to the labor and capital employed on it gives only the ordinary profit of capital, without leaving anything for rent, a standard [i.e., the “margin of cultivation”] is afforded for estimating the amount of rent which will be yielded by all other land. Any land yields just as much more than the ordinary profits of stock as it yields more than what is returned by the worst land in cultivation. The surplus is what the farmer can afford to pay as rent to the landlord; and since, if he did not so pay it, he would receive more than the ordinary rate of profit, the competition of other capitalists, that competition which equalizes the profits of different capitals, will enable the landlord to appropriate it. The rent, therefore, which any land will yield, is the excess of its produce, beyond what would be returned to the same capital if employed on the worst land in cultivation.

It has been denied that there can be any land in cultivation which pays no rent, because landlords (it is contended) would not allow their land to be occupied without payment. Inferior land, however, does not usually occupy, without interruption, many square miles of ground; it is dispersed here and there, with patches of better land intermixed, and the same person who rents the better land obtains along with it the inferior soils which alternate with it. He pays a rent, nominally for the whole farm, but calculated on the produce of those parts alone (however small a portion of the whole) which are capable of returning more than the common rate of profit. It is thus scientifically true that the remaining parts pay no rent.

This point seems to need some illustration. Suppose that all the lands in a community are of five different grades of productiveness. When the price of agricultural produce was such that grades one, two, and three all came into cultivation, lands of poorer quality would not be cultivated. When a man rents a farm, he always gets land of varying degrees of fertility within its limits. Now, in determining what he ought to pay as rent, the farmer will agree to give that which will still leave him a profit on his working capital; if in his fields he finds land which would not enter into the question of rental, because it did not yield more than the profit on working it, after he rented the farm he would find it to his interest to cultivate it, simply because it yielded him a profit, and because he was not obliged to pay rent upon it; if required to pay rent for it, he would lose the ordinary rate of profit, would have no reason for cultivating it, of course, and would throw it out of cultivation. Moreover, suppose that lands down to grade three paid rent when A took the farm; now, if the price of produce rises slightly, grade four may pay something, but possibly not enough to warrant any rent going to a landlord. A will put capital on it for this return, but certainly not until the price warrants it; that is, not until the price will return him at least the cost of working the land, plus the profit on his outlay. But the community needed this land, or the price would not have gone up to the point which makes possible its cultivation even for a profit, without rent. There must always be somewhere some land affected in just this way.

§ 4. —Or to the Capital employed in the least advantageous Circumstances.

Let us, however, suppose that there were a validity in this objection, which can by no means be conceded to it; that, when the demand of the community had forced up food to such a price as would remunerate the expense of producing it from a certain quality of soil, it happened nevertheless that all the soil of that quality was withheld from cultivation, the increase of produce, which the wants of society required, would for the time be obtained wholly (as it always is partially), not by an extension of cultivation, but by an increased application of labor and capital to land already cultivated.

Now we have already seen that this increased application of capital, other things being unaltered, is always attended with a smaller proportional return. The rise of price enables measures to be taken for increasing the produce, which could not have been taken with profit at the previous price. The farmer uses more expensive manures, or manures land which he formerly left to nature; or procures lime or marl from a distance, as a dressing for the soil; or pulverizes or weeds it more thoroughly; or drains, irrigates, or subsoils portions of it, which at former prices would not have paid the cost of the operation; and so forth. The farmer or improver will only consider whether the outlay he makes for the purpose will be returned to him with the ordinary profit, and not whether any surplus will remain for rent. Even, therefore, if it were the fact that there is never any land taken into cultivation, for which rent, and that too of an amount worth taking into consideration, was not paid, it would be true, nevertheless, that there is always some agricultural capital which pays no rent, because it returns nothing beyond the ordinary rate of profit: this capital being the portion of capital last applied—that to which the last addition to the produce was due; or (to express the essentials of the case in one phrase) that which is applied in the least favorable circumstances. But the same amount of demand and the same price, which enable this least productive portion of capital barely to replace itself with the ordinary profit, enable every other portion to yield a surplus proportioned to the advantage it possesses. And this surplus it is which competition enables the landlord to appropriate.

If land were all occupied, and of only one grade, the first installment of labor and capital produced, we will say, twenty bushels of wheat; when the price of wheat rose, and it became profitable to resort to greater expense on the soil, a second installment of the same amount of labor and capital when applied, however, only yielded fifteen bushels more; a third, ten bushels more; and a fourth, five bushels more. The soil now gives fifty bushels only under the highest pressure. But, if it was profitable to invest the same installment of labor and capital simply for the five bushels that at first had received a return of twenty bushels, the price must have gone up so that five bushels should sell for as much as the twenty did formerly; so, mutatis mutandis, of installments second and third. So that if the demand is such as to require all of the fifty bushels, the agricultural capital which produced the five bushels will be the standard according to which the rent of the capital, which grew twenty, fifteen, and ten bushels respectively, is measured. The principle is exactly the same as if equal installments of capital and labor were invested on four different grades of land returning twenty, fifteen, ten, and five bushels for each installment. Or, as if in the table on page 240, A, B, C, and D each represented different installments of the same amount of labor and capital put upon the same spot of ground, instead of being, as there, put upon different grades of land.

The rent of all land is measured by the excess of the return to the whole capital employed on it above what is necessary to replace the capital with the ordinary rate of profit, or, in other words, above what the same capital would yield if it were all employed in as disadvantageous circumstances as the least productive portion of it: whether that least productive portion of capital is rendered so by being employed on the worst soil, or by being expended in extorting more produce from land which already yielded as much as it could be made to part with on easier terms.

It will be true that the farmer requires the ordinary rate of profit on the whole of his capital; that whatever it returns to him beyond this he is obliged to pay to the landlord, but will not consent to pay more; that there is a portion of capital applied to agriculture in such circumstances of productiveness as to yield only the ordinary profits; and that the difference between the produce of this and of any other capital of similar amount is the measure of the tribute which that other capital can and will pay, under the name of rent, to the landlord. This constitutes a law of rent, as near the truth as such a law can possibly be; though of course modified or disturbed, in individual cases, by pending contracts, individual miscalculations, the influence of habit, and even the particular feelings and dispositions of the persons concerned.

The law of rent, in the economic sense, operates in the United States as truly as elsewhere, although there is no separate class of landlords here. With us, almost all land is owned by the cultivator; so that two functions, those of the landlord and farmer, are both united in one person. Although one payment is made, it is still just as distinctly made up of two parts, one of which is a payment to the owner for the superior quality of his soil, and the other a payment (to the same person, if the owner is the cultivator) of profit on the farmer’s working capital. Land which in the United States will only return enough to pay a profit on this capital can not pay any rent. And land which can pay more than a profit on this working capital, returns that excess as rent, even if the farmer is also the owner and landlord. The principle which regulates the amount of that excess—which is the essential point—is the principle which determines the amount of economic rent, and it holds true in the United States or Finland, provided only that different grades of land are called into cultivation. The governing principle is the same, no matter whether a payment is made to one man as profit and to another as rent, or whether the two payments are made to the same man in two capacities. It has been urged that the law of rent does not hold in the United States, because “the price of grain and other agricultural produce has not risen in proportion to the increase of our numbers, as it ought to have done if Ricardo’s theory were true, but has fallen, since 1830, though since that time our population has been more than tripled.”(181) This overlooks the fact that we have not even yet taken up all our best agricultural lands, so that for some products the law of diminishing productiveness has not yet shown itself. The reason is, that the extension of our railway system has only of late years brought the really good grain-lands into cultivation. The fact that there has been no rise in agricultural products is due to the enormous extent of marvelously fertile grain-lands in the West, and to the cheapness of transportation from those districts to the seaboard.

For a general understanding of the law of rent the following table will show how, under constant increase of population (represented by four different advances of population, in the first column), first the best and then the poorer lands are brought into cultivation. We will suppose (1) that the most fertile land, A, at first pays no rent; then (2), when more food is wanted than land A can supply, it will be profitable to till land B, but which, as yet, pays no rent. But if eighteen bushels are a sufficient return to a given amount of labor and capital, then when an equal amount of labor and capital engaged on A returns twenty-four bushels, six of that are beyond the ordinary profit, and form the rent on land A, and so on; C will next be the line of comparison, and then D; as the poorer soils are cultivated, the rent of A increases:

Population A B C D Increase. 24 18 12 6 bushels bushels bushels bushels Total Rent in Total Rent in Total Rent in Total Rent in product Bushels product Bushels product Bushels product Bushels I. 24 0 .. .. .. .. .. .. II. 24 6 18 0 .. .. .. .. III. 24 12 18 6 12 0 .. .. IV. 24 18 18 12 12 6 6 0

§ 5. Opposing Views of the Law of Rent.

Under the name of rent, many payments are commonly included, which are not a remuneration for the original powers of the land itself, but for capital expended on it. The buildings are as distinct a thing from the farm as the stock or the timber on it; and what is paid for them can no more be called rent of land than a payment for cattle would be, if it were the custom that the landlord should stock the farm for the tenant. The buildings, like the cattle, are not land, but capital, regularly consumed and reproduced; and all payments made in consideration for them are properly interest.

But with regard to capital actually sunk in improvements, and not requiring periodical renewal, but spent once for all in giving the land a permanent increase of productiveness, it appears to me that the return made to such capital loses altogether the character of profits, and is governed by the principles of rent. It is true that a landlord will not expend capital in improving his estate unless he expects from the improvement an increase of income surpassing the interest of his outlay. Prospectively, this increase of income may be regarded as profit; but, when the expense has been incurred and the improvement made, the rent of the improved land is governed by the same rules as that of the unimproved.

Mr. Carey (as well as Bastiat) has declared that there is a law of increasing returns from land. He points out that everything now existing could be reproduced to-day at a less cost than that involved in its original production, owing to our advance in skill, knowledge, and all the arts of production; that, for example, it costs less to make an axe now than it did five hundred years ago; so also with a farm, since a farm of a given amount of productiveness can be brought into cultivation at less cost to-day than that originally spent upon it. The gain of society has, we all admit, been such that we produce almost everything at a less cost now than long ago; but to class a farm and an axe together overlooks, in the most remarkable way, the fact that land can not be created by labor and capital, while axes can, and that too indefinitely. Nor can the produce from the land be increased indefinitely at a diminishing cost. This is sometimes denied by the appeal to facts: “It can be abundantly proved that, if we take any two periods sufficiently distant to afford a fair test, whether fifty or one hundred or five hundred years, the production of the land relatively to the labor employed upon it has progressively become greater and greater.”(182) But this does not prove that an existing tendency to diminishing returns has not been more than offset by the progress of the arts and improvements. “The advance of a ship against wind and tide is [no] proof that there is no wind and tide.”

In a work entitled “The Past, the Present, and the Future,” Mr. Carey takes [a] ground of objection to the Ricardo theory of rent, namely, that in point of historical fact the lands first brought under cultivation are not the most fertile, but the barren lands. “We find the settler invariably occupying the high and thin lands requiring little clearing and no drainage. With the growth of population and wealth, other soils yielding a larger return to labor are always brought into activity, with a constantly increasing return to the labor expended upon them.”

In whatever order the lands come into cultivation, those which when cultivated yield the least return, in proportion to the labor required for their culture, will always regulate the price of agricultural produce; and all other lands will pay a rent simply equivalent to the excess of their produce over this minimum. Whatever unguarded expressions may have been occasionally used in describing the law of rent, these two propositions are all that was ever intended by it. If, indeed, Mr. Carey could show that the return to labor from the land, agricultural skill and science being supposed the same, is not a diminishing return, he would overthrow a principle much more fundamental than any law of rent. But in this he has wholly failed.

Another objection taken against the law of diminishing returns, and so against the law of rent, is that the potential increase of food, e.g., of a grain of wheat, is far greater than that of man.(183) No one disputes the fact that one grain of wheat can reproduce itself more times than man, and that too in a geometric increase; but not without land. A grain of wheat needs land in which it can multiply itself, and this necessary element of its increase is limited; and it is the very thing which limits the multiplication of the grains of wheat. On the same piece of land, one can not get more than what comes from one act of reproduction in the grain. If one grain produces 100 of its kind, doubling the capital will not repeatedly cause a geometric increase in the ratio of reproduction of each grain on this same land, so that one grain, by one process, produces of its kind 200, 400, 800, or 1,600, because you can not multiply the land in any such ratio as would accompany this potential reduplication of the grain. This objection would not seem worth answering, were it not that it furnishes some difficulty to really honest inquirers.

Others, again, allege as an objection against Ricardo, that if all land were of equal fertility it might still yield a rent. But Ricardo says precisely the same. It is also distinctly a portion of Ricardo’s doctrine that, even apart from differences of situation, the land of a country supposed to be of uniform fertility would, all of it, on a certain supposition, pay rent, namely, if the demand of the community required that it should all be cultivated, and cultivated beyond the point at which a further application of capital begins to be attended with a smaller proportional return.

This is simply the question, before discussed, whether, if only one class of land were cultivated, some agricultural capital would pay rent or not. It all depends on the fact whether population—and so the demand for food—has increased to the point where it calls out a recognition of the diminishing productiveness of the soil. In that case different capitals would be invested, so that there would be different returns to the same amount of capital; and the prior or more advantageous investments of capital on the land would yield more than the ordinary rate of profit, which could be claimed as rent.

A. L. Perry(184) admits the law of diminishing returns, but holds that, “as land is capital, and as every form of capital may be loaned or rented, and thus become fruitful in the hands of another, the rent of land does not differ essentially in its nature from the rent of buildings in cities, or from the interest of money.” Henry George admits Ricardo’s law of rent to its full extent, but very curiously says: “Irrespective of the increase of population, the effect of improvements in methods of production and exchange is to increase rent.... The effect of labor-saving improvements will be to increase the production of wealth. Now, for the production of wealth, two things are required, labor and land. Therefore, the effect of labor-saving improvements will be to extend the demand for land, and, wherever the limit of the quality of land in use is reached, to bring into cultivation lands of less natural productiveness, or to extend cultivation on the same lands to a point of lower natural productiveness. And thus, while the primary effect of labor-saving improvements is to increase the power of labor, the secondary effect is to extend cultivation, and, where this lowers the margin of cultivation, to increase rent.”(185) Francis Bowen(186) rejects Ricardo’s law, and says, “Rent depends, not on the increase, but on the distribution, of the population”—asserting that the existence of large cities and towns determines the amount of rent paid by neighboring land.(187)

§ 6. Rent does not enter into the Cost of Production of Agricultural Produce.

Rent does not really form any part of the expenses of [agricultural] production, or of the advances of the capitalist. The grounds on which this assertion was made are now apparent. It is true that all tenant-farmers, and many other classes of producers, pay rent. But we have now seen that whoever cultivates land, paying a rent for it, gets in return for his rent an instrument of superior power to other instruments of the same kind for which no rent is paid. The superiority of the instrument is in exact proportion to the rent paid for it. If a few persons had steam-engines of superior power to all others in existence, but limited by physical laws to a number short of the demand, the rent which a manufacturer would be willing to pay for one of these steam-engines could not be looked upon as an addition to his outlay, because by the use of it he would save in his other expenses the equivalent of what it cost him: without it he could not do the same quantity of work, unless at an additional expense equal to the rent. The same thing is true of land. The real expenses of production are those incurred on the worst land, or by the capital employed in the least favorable circumstances. This land or capital pays, as we have seen, no rent, but the expenses to which it is subject cause all other land or agricultural capital to be subjected to an equivalent expense in the form of rent. Whoever does pay rent gets back its full value in extra advantages, and the rent which he pays does not place him in a worse position than, but only in the same position as, his fellow-producer who pays no rent, but whose instrument is one of inferior efficiency.

Soils are of every grade: some, which if cultivated, might replace the capital, but give no profit; some give a slight but not an ordinary profit; some, the ordinary profit. That is, “there is a point up to which it is profitable to cultivate, and beyond which it is not profitable to cultivate. The price of corn will not, for any long time, remain at a higher rate than is sufficient to cover with ordinary profit the cost of that portion of the general crop which is raised at greatest expense.”(188) For similar reasons the price will not remain at a lower rate. If, then, the cost of production of grain is determined by that land which replaces the capital, yields only the ordinary profit, and pays no rent, rent forms no part of this cost, since that land does not and can not pay any rent. McLeod,(189) however, says it is not the cost of production which regulates the value of agricultural produce, but the value which regulates the cost.

I. Of Value

§ 1. Definitions of Value in Use, Exchange Value, and Price.

It is evident that, of the two great departments of Political Economy, the production of wealth and its distribution, the consideration of Value has to do with the latter alone; and with that only so far as competition, and not usage or custom, is the distributing agency.

The use of a thing, in political economy, means its capacity to satisfy a desire, or serve a purpose. Diamonds have this capacity in a high degree, and, unless they had it, would not bear any price. Value in use, or, as Mr. De Quincey calls it, teleologic value, is the extreme limit of value in exchange. The exchange value of a thing may fall short, to any amount, of its value in use; but that it can ever exceed the value in use implies a contradiction; it supposes that persons will give, to possess a thing, more than the utmost value which they themselves put upon it, as a means of gratifying their inclinations.

The word Value, when used without adjunct, always means, in political economy, value in exchange.

Exchange value requires to be distinguished from Price. Writers have employed Price to express the value of a thing in relation to money—the quantity of money for which it will exchange. By the price of a thing, therefore, we shall henceforth understand its value in money; by the value, or exchange value of a thing, its general power of purchasing; the command which its possession gives over purchasable commodities in general. What is meant by command over commodities in general? The same thing exchanges for a greater quantity of some commodities, and for a very small quantity of others. A coat may exchange for less bread this year than last, if the harvest has been bad, but for more glass or iron, if a tax has been taken off those commodities, or an improvement made in their manufacture. Has the value of the coat, under these circumstances, fallen or risen? It is impossible to say: all that can be said is, that it has fallen in relation to one thing, and risen in respect to another. Suppose, for example, that an invention has been made in machinery, by which broadcloth could be woven at half the former cost. The effect of this would be to lower the value of a coat, and, if lowered by this cause, it would be lowered not in relation to bread only or to glass only, but to all purchasable things, except such as happened to be affected at the very time by a similar depressing cause. Those [changes] which originate in the commodities with which we compare it affect its value in relation to those commodities; but those which originate in itself affect its value in relation to all commodities.

There is such a thing as a general rise of prices. All commodities may rise in their money price. But there can not be a general rise of values. It is a contradiction in terms. A can only rise in value by exchanging for a greater quantity of B and C; in which case these must exchange for a smaller quantity of A. All things can not rise relatively to one another. If one half of the commodities in the market rise in exchange value, the very terms imply a fall of the other half; and, reciprocally, the fall implies a rise. Things which are exchanged for one another can no more all fall, or all rise, than a dozen runners can each outrun all the rest, or a hundred trees all overtop one another. A general rise or a general fall of prices is merely tantamount to an alteration in the value of money, and is a matter of complete indifference, save in so far as it affects existing contracts for receiving and paying fixed pecuniary amounts.

Before commencing the inquiry into the laws of value and price, I have one further observation to make. I must give warning, once for all, that the cases I contemplate are those in which values and prices are determined by competition alone. In so far only as they are thus determined, can they be reduced to any assignable law. The buyers must be supposed as studious to buy cheap as the sellers to sell dear.

The reader is advised to study the definitions of value given by other writers. Cairnes(190) defines value as “the ratio in which commodities in open market are exchanged against each other.” F. A. Walker(191) holds that “value is the power which an article confers upon its possessor, irrespective of legal authority or personal sentiments, of commanding, in exchange for itself, the labor, or the products of the labor, of others.” Carey(192) says, “Value is the measure of the resistance to be overcome in obtaining those commodities or things required for our purposes—of the power of nature over man.” Value is thus, with him, the antithesis of wealth, which is (according to Carey) the power of man over nature. In this school, value is the service rendered by any one who supplies the article for the use of another. This is also Bastiat’s idea,(193) “le rapport de deux services échangés.” Following Bastiat, A. L. Perry(194) defines value as “always and everywhere the relation of mutual purchase established between two services by their exchange.” Roscher(195) explains exchange value as “the quality which makes them exchangeable against other goods.” He also makes a distinction between utility and value in use: “Utility is a quality of things themselves, in relation, it is true, to human wants. Value in use is a quality imputed to them, the result of man’s thought, or his view of them. Thus, for instance, in a beleaguered city, the stores of food do not increase in utility, but their value in use does.” Levasseur(196) regards value as “the relation resulting from exchange”—le rapport resultant de l’échange. Cherbuliez(197) asserts that “the value of a product or of a service can be expressed only as the products or services which it obtains in exchange.... If I exchange the thing A against B, A is the value of B, B is the value of A.” Jevons(198) defines value as “proportion in exchange.”

§ 2. Conditions of Value: Utility, Difficulty of Attainment, and Transferableness.

That a thing may have any value in exchange, two conditions are necessary. 1. It must be of some use; that is (as already explained), it must conduce to some purpose, satisfy some desire. No one will pay a price, or part with anything which serves some of his purposes, to obtain a thing which serves none of them. 2. But, secondly, the thing must not only have some utility, there must also be some difficulty in its attainment.

The question is one as to the conditions essential to the existence of any value. Very justly Cairnes(199) adds also a third condition, “the possibility of transferring the possession of the articles which are the subject of the exchange.” For instance, a cargo of wheat at the bottom of the sea has value in use and difficulty of attainment, but it is not transferable. Jevons (following J. B. Say) maintains that “value depends entirely on utility.” If utility means the power to satisfy a desire, things which merely have utility and no difficulty of attainment could have no exchange value.(200) F. A. Walker(201) believes that “value depends wholly on the relation between demand and supply.” Carey(202) holds that value depends merely on the cost of reproduction of the given article. Roscher(203) finds that exchange value is “based on a combination of value in use with cost value.” Cherbuliez(204) calls the conditions of value two, “the ability to give satisfaction, and inability of attainment without effort. The first element is subjective; it is determined wholly by the needs or desires of the parties to the exchange. The second is objective; it depends upon material considerations, which are the conditions of the existence of the thing, and upon which the needs of the persons exchanging have no influence whatever.” It is, as usual, one of Cherbuliez’s clear expositions. A. L. Perry(205) states that, “while value always takes its rise in the desires of men, it is never realized except through the efforts of men, and through these efforts as mutually exchanged.”

The difficulty of attainment which determines value is not always the same kind of difficulty: (1.) It sometimes consists in an absolute limitation of the supply. There are things of which it is physically impossible to increase the quantity beyond certain narrow limits. Such are those wines which can be grown only in peculiar circumstances of soil, climate, and exposure. Such also are ancient sculptures; pictures by the old masters; rare books or coins, or other articles of antiquarian curiosity. Among such may also be reckoned houses and building-ground, in a town of definite extent.

De Quincey(206) has presented some ingenious diagrams to represent the operations of the two constituents of value in each of the three following cases: U represents the power of the article to satisfy some desire, and D difficulty of attainment. In the first case, exchange value is not hindered by D from going up to any height, and so it rises and falls entirely according to the force of U. D being practically infinite, the horizontal line, exchange value, is not kept down by D, but it rises just as far as U, the desires of purchasers, may carry it.

(2.) But there is another category (embracing the majority of all things that are bought and sold), in which the obstacle to attainment consists only in the labor and expense requisite to produce the commodity. Without a certain labor and expense it can not be had; but, when any one is willing to incur these, there needs be no limit to the multiplication of the product. If there were laborers enough and machinery enough, cottons, woolens, or linens might be produced by thousands of yards for every single yard now manufactured.

In case (2) the horizontal line, representing exchange value, follows the force of D entirely. The utility of the article is very great, but the value is only limited by the difficulty of obtaining it. So far as U is concerned, exchange value can go up a great distance, but will go no higher than the point where the article can be obtained. The dotted lines underneath the horizontal line indicate that the exchange value of articles in this class tend to fall in value.

(3.) There is a third case, intermediate between the two preceding, and rather more complex, which I shall at present merely indicate, but the importance of which in political economy is extremely great. There are commodities which can be multiplied to an indefinite extent by labor and expenditure, but not by a fixed amount of labor and expenditure. Only a limited quantity can be produced at a given cost; if more is wanted, it must be produced at a greater cost. To this class, as has been often repeated, agricultural produce belongs, and generally all the rude produce of the earth; and this peculiarity is a source of very important consequences; one of which is the necessity of a limit to population; and another, the payment of rent.

In case (3) articles like agricultural produce have a very great power to satisfy desires, and if scarce would have a high value. So far as U is concerned, here also, as in case (2), exchange value might mount upward to almost any height, but it can go no higher than D permits. In commodities of this class, affected by the law of diminishing returns, the tendency is for D to increase, and so for exchange value to rise, as indicated by the dotted lines above that of the exchange value.

§ 3. Commodities limited in Quantity by the law of Demand and Supply: General working of this Law.

These being the three classes, in one or other of which all things that are bought and sold must take their place, we shall consider them in their order. And first, of things absolutely limited in quantity, such as ancient sculptures or pictures.

Of such things it is commonly said that their value depends on their scarcity; others say that the value depends on the demand and supply. But this statement requires much explanation. The supply of a commodity is an intelligible expression: it means the quantity offered for sale; the quantity that is to be had, at a given time and place, by those who wish to purchase it. But what is meant by the demand? Not the mere desire for the commodity. A beggar may desire a diamond; but his desire, however great, will have no influence on the price. Writers have therefore given a more limited sense to demand, and have defined it, the wish to possess, combined with the power of purchasing.(207) To distinguish demand in this technical sense from the demand which is synonymous with desire, they call the former effectual demand.

General supply consists in the commodities offered in exchange for other commodities; general demand likewise, if no money exists, consists in the commodities offered as purchasing power in exchange for other commodities. That is, one can not increase the demand for certain things without increasing the supply of some articles which will be received in exchange for the desired commodities. Demand is based upon the production of articles having exchange value, in its economic sense; and the measure of this demand is necessarily the quantity of commodities offered in exchange for the desired goods. General demand and supply are thus reciprocal to each other. But as soon as money, or general purchasing power, is introduced, Mr. Cairnes(208) defines “demand as the desire for commodities or services, seeking its end by an offer of general purchasing power; and supply, as the desire for general purchasing power, seeking its end by an offer of specific commodities or services.” But many persons find a difficulty because they insist upon separating the idea of supply from that of demand, owing to the fact that producers seem to be a distinct class in the community, different from consumers. That they are in reality the same persons can be easily explained by the following statement: “A certain number of people, A, B, C, D, E, F, etc., are engaged in industrial occupations—A produces for B, C, D, E, F; B for A, C, D, E, F; C for A, B, D, E, F, and so on. In each case the producer and the consumers are distinct, and hence, by a very natural fallacy, it is concluded that the whole body of consumers is distinct from the whole body of producers, whereas they consist of precisely the same persons.”

But in regard to demand and supply of particular commodities (not general demand and supply), the increase of the demand is not necessarily followed by an increased supply, or vice versa. Out of the total production (which constitutes general demand) a varying amount, sometimes more, sometimes less, may be directed by the desires of men to the purchase of some given thing. This should be borne in mind, in connection with the future discussion of over-production. The identity of general demand with general supply shows there can be no general over-production: but so long as there exists the possibility that the demand for a particular commodity may diminish without a corresponding effect being thereby produced on the supply of that commodity, by a necessary connection, we see that there may be over-production of particular commodities; that is, a production in excess of the demand.

The proper mathematical analogy [between demand and supply] is that of an equation. If unequal at any moment, competition equalizes them, and the manner in which this is done is by an adjustment of the value. If the demand increases, the value rises; if the demand diminishes, the value falls; again, if the supply falls off, the value rises; and falls, if the supply is increased. The rise or the fall continues until the demand and supply are again equal to one another: and the value which a commodity will bring in any market is no other than the value which, in that market, gives a demand just sufficient to carry off the existing or expected supply.

Mr. Cairnes(209) finally defined market value as the price “which is sufficient, and no more than sufficient, to carry the existing supply over, with such a surplus as circumstances may render advisable, to meet the new supplies forthcoming,” which is nothing more than a paraphrase of the words “existing or expected supply” just used by Mr. Mill. It seems unnecessary, therefore, that Mr. Cairnes should have added: “According to Mr. Mill, the actual market price is the price which equalizes supply and demand in a given market; as I view the case, the ‘proper market price’ is the price which equalizes supply and demand, not as existing in the particular market, but in the larger sense which I have assigned to the terms. To this price the actual market price will, according to my view, approximate, in proportion to the intelligence and knowledge of the dealers.”

Adam Smith, who introduced the expression “effectual demand,” employed it to denote the demand of those who are willing and able to give for the commodity what he calls its natural price—that is, the price which will enable it to be permanently produced and brought to market.(210)

This, then, is the Law of Value, with respect to all commodities not susceptible of being multiplied at pleasure.

§ 4. Miscellaneous Cases falling under this Law.

There are but few commodities which are naturally and necessarily limited in supply. But any commodity whatever may be artificially so. The monopolist can fix the value as high as he pleases, short of what the consumer either could not or would not pay; but he can only do so by limiting the supply. Monopoly value, therefore, does not depend on any peculiar principle, but is a mere variety of the ordinary case of demand and supply.

Again, though there are few commodities which are at all times and forever unsusceptible of increase of supply, any commodity whatever may be temporarily so; and with some commodities this is habitually the case. Agricultural produce, for example, can not be increased in quantity before the next harvest; the quantity of corn already existing in the world is all that can be had for sometimes a year to come. During that interval, corn is practically assimilated to things of which the quantity can not be increased. In the case of most commodities, it requires a certain time to increase their quantity; and if the demand increases, then, until a corresponding supply can be brought forward, that is, until the supply can accommodate itself to the demand, the value will so rise as to accommodate the demand to the supply.

There is another case the exact converse of this. There are some articles of which the supply may be indefinitely increased, but can not be rapidly diminished. There are things so durable that the quantity in existence is at all times very great in comparison with the annual produce. Gold and the more durable metals are things of this sort, and also houses. The supply of such things might be at once diminished by destroying them; but to do this could only be the interest of the possessor if he had a monopoly of the article, and could repay himself for the destruction of a part by the increased value of the remainder. The value, therefore, of such things may continue for a long time so low, either from excess of supply or falling off in the demand, as to put a complete stop to further production; the diminution of supply by wearing out being so slow a process that a long time is requisite, even under a total suspension of production, to restore the original value. During that interval the value will be regulated solely by supply and demand, and will rise very gradually as the existing stock wears out, until there is again a remunerating value, and production resumes its course.

The total value of gold and silver in the world is variously estimated at from $10,000,000,000 to $14,000,000,000; while the annual production of both gold and silver in the world during 1882(211) was only $212,000,000. The loss of gold by abrasion is about 1/1000 annually, and of silver about 1/700, but much depends on the size of the coin. A change in the annual production of the precious metals can have a perceptible effect on their value only after such a time as will permit the change to affect the existing quantity in a way somewhat comparable with its previous amount. The quantity, however, of wheat produced is nearly all consumed between harvests; and the annual supply bears a very large ratio to the existing quantity. Consequently the price of wheat will be very seriously affected by the quantity coming from the annual product.

Finally, there are commodities of which, though capable of being increased or diminished to a great and even an unlimited extent, the value never depends upon anything but demand and supply. This is the case, in particular, with the commodity Labor, of the value of which we have treated copiously in the preceding book; and there are many cases besides in which we shall find it necessary to call in this principle to solve difficult questions of exchange value. This will be particularly exemplified when we treat of International Values; that is, of the terms of interchange between things produced in different countries, or, to speak more generally, in distant places.

§ 5. Commodities which are Susceptible of Indefinite Multiplication without Increase of Cost. Law of their Value Cost of Production.

When the production of a commodity is the effect of labor and expenditure, whether the commodity is susceptible of unlimited multiplication or not, there is a minimum value which is the essential condition of its being permanently produced. The value at any particular time is the result of supply and demand, and is always that which is necessary to create a market for the existing supply. But unless that value is sufficient to repay the Cost of Production, and to afford, besides, the ordinary expectation of profit, the commodity will not continue to be produced. Capitalists will not go on permanently producing at a loss. When such profit is evidently not to be had, if people do not actually withdraw their capital, they at least abstain from replacing it when consumed. The cost of production, together with the ordinary profit, may, therefore, be called the necessary price or value of all things made by labor and capital. Nobody willingly produces in the prospect of loss.

When a commodity is not only made by labor and capital, but can be made by them in indefinite quantity, this Necessary Value, the minimum with which the producers will be content, is also, if competition is free and active, the maximum which they can expect. If the value of a commodity is such that it repays the cost of production not only with the customary but with a higher rate of profit, capital rushes to share in this extra gain, and, by increasing the supply of the article, reduces its value. This is not a mere supposition or surmise, but a fact familiar to those conversant with commercial operations. Whenever a new line of business presents itself, offering a hope of unusual profits, and whenever any established trade or manufacture is believed to be yielding a greater profit than customary, there is sure to be in a short time so large a production or importation of the commodity as not only destroys the extra profit, but generally goes beyond the mark, and sinks the value as much too low as it had before been raised too high, until the over-supply is corrected by a total or partial suspension of further production. As already intimated,(212) these variations in the quantity produced do not presuppose or require that any person should change his employment. Those whose business is thriving, increase their produce by availing themselves more largely of their credit, while those who are not making the ordinary profit, restrict their operations, and (in manufacturing phrase) work short time. In this mode is surely and speedily effected the equalization, not of profits, perhaps, but of the expectations of profit, in different occupations.

As a general rule, then, things tend to exchange for one another at such values as will enable each producer to be repaid the cost of production with the ordinary profit; in other words, such as will give to all producers the same rate of profit on their outlay. But in order that the profit may be equal where the outlay, that is, the cost of production, is equal, things must on the average exchange for one another in the ratio of their cost of production; things of which the cost of production is the same, must be of the same value.

Mr. Mill has here used cost of production almost exactly in the sense of cost of labor, and as excluding profit (while in the next chapter he includes some part of profit in the analysis). It will be well, for the sake of definiteness, to collect the phrases above in which he describes cost of production: “Unless that value is sufficient to repay the cost of production, and to afford, besides, the ordinary expectation of profit, the commodity will not continue to be produced”; “the cost of production, together with the ordinary profit, may therefore be called the necessary price, or value”; “it repays the cost of production, not only with the customary, but with a higher rate of profit”; “the cost of production with the ordinary profit—in other words, such as will give to all producers the same rate of profit on their outlay”; “that the profit may be equal where the outlay, that is, the cost of production, is equal.” This is a view which distinctly uses cost of production in the sense of the outlay to the capitalist, or cost of labor. In no other way can profit vary with “cost of production” than in the sense that it is what a given article “costs to the capitalist”; but that is Mr. Mill’s definition of cost of labor (p. 227). It is, however, very puzzling when in the next section he speaks of “the natural value, that is, the cost of production.” Above, value included cost of production and profit also. Having thus pointed out what is Mr. Mill’s conception of cost of production, it will remain for us in the next chapter to consider whether any other view of it is more satisfactory.

Adam Smith and Ricardo have called that value of a thing which is proportional to its cost of production, its Natural Value (or its Natural Price). They meant by this, the point about which the value oscillates, and to which it always tends to return; the center value, toward which, as Adam Smith expresses it, the market value of a thing is constantly gravitating; and any deviation from which is but a temporary irregularity which, the moment it exists, sets forces in motion tending to correct it. On an average of years sufficient to enable the oscillations on one side of the central line to be compensated by those on the other, the market value agrees with the natural value; but it very seldom coincides exactly with it at any particular time. The sea everywhere tends to a level, but it never is at an exact level; its surface is always ruffled by waves, and often agitated by storms. It is enough that no point, at least in the open sea, is permanently higher than another. Each place is alternately elevated and depressed; but the ocean preserves its level.

§ 6. The Value of these Commodities confirm, in the long run, to their Cost of Production through the operation of Demand and Supply.

The latent influence by which the values of things are made to conform in the long run to the cost of production is the variation that would otherwise take place in the supply of the commodity. The supply would be increased if the thing continued to sell above the ratio of its cost of production, and would be diminished if it fell below that ratio.

If one dollar covers the expense of making one spade, then when a spade, by virtue of a sudden demand, rises in value to one dollar and ten cents, the manufacturers get an extra profit of ten cents. This could not long remain so, because other capital would enter this industry, and so increase the supply that one spade would sell for only one dollar; then all would receive the average profit. If, owing to a cessation of demand for spades, the price fell to ninety cents, then the manufacturers would lose ten cents on each one made and sold. Thereupon they would cease to do a losing business, capital would be withdrawn, and spades would not be made until the supply was suited to the necessary expense of making them (one dollar). In this way, whenever there is a departure of the value from the normal cost, there is set in motion ipso facto a series of forces which automatically restores the value to that cost. So here again we see the nature of an economic law: the value may not often correspond exactly with cost of production, but there is a tendency in all values to conform to that cost, and this tendency they irresistibly obey. A body possessing weight does not move downward under all circumstances (stones may be thrown upward), but the law of gravitation holds true, nevertheless.

There is no need that there should be any actual alteration of supply; and when there is, the alteration, if permanent, is not the cause but the consequence of the alteration in value. If, indeed, the supply could not be increased, no diminution in the cost of production would lower the value; but there is by no means any necessity that it should. The mere possibility often suffices; the dealers are aware of what would happen, and their mutual competition makes them anticipate the result by lowering the price.

Before the electric light was yet known as a feasible means of lighting (in 1878), the mere rumor of Edison’s invention, before it was made public, and long before it became practicable, caused a serious fall in the price of gas stocks.

It is, therefore, strictly correct to say that the value of things which can be increased in quantity at pleasure does not depend (except accidentally, and during the time necessary for production to adjust itself) upon demand and supply; on the contrary, demand and supply depend upon it. There is a demand for a certain quantity of the commodity at its natural or cost value, and to that the supply in the long run endeavors to conform.

Mr. Cairnes(213) fitly says: “The supply of a commodity always tends to adapt itself to the demand at the normal price. I may here say briefly that by the normal price of a commodity I mean that price which suffices, and no more than suffices, to yield to the producers what is considered to be the average and usual remuneration on such sacrifices as they undergo.”

When at any time it fails of so conforming, it is either from miscalculation, or from a change in some of the elements of the problem; either in the natural value, that is, in the cost of production, or in the demand, from an alteration in public taste, or in the number or wealth of the consumers. If a value different from the natural value be necessary to make the demand equal to the supply, the market value will deviate from the natural value; but only for a time, for the permanent tendency of supply is to conform itself to the demand which is found by experience to exist for the commodity when selling at its natural value. If the supply is either more or less than this, it is so accidentally, and affords either more or less than the ordinary rate of profit, which, under free and active competition, can not long continue to be the case.

To recapitulate: demand and supply govern the value of all things which can not be indefinitely increased; except that even for them, when produced by industry, there is a minimum value, determined by the cost of production. But in all things which admit of indefinite multiplication, demand and supply only determine the perturbations of value during a period which can not exceed the length of time necessary for altering the supply. While thus ruling the oscillations of value, they themselves obey a superior force, which makes value gravitate toward Cost of Production, and which would settle it and keep it there, if fresh disturbing influences were not continually arising to make it again deviate.

II. Ultimate Analysis Of Cost Of Production

§ 1. Of Labor, the principal Element in Cost of Production.

The component elements of Cost of Production have been set forth in the First Part of this inquiry.(214) The principal of them, and so much the principal as to be nearly the sole, was found to be Labor. What the production of a thing costs to its producer, or its series of producers, is the labor expended in producing it. If we consider as the producer the capitalist who makes the advances, the word Labor may be replaced by the word Wages: what the produce costs to him, is the wages which he has had to pay. At the first glance, indeed, this seems to be only a part of his outlay, since he has not only paid wages to laborers, but has likewise provided them with tools, materials, and perhaps buildings. These tools, materials, and buildings, however, were produced by labor and capital; and their value, like that of the article to the production of which they are subservient, depends on cost of production, which again is resolvable into labor. The cost of production of broadcloth does not wholly consist in the wages of weavers; which alone are directly paid by the cloth-manufacturer. It consists also of the wages of spinners and wool-combers, and, it may be added, of shepherds, all of which the clothier has paid for in the price of yarn. It consists, too, of the wages of builders and brick-makers, which he has reimbursed in the contract price of erecting his factory. It partly consists of the wages of machine-makers, iron-founders, and miners. And to these must be added the wages of the carriers who transported any of the means and appliances of the production to the place where they were to be used, and the product itself to the place where it is to be sold.

Confirmation is here given, in the above words, of the opinion that, in Mr. Mill’s mind, Cost of Production was looked at wholly from the stand-point of the capitalist, and was identical with Cost of Labor to the capitalist.

The value of commodities, therefore, depends principally (we shall presently see whether it depends solely) on the quantity of labor required for their production, including in the idea of production that of conveyance to the market. But since the cost of production to the capitalist is not labor but wages, and since wages may be either greater or less, the quantity of labor being the same, it would seem that the value of the product can not be determined solely by the quantity of labor, but by the quantity together with the remuneration, and that values must partly depend on wages.

Now the relation of one thing to another can not be altered by any cause which affects them both alike. A rise or fall of general wages is a fact which affects all commodities in the same manner, and therefore affords no reason why they should exchange for each other in one rather than in another proportion. Though there is no such thing as a general rise of values, there is such a thing as a general rise of prices. As soon as we form distinctly the idea of values, we see that high or low wages can have nothing to do with them; but that high wages make high prices, is a popular and widely spread opinion. The whole amount of error involved in this proposition can only be seen thoroughly when we come to the theory of money; at present we need only say that if it be true, there can be no such thing as a real rise of wages; for if wages could not rise without a proportional rise of the price of everything, they could not, for any substantial purpose, rise at all. It must be remembered, too, that general high prices, even supposing them to exist, can be of no use to a producer or dealer, considered as such; for, if they increase his money returns, they increase in the same degree all his expenses. There is no mode in which capitalists can compensate themselves for a high cost of labor, through any action on values or prices. It can not be prevented from taking its effect in low profits. If the laborers really get more, that is, get the produce of more labor, a smaller percentage must remain for profit.

§ 2. Wages affect Values, only if different in different employments; “non-competing groups.”

Although, however, general wages, whether high or low, do not affect values, yet if wages are higher in one employment than another, or if they rise or fall permanently in one employment without doing so in others, these inequalities do really operate upon values. Things, for example, which are made by skilled labor, exchange for the produce of a much greater quantity of unskilled labor, for no reason but because the labor is more highly paid. We have before remarked that the difficulty of passing from one class of employments to a class greatly superior has hitherto caused the wages of all those classes of laborers who are separated from one another by any very marked barrier to depend more than might be supposed upon the increase of the population of each class considered separately, and that the inequalities in the remuneration of labor are much greater than could exist if the competition of the laboring people generally could be brought practically to bear on each particular employment. It follows from this that wages in different employments do not rise or fall simultaneously, but are, for short and sometimes even for long periods, nearly independent of one another. All such disparities evidently alter the relative cost of production of different commodities, and will therefore be completely represented in their natural or average value.

This is again a clear recognition of the influence of Mr. Cairnes’s theory of “non-competing groups.”(215)

Wages do enter into value. The relative wages of the labor necessary for producing different commodities affect their value just as much as the relative quantities of labor. It is true, the absolute wages paid have no effect upon values; but neither has the absolute quantity of labor. If that were to vary simultaneously and equally in all commodities, values would not be affected. If, for instance, the general efficiency of all labor were increased, so that all things without exception could be produced in the same quantity as before with a smaller amount of labor, no trace of this general diminution of cost of production would show itself in the values of commodities.

§ 3. Profits an element in Cost of Production.

Thus far of labor or wages as an element in cost of production. But in our analysis, in the First Book, of the requisites of production, we found that there is another necessary element in it besides labor. There is also capital; and this being the result of abstinence, the produce, or its value, must be sufficient to remunerate, not only all the labor required, but the abstinence of all the persons by whom the remuneration of the different classes of laborers was advanced. The return from abstinence is Profit. And profit, we have also seen, is not exclusively the surplus remaining to the capitalist after he has been compensated for his outlay, but forms, in most cases, no unimportant part of the outlay itself. The flax-spinner, part of whose expenses consists of the purchase of flax and of machinery, has had to pay, in their price, not only the wages of the labor by which the flax was grown and the machinery made, but the profits of the grower, the flax-dresser, the miner, the iron-founder, and the machine-maker. All these profits, together with those of the spinner himself, were again advanced by the weaver, in the price of his material—linen yarn; and along with them the profits of a fresh set of machine-makers, and of the miners and iron-workers who supplied them with their metallic material. All these advances form part of the cost of production of linen. Profits, therefore, as well as wages, enter into the cost of production which determines the value of the produce.

§ 4. Cost of Production properly represented by sacrifice, or cost, to the Laborer as well as to the Capitalist; the relation of this conception to the Cost of Labor.

In discussing Cost of Labor (supra, pp. 225, 226), Mr. Mill found that the advances of the immediate producer consisted not only of wages, but also of tools, materials, etc., in the price of which he was including the profits of an auxiliary capitalist who advanced the capital for making these tools, etc. But, then, if a line of division were to be passed down through all these advances, separating wages from profits, he urged that, if all the capitalists (auxiliary and immediate both) were one, all the advances of the capitalist might be considered as wages. Profits did not form a part of the outlay to the capitalists in the former analysis. And this seems correct enough. Now, however, he suggests that the outlay of the immediate producers should include the profit of the auxiliary capitalist. More than this, Mr. Mill now includes in cost to the capitalist the profit of the immediate capitalist. For example, in his illustration of the manufacture of linen, he includes not merely the profit of the auxiliary capital engaged in spinning and weaving, but the profit of the immediate and last capitalist, the linen-manufacturer, also. This includes in the cost of producing an article a profit not realized until after the commodity is produced.

It is now time to give a more correct idea of cost of production. Every one admits, for example, that the “cost of production” of wheat is less in the United States than in England. If, for instance, three men with a capital of one hundred dollars may on a plot of ground, A, in the United States produce one hundred bushels of wheat, it will happen that the same men and capital will only produce sixty bushels on ground, B, in England.

In ordinary language, then, we say that the cost of production is greater in England than in the United States, because the same labor and capital here produce one hundred bushels for sixty in England; or, what amounts to the same thing, that less labor and capital could produce sixty bushels in the United States than sixty bushels in England. If we suppose that one fourth of the crop is profit, and three fourths is assigned to wages in both countries, then in the United States the one hundred dollars of capital receives twenty-five bushels of profit, while in England it receives only fifteen; and the three men receive as wages in the United States twenty-five bushels each, while in England they receive only fifteen bushels each. The first important induction to be made is that where cost of production is low, wages and profits are high. The high productiveness of extractive industries in the United States is the reason why wages and profits are higher here than in older countries.

Now the second important question is, Is cost of production made up of wages and profits, and is it true that the cost rises with a rise of wages and profits? Certainly not. Wages and profits are both higher in the United States than in England, but no one is so absurd as to say that the cost of production of wheat (as above explained) is higher here than there. It is exactly because cost of production of wheat is lower in the United States that wages and profits measured in wheat are higher here than in England. Therefore, it can not be granted, as Mr. Mill expounds the doctrine, that cost of production is made up of wages and profits. When we speak of an increased cost of production of a given article, we mean that its production requires more labor and capital than before; and of a decrease in cost of production, that it requires less labor and capital than before; meaning by “more labor” that a given quality of labor is exerted for a longer or shorter time, and by “more capital” that a greater or less quantity of wealth abstained from is employed for a longer or shorter time; or, in other words, that laborers and capitalists undergo more or less sacrifice in exertion and abstinence, respectively, to attain a given result. This is the contribution to cost of production made by Mr. Cairnes, and briefly defined as follows: “In the case of labor, the cost of producing a given commodity will be represented by the number of average laborers employed in its production—regard at the same time being had to the severity of the work and the degree of risk it involves—multiplied by the duration of their labors. In that of abstinence, the principle is analogous; the sacrifice will be measured by the quantity of wealth abstained from, taken in connection with the risk incurred, and multiplied by the duration of the abstinence.”(216)

This view of cost of production takes into consideration, in the act of production, what Mr. Mill does not include, the cost, or real sacrifice, to the laborer as well as to the capitalist. It may, then, be well to state the relations of cost of production, taken in this better sense, to value.

Within competing groups, where there is free choice for labor and capital to select the most remunerative occupations, the hardest and most disagreeable employments will be best paid, and the wages and profits will be in proportion to the sacrifice involved in each case. If so, the amount paid in wages and profits represents the sacrifices in each case. Now, the aggregate product of an industry is the source from which is drawn its wages and profits: the aggregate wages and profits, therefore, must vary with the value of the total product. If the total value depart from the sum hitherto sufficient to pay the given wages and profits, then some will be paid proportionally less than their sacrifice. The value of a commodity, therefore, within the competing group, must conform to the costs of production. If, for example (a), the value at any time were such as not to give the laborer the usual equivalent for his sacrifice, he would change his employment to another within the group where he could get it; if (b) the share of the capitalist were at any time insufficient to give him the usual reward for his abstinence, he would change the investment of his capital. Therefore, within such limits as allow a free competition of labor and capital, value must conform itself to cost of production.

Not so, however, with the products of non-competing industrial groups. As shown by Mr. Mill, labor does not pass freely from one employment to another; and it must be said that capital does not either, although vastly more ready to move than labor. In a large and thinly settled country capital does not move freely over the whole area of industry; if it did, different rates of profit would not prevail, as we all know they do, in the United States. Now, as before stated, the total value of the commodities resulting from the exertions of each group of producers is the source from which wages and profits are drawn. The aggregate wages and profits in each industry will vary with the value of the aggregate products. But this total value depends upon what it will exchange for of the products of other groups; that is, this value depends on the reciprocal demand of one group for the commodities of the other groups, as compared with the demand of the other groups for its products. For example, although cost of production is low in group A, if the demand from outside groups were to be strong, the exchange value of A’s products would rise, and A would get more of other goods in exchange; that is, the total produce is large, but a second increment, arising from a higher exchange value, is to be shared among A’s laborers and capitalists. A few years ago, about 1878-1879, the value of wheat in the United States rose because of the increased demand from Europe, where the harvests had been unusually deficient. There had been no falling off in the productiveness of the farming industry of the United States to cause the increased price; but the relative demand of other industrial groups for wheat, the product of the farming industry, raised the exchange value of wheat, and so increased the industrial rewards of those engaged as laborers and capitalists in farming. So it is to be concluded that since there is no free movement of labor and capital between non-competing groups, wages and profits may constantly remain at rates which are not in correspondence with the actual sacrifice, or cost, to labor and capital in different groups; hence, their products do not exchange for each other in proportion to their costs of production. Reciprocal demand is the law of their value.

It will be said, at once, that the foregoing conception of cost of production is entirely opposed to the language of practical men of affairs. They constantly speak of higher or lower wages as increasing their cost of production, or as affecting their ability to compete with foreigners. So universal a usage implies a foundation of truth which demands attention. Wages do represent cost to the capitalist, that is, the chief part of the outlay he makes in order to get a given return; but we have already seen this, and, in the language of Political Economy, termed it “cost of labor” to the capitalist. When the business world use the phrase cost of production, they use it in the sense of cost of labor, as hitherto explained. When they are obliged by strikers to pay more wages, they say that it increases their “cost of production,” meaning the cost to them of getting their product, and that it affects their profits. This, then, will show that there is no objection to be urged, in its true sense, against the phrase cost of production, arising from its misuse in the common language of business.

The real connection between the proper conception of cost of production and cost of labor is, however, worth attention. It touches cost of labor through that one of its elements called “efficiency of labor.” The more productive an industry is, the higher its wages and profits may be, and it is exactly at this point that more attention should be given to the relations of labor and capital. If productiveness can be increased, higher wages as well as higher profits are possible. The proper understanding of the idea that where cost of production is low wages and profits are high, throws a flood of light on many industrial questions in the United States. In the connection in which it stands, as I have shown, to cost of labor, it means that if commodities can be produced at a less sacrifice to labor and capital by the use of machinery and new processes, higher wages are consistent with a lower price of the given product. It explains the fact that, owing to skill or natural resources, labor, although paid much higher rates, can produce articles cheaper than laborers who are less highly paid. Mr. Brassey(217) has pointed out that English wages are higher than on the Continent; and yet England, through low cost of production, owing to skill, natural resources, etc., can produce so much more of commodities for a given outlay that (while keeping her usual rate of profit) she can generally undersell her competitors who employ cheaper labor. The same observations apply to the United States; but the question of foreign competition will be further discussed (Book III, Chap. XX) after we have studied international trade and values.

“And here it may be well to state precisely what is to be understood by a ‘fluctuation of the market,’ as distinguished from those changes of normal price which we have been considering. Normal price, as we have seen, is governed, according to the circumstances of the case [as to whether there is free industrial competition or not], by one or other of two causes—cost of production and reciprocal demand. A change in normal price, therefore, is a change which is the consequence of an alteration in one or other of these conditions. So long as the determining condition—be it cost of production or reciprocal demand—remains constant, the normal price must be considered as remaining constant; but, the normal price remaining constant, the market price (which, as we have seen, depends on the opinion of dealers respecting the state of supply and demand in relation to the particular article) may undergo a change—may deviate, that is to say, either upward or downward from the normal level. Such changes of price, occurring while the permanent conditions of production remain unaffected, can only be temporary, calling into action, as they do, forces which at once tend to restore the normal state of things: they may therefore be properly described as ‘fluctuations of the market.’ ”(218)

§ 5. When profits vary from Employment to Employment, or are spread over unequal lengths of Time, they affect Values accordingly.

Value, however, being purely relative, can not depend upon absolute profits, no more than upon absolute wages, but upon relative profits only. High general profits can not, any more than high general wages, be a cause of high values, because high general values are an absurdity and a contradiction. In so far as profits enter into the cost of production of all things, they can not affect the value of any. It is only by entering in a greater degree into the cost of production of some things than of others, that they can have any influence on value.

Profits, however, may enter more largely into the conditions of production of one commodity than of another, even though there be no difference in the rate of profit between the two employments. The one commodity may be called upon to yield a profit during a longer period of time than the other. The example by which this case is usually illustrated is that of wine. Suppose a quantity of wine and a quantity of cloth, made by equal amounts of labor, and that labor paid at the same rate. The cloth does not improve by keeping; the wine does. Suppose that, to attain the desired quality, the wine requires to be kept five years. The producer or dealer will not keep it, unless at the end of five years he can sell it for as much more than the cloth as amounts to five years’ profit, accumulated at compound interest. The wine and the cloth were made by the same original outlay. Here, then, is a case in which the natural values, relatively to one another, of two commodities, do not conform to their cost of production alone, but to their cost of production plus something else—unless, indeed, for the sake of generality in the expression, we include the profit which the wine-merchant foregoes during the five years, in the cost of production of the wine, looking upon it as a kind of additional outlay, over and above his other advances, for which outlay he must be indemnified at last.

Regarding cost of production as the amounts of labor and abstinence required in production, and not as Mr. Mill regards it, as the amounts of wages and profits, the above is simply a case where, in the production of wine, there is a longer duration of the abstinence than in the production of cloth. If there is a free movement of labor and capital between the two industries, they will exchange for each other in proportion to the sacrifices involved; so that the wine would exchange for more of cloth, because there was more sacrifice undergone. The same explanation also holds good in the following illustration:

All commodities made by machinery are assimilated, at least approximately, to the wine in the preceding example. In comparison with things made wholly by immediate labor, profits enter more largely into their cost of production. Suppose two commodities, A and B, each requiring a year for its production, by means of a capital which we will on this occasion denote by money, and suppose it to be £1,000. A is made wholly by immediate labor, the whole £1,000 being expended directly in wages. B is made by means of labor which cost £500 and a machine which cost £500, and the machine is worn out by one year’s use. The two commodities will be of exactly the same value, which, if computed in money, and if profits are 20 per cent per annum, will be £1,200. But of this £1,200, in the case of A, only £200, or one sixth, is profit; while in the case of B there is not only the £200, but as much of £500 (the price of the machine) as consisted of the profits of the machine-maker; which, if we suppose the machine also to have taken a year for its production, is again one sixth. So that in the case of A only one sixth of the entire return is profit, while in B the element of profit comprises not only a sixth of the whole, but an additional sixth of a large part.

From the unequal proportion in which, in different employments, profits enter into the advances of the capitalist, and therefore into the returns required by him, two consequences follow in regard to value. (1). One is, that commodities do not exchange in the ratio simply of the quantities of labor required to produce them; not even if we allow for the unequal rates at which different kinds of labor are permanently remunerated.

(2.) A second consequence is, that every rise or fall of general profits will have an effect on values. Not, indeed, by raising or lowering them generally (which, as we have so often said, is a contradiction and an impossibility), but by altering the proportion in which the values of things are affected by the unequal lengths of time for which profit is due. When two things, though made by equal labor, are of unequal value because the one is called upon to yield profit for a greater number of years or months than the other, this difference of value will be greater when profits are greater, and less when they are less. The wine which has to yield five years’ profit more than the cloth will surpass it in value much more if profits are forty per cent than if they are only twenty.

It follows from this that even a general rise of wages, when it involves a real increase in the cost of labor, does in some degree influence values. It does not affect them in the manner vulgarly supposed, by raising them universally; but an increase in the cost of labor lowers profits, and therefore lowers in natural values the things into which profits enter in a greater proportion than the average, and raises those into which they enter in a less proportion than the average. All commodities in the production of which machinery bears a large part, especially if the machinery is very durable, are lowered in their relative value when profits fall; or, what is equivalent, other things are raised in value relatively to them. This truth is sometimes expressed in a phraseology more plausible than sound, by saying that a rise of wages raises the value of things made by labor in comparison with those made by machinery. But things made by machinery, just as much as any other things, are made by labor—namely, the labor which made the machinery itself—the only difference being that profits enter somewhat more largely into the production of things for which machinery is used, though the principal item of the outlay is still labor.

§ 6. Occasional Elements in Cost of Production; taxes and ground-rent.

Cost of Production consists of several elements, some of which are constant and universal, others occasional. The universal elements of cost of production are the wages of the labor, and the profits of the capital. The occasional elements are taxes, and any extra cost occasioned by a scarcity value of some of the requisites. Besides the natural and necessary elements in cost of production—labor and profits—there are others which are artificial and casual, as, for instance, a tax. The taxes on hops and malt are as much a part of the cost of production of those articles as the wages of the laborers. The expenses which the law imposes, as well as those which the nature of things imposes, must be reimbursed with the ordinary profit from the value of the produce, or the things will not continue to be produced. But the influence of taxation on value is subject to the same conditions as the influence of wages and of profits. It is not general taxation, but differential taxation, that produces the effect. If all productions were taxed so as to take an equal percentage from all profits, relative values would be in no way disturbed. If only a few commodities were taxed, their value would rise; and if only a few were left untaxed, their value would fall.

But the case in which scarcity value chiefly operates in adding to cost of production is the case of natural agents. These, when unappropriated, and to be had for the taking, do not enter into the cost of production, save to the extent of the labor which may be necessary to fit them for use. Even when appropriated, they do not (as we have already seen) bear a value from the mere fact of the appropriation, but only from scarcity—that is, from limitation of supply. But it is equally certain that they often do bear a scarcity value.

No one can deny that rent sometimes enters into cost of production [of other than agricultural products]. If I buy or rent a piece of ground, and build a cloth-manufactory on it, the ground-rent forms legitimately a part of my expenses of production, which must be repaid by the product. And since all factories are built on ground, and most of them in places where ground is peculiarly valuable, the rent paid for it must, on the average, be compensated in the values of all things made in factories. In what sense it is true that rent does not enter into the cost of production or affect the value of agricultural produce will be shown in the succeeding chapter.

These occasional elements in cost of production, such as taxes, insurance, ground-rent, etc., are to be considered as just so much of an increase in the quantity of capital required for the operation involved in the particular production, and, consequently, result in an increased cost of production, because there is either more abstinence, or abstinence for a longer time, to be rewarded. These elements, therefore, if they are not universal (or common to all articles), will affect the exchange value of commodities, wherever there is a free competition.

III. Of Rent, In Its Relation To Value

§ 1. Commodities which are susceptible of indefinite Multiplication, but not without increase of Cost. Law of their Value, Cost of Production in the most unfavorable existing circumstances.

We have investigated the laws which determine the value of two classes of commodities—the small class which, being limited to a definite quantity, have their value entirely determined by demand and supply, save that their cost of production (if they have any) constitutes a minimum below which they can not permanently fall; and the large class, which can be multiplied ad libitum by labor and capital, and of which the cost of production fixes the maximum as well as the minimum at which they can permanently exchange [if there be free competition]. But there is still a third kind of commodities to be considered—those which have, not one, but several costs of production; which can always be increased in quantity by labor and capital, but not by the same amount of labor and capital; of which so much may be produced at a given cost, but a further quantity not without a greater cost. These commodities form an intermediate class, partaking of the character of both the others. The principal of them is agricultural produce. We have already made abundant reference to the fundamental truth that in agriculture, the state of the art being given, doubling the labor does not double the produce; that, if an increased quantity of produce is required, the additional supply is obtained at a greater cost than the first. Where a hundred quarters of corn are all that is at present required from the lands of a given village, if the growth of population made it necessary to raise a hundred more, either by breaking up worse land now uncultivated, or by a more elaborate cultivation of the land already under the plow, the additional hundred, or some part of them, at least, might cost double or treble as much per quarter as the former supply.

If the first hundred quarters were all raised at the same expense (only the best land being cultivated), and if that expense would be remunerated with the ordinary profit by a price of 20_s._ the quarter, the natural price of wheat, so long as no more than that quantity was required, would be 20_s._; and it could only rise above or fall below that price from vicissitudes of seasons, or other casual variations in supply. But if the population of the district advanced, a time would arrive when more than a hundred quarters would be necessary to feed it. We must suppose that there is no access to any foreign supply. By the hypothesis, no more than a hundred quarters can be produced in the district, unless by either bringing worse land into cultivation, or altering the system of culture to a more expensive one. Neither of these things will be done without a rise in price. This rise of price will gradually be brought about by the increasing demand. So long as the price has risen, but not risen enough to repay with the ordinary profit the cost of producing an additional quantity, the increased value of the limited supply partakes of the nature of a scarcity value. Suppose that it will not answer to cultivate the second best land, or land of the second degree of remoteness, for a less return than 25_s._ the quarter; and that this price is also necessary to remunerate the expensive operations by which an increased produce might be raised from land of the first quality. If so, the price will rise, through the increased demand, until it reaches 25_s._ That will now be the natural price; being the price without which the quantity, for which society has a demand at that price, will not be produced. At that price, however, society can go on for some time longer; could go on perhaps forever, if population did not increase. The price, having attained that point, will not again permanently recede (though it may fall temporarily from accidental abundance); nor will it advance further, so long as society can obtain the supply it requires without a second increase of the cost of production.

In the case supposed, different portions of the supply of corn have different costs of production. Though the twenty, or fifty, or one hundred and fifty quarters additional have been produced at a cost proportional to 25_s._, the original hundred quarters per annum are still produced at a cost only proportional to 20_s._ This is self-evident, if the original and the additional supply are produced on different qualities of land. It is equally true if they are produced on the same land. Suppose that land of the best quality, which produced one hundred quarters at 20_s._, has been made to produce one hundred and fifty by an expensive process, which it would not answer to undertake without a price of 25_s._ The cost which requires 25_s._ is incurred for the sake of fifty quarters alone: the first hundred might have continued forever to be produced at the original cost, and with the benefit, on that quantity, of the whole rise of price caused by the increased demand: no one, therefore, will incur the additional expense for the sake of the additional fifty, unless they alone will pay for the whole of it. The fifty, therefore, will be produced at their natural price, proportioned to the cost of their production; while the other hundred will now bring in 5_s._ a quarter more than their natural price—than the price corresponding to, and sufficing to remunerate, their lower cost of production.

If the production of any, even the smallest, portion of the supply requires as a necessary condition a certain price, that price will be obtained for all the rest. We are not able to buy one loaf cheaper than another because the corn from which it was made, being grown on a richer soil, has cost less to the grower. The value, therefore, of an article (meaning its natural, which is the same with its average value) is determined by the cost of that portion of the supply which is produced and brought to market at the greatest expense. This is the Law of Value of the third of the three classes into which all commodities are divided.

§ 2. Such commodities, when Produced in circumstances more favorable, yield a Rent equal to the difference of Cost.

If the portion of produce raised in the most unfavorable circumstances obtains a value proportioned to its cost of production; all the portions raised in more favorable circumstances, selling as they must do at the same value, obtain a value more than proportioned to their cost of production.

The owners, however, of those portions of the produce enjoy a privilege; they obtain a value which yields them more than the ordinary profit. The advantage depends on the possession of a natural agent of peculiar quality, as, for instance, of more fertile land than that which determines the general value of the commodity; and when this natural agent is not owned by themselves, the person who does own it is able to exact from them, in the form of rent, the whole extra gain derived from its use. We are thus brought by another road to the Law of Rent, investigated in the concluding chapter of the Second Book. Rent, we again see, is the difference between the unequal returns to different parts of the capital employed on the soil. Whatever surplus any portion of agricultural capital produces, beyond what is produced by the same amount of capital on the worst soil, or under the most expensive mode of cultivation, which the existing demands of society compel a recourse to, that surplus will naturally be paid as rent from that capital, to the owner of the land on which it is employed.

The discussion of rent is here followed wholly from the point of view of value, while before (Book II, Chap. VI) the law of rent was reached through a limitation of the quantity of land due to the influence of population. In the former case the rent and produce were stated in bushels. By introducing price now (as the convenient symbol of value), instead of the separate increased demands of population in our illustration than used (p. 240), it will be seen how the same operation, looking at it solely in respect to value, brings us to the same law:

Price A B C D per Bushel. 24 18 12 6 bushels bushels bushels bushels Total Rent. Total Rent. Total Rent. Total value of value of value of value of product. product. product. product. $1.00 $24.00 $0.00 .... .... .... .... .... $1.33 $32.00 $8.00 $24.00 $0.00 .... .... .... $2.00 $48.00 $24.00 $36.00 $12.00 $24.00 $0.00 .... $4.00 $96.00 $72.00 $72.00 $48.00 $48.00 $24.00 $24.00

It was long thought by political economists, among the rest even by Adam Smith, that the produce of land is always at a monopoly value, because (they said), in addition to the ordinary rate of profit, it always yields something further for rent. This we now see to be erroneous. A thing can not be at a monopoly value when its supply can be increased to an indefinite extent if we are only willing to incur the cost. As long as there is any land fit for cultivation, which at the existing price can not be profitably cultivated at all, there must be some land a little better, which will yield the ordinary profit, but allow nothing for rent: and that land, if within the boundary of a farm, will be cultivated by the farmer; if not so, probably by the proprietor, or by some other person on sufferance. Some such land at least, under cultivation, there can scarcely fail to be.

Rent, therefore, forms no part of the cost of production which determines the value of agricultural produce. The land or the capital most unfavorably circumstanced among those actually employed, pays no rent, and that land or capital determines the cost of production which regulates the value of the whole produce. Thus rent is, as we have already seen, no cause of value, but the price of the privilege which the inequality of the returns to different portions of agricultural produce confers on all except the least favored portion.

Rent, in short, merely equalizes the profits of different farming capitals, by enabling the landlord to appropriate all extra gains occasioned by superiority of natural advantages. If all landlords were unanimously to forego their rent, they would but transfer it to the farmers, without benefiting the consumer; for the existing price of corn would still be an indispensable condition of the production of part of the existing supply, and if a part obtained that price the whole would obtain it. Rent, therefore, unless artificially increased by restrictive laws, is no burden on the consumer: it does not raise the price of corn, and is no otherwise a detriment to the public than inasmuch as if the state had retained it, or imposed an equivalent in the shape of a land-tax, it would then have been a fund applicable to general instead of private advantage.

The nationalization of the land, consequently, would not benefit the laboring-classes a whit through lowering the price to them, or any consumer, of food or agricultural produce.

§ 3. Rent of Mines and Fisheries and ground-rent of Buildings, and cases of gain analogous to Rent.

Agricultural productions are not the only commodities which have several different costs of production at once, and which, in consequence of that difference, and in proportion to it, afford a rent. Mines are also an instance. Almost all kinds of raw material extracted from the interior of the earth—metals, coals, precious stones, etc.—are obtained from mines differing considerably in fertility—that is, yielding very different quantities of the product to the same quantity of labor and capital. There are, perhaps, cases in which it is impossible to extract from a particular vein, in a given time, more than a certain quantity of ore, because there is only a limited surface of the vein exposed, on which more than a certain number of laborers can not be simultaneously employed. But this is not true of all mines. In collieries, for example, some other cause of limitation must be sought for. In some instances the owners limit the quantity raised, in order not too rapidly to exhaust the mine; in others there are said to be combinations of owners, to keep up a monopoly price by limiting the production. Whatever be the causes, it is a fact that mines of different degrees of richness are in operation, and since the value of the produce must be proportional to the cost of production at the worst mine (fertility and situation taken together), it is more than proportional to that of the best. All mines superior in produce to the worst actually worked will yield, therefore, a rent equal to the excess. They may yield more; and the worst mine may itself yield a rent. Mines being comparatively few, their qualities do not graduate gently into one another, as the qualities of land do; and the demand may be such as to keep the value of the produce considerably above the cost of production at the worst mine now worked, without being sufficient to bring into operation a still worse. During the interval, the produce is really at a scarcity value.

Fisheries are another example. Fisheries in the open sea are not appropriated, but fisheries in lakes or rivers almost always are so, and likewise oyster-beds or other particular fishing-grounds on coasts. We may take salmon-fisheries as an example of the whole class. Some rivers are far more productive in salmon than others. None, however, without being exhausted, can supply more than a very limited demand. All others, therefore, will, if appropriated, afford a rent equal to the value of their superiority.

Both in the case of mines and of fisheries, the natural order of events is liable to be interrupted by the opening of a new mine, or a new fishery, of superior quality to some of those already in use. In this case, when things have permanently adjusted themselves, the result will be that the scale of qualities which supply the market will have been cut short at the lower end, while a new insertion will have been made in the scale at some point higher up; and the worst mine or fishery in use—the one which regulates the rents of the superior qualities and the value of the commodity—will be a mine or fishery of better quality than that by which they were previously regulated.

The ground-rent of a building, and the rent of a garden or park attached to it, will not be less than the rent which the same land would afford in agriculture, but may be greater than this to an indefinite amount; the surplus being either in consideration of beauty or of convenience, the convenience often consisting in superior facilities for pecuniary gain. Sites of remarkable beauty are generally limited in supply, and therefore, if in great demand, are at a scarcity value. Sites superior only in convenience are governed as to their value by the ordinary principles of rent. The ground-rent of a house in a small village is but little higher than the rent of a similar patch of ground in the open fields.

Suppose the various kinds of land to be represented by the alphabet; that those below O pay no agricultural rent, and that all lands increase in fertility and situation as we approach the beginning of the alphabet, but which, as far up as K, are used in agriculture; that higher than K all are more profitably used for building purposes, viz.:

A, B, C, ... | K, L, M, N, O, | ... X, Y, Z.

Now it will happen that land is chosen for building purposes irrespective of its fertility for agricultural purposes. It will not be true, as some may think, that no land will be used for building until it will pay a ground-rent greater than the greatest agricultural rent paid by any piece of land. It is not true, for example, if N be selected for a building-lot, that it must pay a ground-rent as high as the agricultural rent of K, the most fertile land cultivated in agriculture. It must pay a ground-rent higher only than it itself would pay, if cultivated. It is only necessary that it pay more than the same (not better) land would pay as rent if used only in agriculture.

The rents of wharfage, dock, and harbor room, water-power, and many other privileges, may be analyzed on similar principles. Take the case, for example, of a patent or exclusive privilege for the use of a process by which the cost of production is lessened. If the value of the product continues to be regulated by what it costs to those who are obliged to persist in the old process, the patentee will make an extra profit equal to the advantage which his process possesses over theirs. This extra profit is essentially similar to rent, and sometimes even assumes the form of it, the patentee allowing to other producers the use of his privilege in consideration of an annual payment.

The extra gains which any producer or dealer obtains through superior talents for business, or superior business arrangements, are very much of a similar kind. If all his competitors had the same advantages, and used them, the benefit would be transferred to their customers through the diminished value of the article; he only retains it for himself because he is able to bring his commodity to market at a lower cost, while its value is determined by a higher.(219)

§ 4. Résumé of the laws of value of each of the three classes of commodities.

A general résumé of the laws of value, where a free movement of labor and capital exists, may now be briefly made in the following form:

Exchange value has three conditions, viz.: 1. Utility, or ability to satisfy a desire (U). 2. Difficulty of attainment (D), according to which there are three classes of commodities. 3. Transferableness.

Of the second condition, there are three classes: 1. Those limited in supply—e.g., ancient pictures or monopolized articles. 2. Those whose supply is capable of indefinite increase by the use of labor and capital. 3. Those whose supply is gained at a gradually increasing cost, under the law of diminishing returns.

Of those limited in supply, their value is regulated by Demand and Supply. The only limit is U.

Of those whose supply is capable of indefinite increase, their normal and permanent value is regulated by Cost of Production, and their temporary or market value is regulated by Demand and Supply, oscillating around Cost of Production (which consists of the amount of labor and abstinence required).

Of those whose supply is gained at a gradually increasing cost, their normal value is regulated by the Cost of Production of that portion of the whole amount of the whole amount needed, which is brought to market at the greatest expense, and their market value is regulated by Demand and Supply (as in class 2).

If there be no free competition between industries, then the value of those commodities which has been said, in the above classification, to depend on cost of production, will be governed by the law of Reciprocal Demand.

IV. Of Money

§ 1. The three functions of Money—a Common Denominator of Value, a Medium of Exchange, a “Standard of Value”.

Having proceeded thus far in ascertaining the general laws of Value, without introducing the idea of Money (except occasionally for illustration), it is time that we should now superadd that idea, and consider in what manner the principles of the mutual interchange of commodities are affected by the use of what is termed a Medium of Exchange.

As Professor Jevons(220) has pointed out, money performs three distinct services, capable of being separated by the mind, and worthy of separate definition and explanation:

1. A Common Measure, or Common Denominator, of Value.

2. A Medium of Exchange.

3. A Standard of Value.

F. A. Walker,(221) however, says: “Money is the medium of exchange. Whatever performs this function, does this work, is money, no matter what it is made of.... That which does the money-work is the money-thing.”

(1.) [If we had no money] the first and most obvious [inconvenience] would be the want of a common measure for values of different sorts. If a tailor had only coats, and wanted to buy bread or a horse, it would be very troublesome to ascertain how much bread he ought to obtain for a coat, or how many coats he should give for a horse. The calculation must be recommenced on different data every time he bartered his coats for a different kind of article, and there could be no current price or regular quotations of value. As it is much easier to compare different lengths by expressing them in a common language of feet and inches, so it is much easier to compare values by means of a common language of [dollars and cents].

The need of a common denominator of values (an excellent term, introduced by Storch), to whose terms the values of all other commodities may be reduced, and so compared, is as great as that the inhabitants of the different States of the United States should have a common language as a means by which ideas could be communicated to the whole nation. A man may have a horse, whose value he wishes to compare in some common term with the value of his house, although he might not wish to sell either. A valuation by the State for taxation could not exist but for this common denominator, or register, of value.

(2.) The second function is that of a medium of exchange. The distinction between this function and the common denominator of value is that the latter measures value, the former transfers value. The man owning the horse, after having measured its value by comparison with a given thing, may now wish to exchange it for other things. This discloses the need of another quality in money.

The inconveniences of barter are so great that, without some more commodious means of effecting exchanges, the division of employments could hardly have been carried to any considerable extent. A tailor, who had nothing but coats, might starve before he could find any person having bread to sell who wanted a coat: besides, he would not want as much bread at a time as would be worth a coat, and the coat could not be divided. Every person, therefore, would at all times hasten to dispose of his commodity in exchange for anything which, though it might not be fitted to his own immediate wants, was in great and general demand, and easily divisible, so that he might be sure of being able to purchase with it whatever was offered for sale. The thing which people would select to keep by them for making purchases must be one which, besides being divisible and generally desired, does not deteriorate by keeping. This reduces the choice to a small number of articles.

This need is well explained by the following facts furnished by Professor Jevons: “Some years since, Mademoiselle Zélie, a singer of the Théâtre Lyrique at Paris, made a professional tour round the world, and gave a concert in the Society Islands. In exchange for an air from ‘Norma’ and a few other songs, she was to receive a third part of the receipts. When counted, her share was found to consist of three pigs, twenty-three turkeys, forty-four chickens, five thousand cocoanuts, besides considerable quantities of bananas, lemons, and oranges. In the Society Islands, however, pieces of money were very scarce; and, as mademoiselle could not consume any considerable portion of the receipts herself, it became necessary in the mean time to feed the pigs and poultry with the fruit.”(222)

(3.) The third function desired of money is what is usually termed a “standard of value.” It is, perhaps, better expressed by F. A. Walker(223) as a “standard of deferred payments.” Its existence is due to the desire to have a means of comparing the purchasing power of a commodity at one time with its purchasing power at another distant time; that is, that for long contracts, exchanges may be in unchanged ratios at the beginning and at the end of the contracts. There is no distinction between this function and the first, except one arising from the introduction of time. At the same time and place, the “standard of value” is given in the common denominator of value.

A Measure of Value,(224) in the ordinary sense of the word measure, would mean something by comparison with which we may ascertain what is the value of any other thing. When we consider, further, that value itself is relative, and that two things are necessary to constitute it, independently of the third thing which is to measure it, we may define a Measure of Value to be something, by comparing with which any two other things, we may infer their value in relation to one another.

In this sense, any commodity will serve as a measure of value at a given time and place; since we can always infer the proportion in which things exchange for one another, when we know the proportion in which each exchanges for any third thing. To serve as a convenient measure of value is one of the functions of the commodity selected as a medium of exchange. It is in that commodity that the values of all other things are habitually estimated.

But the desideratum sought by political economists is not a measure of the value of things at the same time and place, but a measure of the value of the same thing at different times and places: something by comparison with which it may be known whether any given thing is of greater or less value now than a century ago, or in this country than in America or China. To enable the money price of a thing at two different periods to measure the quantity of things in general which it will exchange for, the same sum of money must correspond at both periods to the same quantity of things in general—that is, money must always have the same exchange value, the same general purchasing power. Now, not only is this not true of money, or of any other commodity, but we can not even suppose any state of circumstances in which it would be true.

It being very clear that money, or the precious metals, do not themselves remain absolutely stable in value for long periods, the only way in which a “standard of value” can be properly established is by the proposed “multiple standard of value,” stated as follows:

“A number of articles in general use—corn, beef, potatoes, wool, cotton, silk, tea, sugar, coffee, indigo, timber, iron, coal, and others—shall be taken, in a definite quantity of each, so many pounds, or bushels, or cords, or yards, to form a standard required. The value of these articles, in the quantities specified, and all of standard quality, shall be ascertained monthly or weekly by Government, and the total sum [in money] which would then purchase this bill of goods shall be, thereupon, officially promulgated. Persons may then, if they choose, make their contracts for future payments in terms of this multiple or tabular standard.”(225) A, who had borrowed $1,000 of B in 1870 for ten years, would make note of the total money value of all these articles composing the multiple standard, which we will suppose is $125 in 1870. Consequently, A would promise to pay B eight multiple units in ten years (that is, eight times $125, or $1,000). But, if other things change in value relatively to money during these ten years, the same sum of money—$1,000—in 1880 will not return to B the same just amount of purchasing power which he parted with in 1870. Now, if, in 1880, when his note falls due, the government list is examined, and it is found that commodities in general have fallen in value relatively to gold, the multiple unit will not amount to as much gold as it did in 1870; perhaps each unit may be rated only at $100. In that case, A is obliged to pay back but eight multiple units, which costs him only $800 in money, while B receives from A the same amount of purchasing power over other commodities which he loaned to him. B had no just claim to ten units, since the fall of all commodities relatively to gold was not due to his exertions. On the other hand, if, between 1870 and 1880, prices had risen, mutatis mutandis, the eight units would have cost A more than $1,000 in gold; but he would have been justly obliged to return the same amount of purchasing power to B which he received from him.

§ 2. Gold and Silver, why fitted for those purposes.

By a tacit concurrence, almost all nations, at a very early period, fixed upon certain metals, and especially gold and silver, to serve this purpose. No other substances unite the necessary qualities in so great a degree, with so many subordinate advantages. These were the things which it most pleased every one to possess, and which there was most certainty of finding others willing to receive in exchange for any kind of produce. They were among the most imperishable of all substances. They were also portable, and, containing great value in small bulk, were easily hid; a consideration of much importance in an age of insecurity. Jewels are inferior to gold and silver in the quality of divisibility; and are of very various qualities, not to be accurately discriminated without great trouble. Gold and silver are eminently divisible, and, when pure, always of the same quality; and their purity may be ascertained and certified by a public authority.

Jevons(226) has more fully stated the requisites for a perfect money as—

1. Value. 2. Portability. 3. Indestructibility. 4. Homogeneity. 5. Divisibility. 6. Stability of value. 7. Cognizability.

Accordingly, though furs have been employed as money in some countries, cattle in others, in Chinese Tartary cubes of tea closely pressed together, the shells called cowries on the coast of Western Africa, and in Abyssinia at this day blocks of rock-salt, gold and silver have been generally preferred by nations which were able to obtain them, either by industry, commerce, or conquest. To the qualities which originally recommended them, another came to be added, the importance of which only unfolded itself by degrees. Of all commodities, they are among the least influenced by any of the causes which produce fluctuations of value. No commodity is quite free from such fluctuations. Gold and silver have sustained, since the beginning of history, one great permanent alteration of value, from the discovery of the American mines.

In the present age the opening of new sources of supply, so abundant as the Ural Mountains, California, and Australia, may be the commencement of another period of decline, on the limits of which it would be useless at present to speculate. But, on the whole, no commodities are so little exposed to causes of variation. They fluctuate less than almost any other things in their cost of production. And, from their durability, the total quantity in existence is at all times so great in proportion to the annual supply, that the effect on value even of a change in the cost of production is not sudden: a very long time being required to diminish materially the quantity in existence, and even to increase it very greatly not being a rapid process. Gold and silver, therefore, are more fit than any other commodity to be the subject of engagements for receiving or paying a given quantity at some distant period.

Since Mr. Mill wrote, two great changes in the production of the precious metals have occurred. The discoveries of gold, briefly referred to by him, have led to an enormous increase of the existing fund of gold (see chart No. IX, Chap. VI), and a fall in the value of gold within twenty years after the discoveries, according to Mr. Jevons’s celebrated study,(227) of from nine to fifteen per cent. Another change took place, a change in the value, of silver, in 1876, which has resulted in a permanent fall of its value since that time (see chart No. X, Chap. VII). Before that date, silver sold at about 60_d._ per ounce in the central market of the world, London; and now it remains about 52_d._ per ounce, although it once fell to 47_d._, in July, 1876. In spite of Mr. Mill’s expressions of confidence in their stability of value—although certainly more stable than other commodities—the events of the last thirty-five years have fully shown that neither gold nor silver—silver far less than gold—can successfully serve as a perfect “standard of value” for any considerable length of time.

When gold and silver had become virtually a medium of exchange, by becoming the things for which people generally sold, and with which they generally bought, whatever they had to sell or to buy, the contrivance of coining obviously suggested itself. By this process the metal was divided into convenient portions, of any degree of smallness, and bearing a recognized proportion to one another; and the trouble was saved of weighing and assaying at every change of possessors—an inconvenience which, on the occasion of small purchases, would soon have become insupportable. Governments found it their interest to take the operation into their own hands, and to interdict all coining by private persons.

§ 3. Money a mere contrivance for facilitating exchanges, which does not affect the laws of value.

It must be evident, however, that the mere introduction of a particular mode of exchanging things for one another, by first exchanging a thing for money, and then exchanging the money for something else, makes no difference in the essential character of transactions. It is not with money that things are really purchased. Nobody’s income (except that of the gold or silver miner) is derived from the precious metals. The [dollars or cents] which a person receives weekly or yearly are not what constitutes his income; they are a sort of tickets or orders which he can present for payment at any shop he pleases, and which entitle him to receive a certain value of any commodity that he makes choice of. The farmer pays his laborers and his landlord in these tickets, as the most convenient plan for himself and them; but their real income is their share of his corn, cattle, and hay, and it makes no essential difference whether he distributes it to them directly, or sells it for them and gives them the price. There can not, in short, be intrinsically a more insignificant thing, in the economy of society, than money; except in the character of a contrivance for sparing time and labor. It is a machine for doing quickly and commodiously what would be done, though less quickly and commodiously, without it; and, like many other kinds of machinery, it only exerts a distinct and independent influence of its own when it gets out of order.

The introduction of money does not interfere with the operation of any of the Laws of Value laid down in the preceding chapters. The reasons which make the temporary or market value of things depend on the demand and supply, and their average and permanent values upon their cost of production, are as applicable to a money system as to a system of barter. Things which by barter would exchange for one another will, if sold for money, sell for an equal amount of it, and so will exchange for one another still, though the process of exchanging them will consist of two operations instead of only one. The relations of commodities to one another remain unaltered by money; the only new relation introduced is their relation to money itself; how much or how little money they will exchange for; in other words, how the Exchange Value of money itself is determined. Money is a commodity, and its value is determined like that of other commodities, temporarily by demand and supply, permanently and on the average by cost of production.

V. Of The Value Of Money, As Dependent On Demand And Supply

§ 1. Value of Money, an ambiguous expression.

The Value of Money is to appearance an expression as precise, as free from possibility of misunderstanding, as any in science. The value of a thing is what it will exchange for; the value of money is what money will exchange for, the purchasing power of money. If prices are low, money will buy much of other things, and is of high value; if prices are high, it will buy little of other things, and is of low value. The value of money is inversely as general prices; falling as they rise, and rising as they fall. When one person lends to another, as well as when he pays wages or rent to another, what he transfers is not the mere money, but a right to a certain value of the produce of the country, to be selected at pleasure; the lender having first bought this right, by giving for it a portion of his capital. What he really lends is so much capital; the money is the mere instrument of transfer. But the capital usually passes from the lender to the receiver through the means either of money, or of an order to receive money, and at any rate it is in money that the capital is computed and estimated. Hence, borrowing capital is universally called borrowing money; the loan market is called the money market; those who have their capital disposable for investment on loan are called the moneyed class; and the equivalent given for the use of capital, or, in other words, interest, is not only called the interest of money, but, by a grosser perversion of terms, the value of money.

§ 2. The Value of Money depends on its quantity.

The value or purchasing power of money depends, in the first instance, on demand and supply. But demand and supply, in relation to money, present themselves in a somewhat different shape from the demand and supply of other things.

The supply of a commodity means the quantity offered for sale. But it is not usual to speak of offering money for sale. People are not usually said to buy or sell money. This, however, is merely an accident of language. In point of fact, money is bought and sold like other things, whenever other things are bought and sold for money. Whoever sells corn, or tallow, or cotton, buys money. Whoever buys bread, or wine, or clothes, sells money to the dealer in those articles. The money with which people are offering to buy, is money offered for sale. The supply of money, then, is the quantity of it which people are wanting to lay out; that is, all the money they have in their possession, except what they are hoarding, or at least keeping by them as a reserve for future contingencies. The supply of money, in short, is all the money in circulation at the time.

The demand for money, again, consists of all the goods offered for sale. Every seller of goods is a buyer of money, and the goods he brings with him constitute his demand. The demand for money differs from the demand for other things in this, that it is limited only by the means of the purchaser.

In this last statement Mr. Mill is misled by his former definition of demand as “quantity demanded.” He has the true idea of demand in this case regarding money; but the demand for money does not, as he thinks, differ from the demand for other things, inasmuch as, in our corrected view of demand for other things (p. 255), it was found that the demand for other things than money was also limited by the means of the purchaser.(228)

As the whole of the goods in the market compose the demand for money, so the whole of the money constitutes the demand for goods. The money and the goods are seeking each other for the purpose of being exchanged. They are reciprocally supply and demand to one another. It is indifferent whether, in characterizing the phenomena, we speak of the demand and supply of goods, or the supply and the demand of money. They are equivalent expressions.

Supposing the money in the hands of individuals to be increased, the wants and inclinations of the community collectively in respect to consumption remaining exactly the same, the increase of demand would reach all things equally, and there would be a universal rise of prices. Let us rather suppose, therefore, that to every pound, or shilling, or penny in the possession of any one, another pound, shilling, or penny were suddenly added. There would be an increased money demand, and consequently an increased money value, or price, for things of all sorts. This increased value would do no good to any one; would make no difference, except that of having to reckon [dollars and cents] in higher numbers. It would be an increase of values only as estimated in money, a thing only wanted to buy other things with; and would not enable any one to buy more of them than before. Prices would have risen in a certain ratio, and the value of money would have fallen in the same ratio.

It is to be remarked that this ratio would be precisely that in which the quantity of money had been increased. If the whole money in circulation was doubled, prices would be doubled. If it was only increased one fourth, prices would rise one fourth. There would be one fourth more money, all of which would be used to purchase goods of some description. When there had been time for the increased supply of money to reach all markets, or (according to the conventional metaphor) to permeate all the channels of circulation, all prices would have risen one fourth. But the general rise of price is independent of this diffusing and equalizing process. Even if some prices were raised more, and others less, the average rise would be one fourth. This is a necessary consequence of the fact that a fourth more money would have been given for only the same quantity of goods. General prices, therefore, would in any case be a fourth higher.

So that the value of money, other things being the same, varies inversely as its quantity; every increase of quantity lowering the value, and every diminution raising it, in a ratio exactly equivalent. This, it must be observed, is a property peculiar to money. We did not find it to be true of commodities generally, that every diminution of supply raised the value exactly in proportion to the deficiency, or that every increase lowered it in the precise ratio of the excess. Some things are usually affected in a greater ratio than that of the excess or deficiency, others usually in a less; because, in ordinary cases of demand, the desire, being for the thing itself, may be stronger or weaker; and the amount of what people are willing to expend on it, being in any case a limited quantity, may be affected in very unequal degrees by difficulty or facility of attainment. But in the case of money, which is desired as the means of universal purchase, the demand consists of everything which people have to sell; and the only limit to what they are willing to give, is the limit set by their having nothing more to offer. The whole of the goods being in any case exchanged for the whole of the money which comes into the market to be laid out, they will sell for less or more of it, exactly according as less or more is brought.

§ 3. —Together with the Rapidity of Circulation.

It might be supposed that there is always in circulation in a country a quantity of money equal in value to the whole of the goods then and there on sale. But this would be a complete misapprehension. The money laid out is equal in value to the goods it purchases; but the quantity of money laid out is not the same thing with the quantity in circulation. As the money passes from hand to hand, the same piece of money is laid out many times before all the things on sale at one time are purchased and finally removed from the market; and each pound or dollar must be counted for as many pounds or dollars as the number of times it changes hands in order to effect this object.

If we assume the quantity of goods on sale, and the number of times those goods are resold, to be fixed quantities, the value of money will depend upon its quantity, together with the average number of times that each piece changes hands in the process. The whole of the goods sold (counting each resale of the same goods as so much added to the goods) have been exchanged for the whole of the money, multiplied by the number of purchases made on the average by each piece. Consequently, the amount of goods and of transactions being the same, the value of money is inversely as its quantity multiplied by what is called the rapidity of circulation. And the quantity of money in circulation is equal to the money value of all the goods sold, divided by the number which expresses the rapidity of circulation.

This may be expressed in mathematical language, where V is the value of money, Q is the quantity in circulation, and R the number expressing the rapidity of circulation, as follows:

V = 1 / (Q × R).

The phrase, rapidity of circulation, requires some comment. It must not be understood to mean the number of purchases made by each piece of money in a given time. Time is not the thing to be considered. The state of society may be such that each piece of money hardly performs more than one purchase in a year; but if this arises from the small number of transactions—from the small amount of business done, the want of activity in traffic, or because what traffic there is mostly takes place by barter—it constitutes no reason why prices should be lower, or the value of money higher. The essential point is, not how often the same money changes hands in a given time, but how often it changes hands in order to perform a given amount of traffic. We must compare the number of purchases made by the money in a given time, not with the time itself, but with the goods sold in that same time. If each piece of money changes hands on an average ten times while goods are sold to the value of a million sterling, it is evident that the money required to circulate those goods is £100,000. And, conversely, if the money in circulation is £100,000, and each piece changes hands, by the purchase of goods, ten times in a month, the sales of goods for money which take place every month must amount, on the average, to £1,000,000. [The essential point to be considered is] the average number of purchases made by each piece in order to affect a given pecuniary amount of transactions.

“There is no doubt that the rapidity of circulation varies very much between one country and another. A thrifty people with slight banking facilities, like the French, Swiss, Belgians, and Dutch, hoard coin much more than an improvident people like the English, or even a careful people, with a perfect banking system, like the Scotch. Many circumstances, too, affect the rapidity of circulation. Railways and rapid steamboats enable coin and bullion to be more swiftly remitted than of old; telegraphs prevent its needless removal, and the acceleration of the mails has a like effect.” “So different are the commercial habits of different peoples, that there evidently exists no proportion whatever between the amount of currency in a country and the aggregate of the exchanges which can be effected by it.”(229)

§ 4. Explanations and Limitations of this Principle.

The proposition which we have laid down respecting the dependence of general prices upon the quantity of money in circulation must be understood as applying only to a state of things in which money—that is, gold or silver—is the exclusive instrument of exchange, and actually passes from hand to hand at every purchase, credit in any of its shapes being unknown. When credit comes into play as a means of purchasing, distinct from money in hand, we shall hereafter find that the connection between prices and the amount of the circulating medium is much less direct and intimate, and that such connection as does exist no longer admits of so simple a mode of expression. That an increase of the quantity of money raises prices, and a diminution lowers them, is the most elementary proposition in the theory of currency, and without it we should have no key to any of the others. In any state of things, however, except the simple and primitive one which we have supposed, the proposition is only true, other things being the same.

It is habitually assumed that whenever there is a greater amount of money in the country, or in existence, a rise of prices must necessarily follow. But this is by no means an inevitable consequence. In no commodity is it the quantity in existence, but the quantity offered for sale, that determines the value. Whatever may be the quantity of money in the country, only that part of it will affect prices which goes into the market of commodities, and is there actually exchanged against goods. Whatever increases the amount of this portion of the money in the country tends to raise prices.

This statement needs modification, since the change in the amounts of specie in the bank reserves, particularly of England and the United States, determines the amount of credit and purchasing power granted, and so affects prices in that way; but prices are affected not by this specie being actually exchanged against goods.

It frequently happens that money to a considerable amount is brought into the country, is there actually invested as capital, and again flows out, without having ever once acted upon the markets of commodities, but only upon the market of securities, or, as it is commonly though improperly called, the money market.

A foreigner landing in the country with a treasure might very probably prefer to invest his fortune at interest; which we shall suppose him to do in the most obvious way by becoming a competitor for a portion of the stock, railway debentures, mercantile bills, mortgages, etc., which are at all times in the hands of the public. By doing this he would raise the prices of those different securities, or in other words would lower the rate of interest; and since this would disturb the relation previously existing between the rate of interest on capital in the country itself and that in foreign countries, it would probably induce some of those who had floating capital seeking employment to send it abroad for foreign investment, rather than buy securities at home at the advanced price. As much money might thus go out as had previously come in, while the prices of commodities would have shown no trace of its temporary presence. This is a case highly deserving of attention; and it is a fact now beginning to be recognized that the passage of the precious metals from country to country is determined much more than was formerly supposed by the state of the loan market in different countries, and much less by the state of prices.

If there be, at any time, an increase in the number of money transactions, a thing continually liable to happen from differences in the activity of speculation, and even in the time of year (since certain kinds of business are transacted only at particular seasons), an increase of the currency which is only proportional to this increase of transactions, and is of no longer duration, has no tendency to raise prices.

For example, bankers in Eastern cities each year send in the autumn to the West, as the crops are gathered, very large sums of money, to settle transactions in the buying and selling of grain, wool, etc., but it again flows back to the great centers of business in a short time, in payment of purchases from Eastern merchants.

VI. Of The Value Of Money, As Dependent On Cost Of Production

§ 1. The value of Money, in a state of Freedom, conforms to the value of the Bullion contained in it.

But money, no more than commodities in general, has its value definitely determined by demand and supply. The ultimate regulator of its value is Cost of Production.

We are supposing, of course, that things are left to themselves. Governments have not always left things to themselves. It was, until lately, the policy of all governments to interdict the exportation and the melting of money; while, by encouraging the exportation and impeding the importation of other things, they endeavored to have a stream of money constantly flowing in. By this course they gratified two prejudices: they drew, or thought that they drew, more money into the country, which they believed to be tantamount to more wealth; and they gave, or thought that they gave, to all producers and dealers, high prices, which, though no real advantage, people are always inclined to suppose to be one.

We are, however, to suppose a state, not of artificial regulation, but of freedom. In that state, and assuming no charge to be made for coinage, the value of money will conform to the value of the bullion of which it is made. A pound-weight of gold or silver in coin, and the same weight in an ingot, will precisely exchange for one another. On the supposition of freedom, the metal can not be worth more in the state of bullion than of coin; for as it can be melted without any loss of time, and with hardly any expense, this would of course be done until the quantity in circulation was so much diminished as to equalize its value with that of the same weight in bullion. It may be thought, however, that the coin, though it can not be of less, may be, and being a manufactured article will naturally be, of greater value than the bullion contained in it, on the same principle on which linen cloth is of more value than an equal weight of linen yarn. This would be true, were it not that Government, in this country and in some others, coins money gratis for any one who furnishes the metal. If Government, however, throws the expense of coinage, as is reasonable, upon the holder, by making a charge to cover the expense (which is done by giving back rather less in coin than has been received in bullion, and is called levying a seigniorage), the coin will rise, to the extent of the seigniorage, above the value of the bullion. If the mint kept back one per cent, to pay the expense of coinage, it would be against the interest of the holders of bullion to have it coined, until the coin was more valuable than the bullion by at least that fraction. The coin, therefore, would be kept one per cent higher in value, which could only be by keeping it one per cent less in quantity, than if its coinage were gratuitous.

In the United States there was no charge for seigniorage on gold and silver to 1853, when one half of one per cent was charged as interest on the delay if coin was immediately delivered on the deposit of bullion; in 1873 it was reduced to one fifth of one per cent; and in 1875, by a provision of the Resumption Act, it was wholly abolished (the depositor, however, paying for the copper alloy). For the trade-dollars, as was consistent with their being only coined ingots and not legal money, a seigniorage was charged equal simply to the expense of coinage, which was one and a quarter per cent at Philadelphia, and one and a half per cent at San Francisco on the tale value.

§ 2. —Which is determined by the cost of production.

The value of money, then, conforms permanently, and in a state of freedom almost immediately, to the value of the metal of which it is made; with the addition, or not, of the expenses of coinage, according as those expenses are borne by the individual or by the state.

To the majority of civilized countries gold and silver are foreign products: and the circumstances which govern the values of foreign products present some questions which we are not yet ready to examine. For the present, therefore, we must suppose the country which is the subject of our inquiries to be supplied with gold and silver by its own mines [as in the case of the United States], reserving for future consideration how far our conclusions require modification to adapt them to the more usual case.

Of the three classes into which commodities are divided—those absolutely limited in supply, those which may be had in unlimited quantity at a given cost of production, and those which may be had in unlimited quantity, but at an increasing cost of production—the precious metals, being the produce of mines, belong to the third class. Their natural value, therefore, is in the long run proportional to their cost of production in the most unfavorable existing circumstances, that is, at the worst mine which it is necessary to work in order to obtain the required supply. A pound weight of gold will, in the gold-producing countries, ultimately tend to exchange for as much of every other commodity as is produced at a cost equal to its own; meaning by its own cost the cost in labor and expense at the least productive sources of supply which the then existing demand makes it necessary to work. The average value of gold is made to conform to its natural value in the same manner as the values of other things are made to conform to their natural value. Suppose that it were selling above its natural value; that is, above the value which is an equivalent for the labor and expense of mining, and for the risks attending a branch of industry in which nine out of ten experiments have usually been failures. A part of the mass of floating capital which is on the lookout for investment would take the direction of mining enterprise; the supply would thus be increased, and the value would fall. If, on the contrary, it were selling below its natural value, miners would not be obtaining the ordinary profit; they would slacken their works; if the depreciation was great, some of the inferior mines would perhaps stop working altogether: and a falling off in the annual supply, preventing the annual wear and tear from being completely compensated, would by degrees reduce the quantity, and restore the value.

When examined more closely, the following are the details of the process: If gold is above its natural or cost value—the coin, as we have seen, conforming in its value to the bullion—money will be of high value, and the prices of all things, labor included, will be low. These low prices will lower the expenses of all producers; but, as their returns will also be lowered, no advantage will be obtained by any producer, except the producer of gold; whose returns from his mine, not depending on price, will be the same as before, and, his expenses being less, he will obtain extra profits, and will be stimulated to increase his production. E converso, if the metal is below its natural value; since this is as much as to say that prices are high, and the money expenses of all producers unusually great; for this, however, all other producers will be compensated by increased money returns; the miner alone will extract from his mine no more metal than before, while his expenses will be greater: his profits, therefore, being diminished or annihilated, he will diminish his production, if not abandon his employment.

In this manner it is that the value of money is made to conform to the cost of production of the metal of which it is made. It may be well, however, to repeat (what has been said before) that the adjustment takes a long time to effect, in the case of a commodity so generally desired and at the same time so durable as the precious metals. Being so largely used, not only as money but for plate and ornament, there is at all times a very large quantity of these metals in existence: while they are so slowly worn out that a comparatively small annual production is sufficient to keep up the supply, and to make any addition to it which may be required by the increase of goods to be circulated, or by the increased demand for gold and silver articles by wealthy consumers. Even if this small annual supply were stopped entirely, it would require many years to reduce the quantity so much as to make any very material difference in prices. The quantity may be increased much more rapidly than it can be diminished; but the increase must be very great before it can make itself much felt over such a mass of the precious metals as exists in the whole commercial world. And hence the effects of all changes in the conditions of production of the precious metals are at first, and continue to be for many years, questions of quantity only, with little reference to cost of production. More especially is this the case when, as at the present time, many new sources of supply have been simultaneously opened, most of them practicable by labor alone, without any capital in advance beyond a pickaxe and a week’s food, and when the operations are as yet wholly experimental, the comparative permanent productiveness of the different sources being entirely unascertained.

For the facts in regard to the production of the precious metals, see the investigation by Dr. Adolf Soetbeer,(230) from which Chart IX has been taken. It is worthy of careful study. The figures in each period, at the top of the respective spaces, give the average annual production during those years. The last period has been added by me from figures taken from the reports of the Director of the United States Mint. Other accessible sources, for the production of the precious metals, are the tables in the appendices to the Report of the Committee to the House of Commons on the “Depreciation of Silver” (1876); the French official Procès-Verbaux of the International Monetary Conference of 1881, which give Soetbeer’s figures to a later date than his publication above mentioned; the various papers in the British parliamentary documents; and the reports of the director of our mint. Since 1850 more gold has been produced than in the whole period preceding, from 1492 to 1850. Previous to 1849 the annual average product of gold, out of the total product of both gold and silver, was thirty-six per cent; for the twenty-six years ending in 1875, it has been seventy and one half per cent. The result has been a rise in gold prices certainly down to 1862,(231) as shown by the following chart. It will be observed how much higher the prices rose during the depression after 1858 than it was during a period of similar conditions after 1848. The result, it may be said, was predicted by Chevalier.(232)

Chart IX.

Chart showing the Production of the Precious Metals, according to Value, from 1493 to 1879.

Years. Silver. Gold. Total. 1493-1520 $2,115,000 $4,045,500 $6,160,500 1521-1544 4,059,000 4,994,000 9,053,000 1545-1560 14,022,000 5,935,500 19,957,500 1561-1580 13,477,500 4,770,750 18,248,250 1581-1600 18,850,500 5,147,500 23,998,000 1601-1620 19,030,500 5,942,750 24,973,250 1621-1640 17,712,000 5,789,250 23,501,250 1641-1660 16,483,500 6,117,000 22,600,500 1661-1680 15,165,000 6,458,750 21,623,750 1681-1700 15,385,500 7,508,500 22,894,000 1701-1720 16,002,000 8,942,000 24,944,000 1721-1740 19,404,000 13,308,250 32,712,250 1741-1760 23,991,500 17,165,500 41,157,000 1761-1780 29,373,250 14,441,750 43,815,000 1781-1800 39,557,750 12,408,500 51,966,250 1801-1810 40,236,750 12,400,000 52,636,750 1811-1820 24,334,750 7,983,000 32,317,750 1821-1830 20,725,250 9,915,750 30,641,000 1831-1840 26,840,250 14,151,500 40,991,750 1841-1850 35,118,750 38,194,250 73,313,000 1851-1855 39,875,250 137,766,750 177,642,000 1856-1860 40,724,500 143,725,250 184,449,750 1861-1865 49,551,750 129,123,250 178,675,000 1866-1870 60,258,750 133,850,000 194,108,750 1871-1875 88,624,000 119,045,750 207,669,750 1876-1879 110,575,000 119,710,000 230,285,000

Chart showing rise of average gold prices after the gold discoveries of 1849 to 1862.

The fall of prices from 1873 to 1879, owing to the commercial panic in the former year, however, is regarded, somewhat unjustly, in my opinion, as an evidence of an appreciation of gold. Mr. Giffen’s paper in the “Statistical Journal,” vol. xlii, is the basis on which Mr. Goschen founded an argument in the “Journal of the Institute of Bankers” (London), May, 1883, and which attracted considerable attention. On the other side, see Bourne, “Statistical Journal,” vol. xlii. The claim that the value of gold has risen seems particularly hasty, especially when we consider that after the panics of 1857 and 1866 the value of money rose, for reasons not affecting gold, respectively fifteen and twenty-five per cent.

The very thing for which the precious metals are most recommended for use as the materials of money—their durability—is also the very thing which has, for all practical purposes, excepted them from the law of cost of production, and caused their value to depend practically upon the law of demand and supply. Their durability is the reason of the vast accumulations in existence, and this it is which makes the annual product very small in relation to the whole existing supply, and so prevents its value from conforming, except after a long term of years, to the cost of production of the annual supply.

§ 3. This law, how related to the principle laid down in the preceding chapter.

Since, however, the value of money really conforms, like that of other things, though more slowly, to its cost of production, some political economists have objected altogether to the statement that the value of money depends on its quantity combined with the rapidity of circulation, which, they think, is assuming a law for money that does not exist for any other commodity, when the truth is that it is governed by the very same laws. To this we may answer, in the first place, that the statement in question assumes no peculiar law. It is simply the law of demand and supply, which is acknowledged to be applicable to all commodities, and which, in the case of money, as of most other things, is controlled, but not set aside, by the law of cost of production, since cost of production would have no effect on value if it could have none on supply. But, secondly, there really is, in one respect, a closer connection between the value of money and its quantity than between the values of other things and their quantity. The value of other things conforms to the changes in the cost of production, without requiring, as a condition, that there should be any actual alteration of the supply: the potential alteration is sufficient; and, if there even be an actual alteration, it is but a temporary one, except in so far as the altered value may make a difference in the demand, and so require an increase or diminution of supply, as a consequence, not a cause, of the alteration in value. Now, this is also true of gold and silver, considered as articles of expenditure for ornament and luxury; but it is not true of money. If the permanent cost of production of gold were reduced one fourth, it might happen that there would not be more of it bought for plate, gilding, or jewelry, than before; and if so, though the value would fall, the quantity extracted from the mines for these purposes would be no greater than previously. Not so with the portion used as money: that portion could not fall in value one fourth unless actually increased one fourth; for, at prices one fourth higher, one fourth more money would be required to make the accustomed purchases; and, if this were not forthcoming, some of the commodities would be without purchasers, and prices could not be kept up. Alterations, therefore, in the cost of production of the precious metals do not act upon the value of money except just in proportion as they increase or diminish its quantity; which can not be said of any other commodity. It would, therefore, I conceive, be an error, both scientifically and practically, to discard the proposition which asserts a connection between the value of money and its quantity.

There are cases, however, in which the potential change of the precious metals affects their value as money in the same way that it affects the value of other things. Such a case was the change in the value of silver in 1876. The usual causes assigned for that serious fall in value were the greatly increased production from the mines of Nevada; the demonetization of silver by Germany; and the decreased demand for export to India. It is true that the exports of silver from England to India fell off from about $32,000,000 in 1871-1872 to about $23,000,000 in 1874-1875; but none of the increased Nevada silver was exported from the United States to London, nor had Germany put more than $30,000,000 of her silver on the market;(233) and yet the price of silver so fell that the depreciation amounted to 20-¼ per cent as compared with the average price between 1867 and 1872. The change in value, however, took place without any corresponding change in the actual quantity in circulation. The relation between prices and the quantities of the precious metals is, therefore, not so exact, certainly as regards silver, as Mr. Mill would have us believe; and thus their values conform more nearly to the general law of Demand and Supply in the same way that it affects things other than money.

It is evident, however, that the cost of production, in the long run, regulates the quantity; and that every country (temporary fluctuation excepted) will possess, and have in circulation, just that quantity of money which will perform all the exchanges required of it, consistently with maintaining a value conformable to its cost of production. The prices of things will, on the average, be such that money will exchange for its own cost in all other goods: and, precisely because the quantity can not be prevented from affecting the value, the quantity itself will (by a sort of self-acting machinery) be kept at the amount consistent with that standard of prices—at the amount necessary for performing, at those prices, all the business required of it.

VII. Of A Double Standard And Subsidiary Coins

§ 1. Objections to a Double Standard.

Though the qualities necessary to fit any commodity for being used as money are rarely united in any considerable perfection, there are two commodities which possess them in an eminent and nearly an equal degree—the two precious metals, as they are called—gold and silver. Some nations have accordingly attempted to compose their circulating medium of these two metals indiscriminately.

There is an obvious convenience in making use of the more costly metal for larger payments, and the cheaper one for smaller; and the only question relates to the mode in which this can best be done. The mode most frequently adopted has been to establish between the two metals a fixed proportion [to decide by law, for example, that sixteen grains of silver should be equivalent to one grain of gold]; and it being left free to every one who has a [dollar] to pay, either to pay it in the one metal or in the other.

If [their] natural or cost values always continued to bear the same ratio to one another, the arrangement would be unobjectionable. This, however, is far from being the fact. Gold and silver, though the least variable in value of all commodities, are not invariable, and do not always vary simultaneously. Silver, for example, was lowered in permanent value more than gold by the discovery of the American mines; and those small variations of value which take place occasionally do not affect both metals alike. Suppose such a variation to take place—the value of the two metals relatively to one another no longer agreeing with their rated proportion—one or other of them will now be rated below its bullion value, and there will be a profit to be made by melting it.

Suppose, for example, that gold rises in value relatively to silver, so that the quantity of gold in a sovereign is now worth more than the quantity of silver in twenty shillings. Two consequences will ensue. No debtor will any longer find it his interest to pay in gold. He will always pay in silver, because twenty shillings are a legal tender for a debt of one pound, and he can procure silver convertible into twenty shillings for less gold than that contained in a sovereign. The other consequence will be that, unless a sovereign can be sold for more than twenty shillings, all the sovereigns will be melted, since as bullion they will purchase a greater number of shillings than they exchange for as coin. The converse of all this would happen if silver, instead of gold, were the metal which had risen in comparative value. A sovereign would not now be worth so much as twenty shillings, and whoever had a pound to pay would prefer paying it by a sovereign; while the silver coins would be collected for the purpose of being melted, and sold as bullion for gold at their real value—that is, above the legal valuation. The money of the community, therefore, would never really consist of both metals, but of the one only which, at the particular time, best suited the interest of debtors; and the standard of the currency would be constantly liable to change from the one metal to the other, at a loss, on each change, of the expense of coinage on the metal which fell out of use.

This is the operation by which is carried into effect the law of Sir Thomas Gresham (a merchant of the time of Elizabeth) to the purport that “money of less value drives out money of more value,” where both are legal payments among individuals. A celebrated instance is that where the clipped coins of England were received by the state on equal terms with new and perfect coin before 1695. They hanged men and women, but they did not prevent the operation of Gresham’s law and the disappearance of the perfect coins. When the state refused the clipped coins at legal value, by no longer receiving them in payment of taxes, the trouble ceased.(234) Jevons gives a striking illustration of the same law: “At the time of the treaty of 1858 between Great Britain, the United States, and Japan, which partially opened up the last country to European traders, a very curious system of currency existed in Japan. The most valuable Japanese coin was the kobang, consisting of a thin oval disk of gold about two inches long, and one and a quarter inch wide, weighing two hundred grains, and ornamented in a very primitive manner. It was passing current in the towns of Japan for four silver itzebus, but was worth in English money about 18_s._ 5_d._, whereas the silver itzebu was equal only to about 1_s._ 4_d._ [four itzebus being worth in English money 5_s._ 4_d._]. The earliest European traders enjoyed a rare opportunity for making profit. By buying up the kobangs at the native rating they trebled their money, until the natives, perceiving what was being done, withdrew from circulation the remainder of the gold.”(235)

It appears, therefore, that the value of money is liable to more frequent fluctuations when both metals are a legal tender at a fixed valuation than when the exclusive standard of the currency is either gold or silver. Instead of being only affected by variations in the cost of production of one metal, it is subject to derangement from those of two. The particular kind of variation to which a currency is rendered more liable by having two legal standards is a fall of value, or what is commonly called a depreciation, since practically that one of the two metals will always be the standard of which the real has fallen below the rated value. If the tendency of the metals be to rise in value, all payments will be made in the one which has risen least; and, if to fall, then in that which has fallen most.

While liable to “more frequent fluctuations,” prices do not follow the extreme fluctuations of both metals, as some suppose, and as is shown by the following diagram.(236) A represents the line of the value of gold, and B of silver, relatively to some third commodity represented by the horizontal line. Superposing these curves, C would show the line of extreme variations, while since prices would follow the metal which falls in value, D would show the actual course of variations. While the fluctuations are more frequent in D, they are less extreme than in C.

Chart showing the line of prices under a double standard.

§ 2. The use of the two metals as money, and the management of Subsidiary Coins.

The plan of a double standard is still occasionally brought forward by here and there a writer or orator as a great improvement in currency.

It is probable that, with most of its adherents, its chief merit is its tendency to a sort of depreciation, there being at all times abundance of supporters for any mode, either open or covert, of lowering the standard. [But] the advantage without the disadvantages of a double standard seems to be best obtained by those nations with whom one only of the two metals is a legal tender, but the other also is coined, and allowed to pass for whatever value the market assigns to it.

When this plan is adopted, it is naturally the more costly metal which is left to be bought and sold as an article of commerce. But nations which, like England, adopt the more costly of the two as their standard, resort to a different expedient for retaining them both in circulation, namely (1), to make silver a legal tender, but only for small payments. In England no one can be compelled to receive silver in payment for a larger amount than forty shillings. With this regulation there is necessarily combined another, namely (2), that silver coin should be rated, in comparison with gold, somewhat above its intrinsic value; that there should not be, in twenty shillings, as much silver as is worth a sovereign; for, if there were, a very slight turn of the market in its favor would make it worth more than a sovereign, and it would be profitable to melt the silver coin. The overvaluation of the silver coin creates an inducement to buy silver and send it to the mint to be coined, since it is given back at a higher value than properly belongs to it; this, however, has been guarded against (3) by limiting the quantity of the silver coinage, which is not left, like that of gold, to the discretion of individuals, but is determined by the Government, and restricted to the amount supposed to be required for small payments. The only precaution necessary is, not to put so high a valuation upon the silver as to hold out a strong temptation to private coining.

§ 3. The experience of the United States with a double standard from 1792 to 1883.

The experience of the United States with a double standard, extending as it does from 1792 to 1873 without a break, and from 1878 to the present time, is a most valuable source of instruction in regard to the practical working of bimetallism. While we have nominally had a double standard, in reality we have either had one alone, or been in a transition from one to the other standard; and the history of our coinage strikingly illustrates the truth that the natural values of the two metals, in spite of all legislation, so vary relatively to each other that a constant ratio can not be maintained for any length of time; and that “the poor money drives out the good,” according to Gresham’s statement. For clearness, the period may be divided, in accordance with the changes of legislation, into four divisions:

I. 1792-1834. Transition from gold to silver.

II. 1834-1853. Transition from silver to gold.

III. 1853-1878. Single gold currency (except 1862-1879, the paper period).

IV. 1878-1884. Transition from gold to silver.

I. With the establishment of the mint, Hamilton agreed upon the use of both gold and silver in our money, at a ratio of 15 to 1: that is, that the amount of pure silver in a dollar should be fifteen times the weight of gold in a dollar. So, while the various Spanish dollars then in circulation in the United States seemed to contain on the average about 371-¼ grains of pure silver, and since Hamilton believed the relative market value of gold and silver to be about 1 to 15, he put 1/15 of 371-¼ grains, or 24-¾ grains of pure gold, into the gold dollar. It was the best possible example of the bimetallic system to be found, and the mint ratio was intended to conform to the market ratio. If this conformity could have been maintained, there would have been no disturbance. But a cause was already in operation affecting the supply of one of the metals—silver—wholly independent of legislation, and without correspondingly affecting gold.

Two periods of production of silver, in which the production of silver was great relatively to gold, stand out prominently in the history of that metal. (1) One was the enormous yield from the mines of the New World, continuing from 1545 to about 1640, and (2) the only other period of great production at all comparable with it (that is, as regards the production of silver relatively to gold) was that lasting from 1780 to 1820, due to the richness of the Mexican silver-mines. The first period of ninety-five years was longer than the second, which was only forty years; yet while about forty-seven times as much silver as gold was produced on an average during the first period, the average annual amount of silver produced relatively to gold was probably a little greater from 1780 to 1820. The effect of the first period in lowering the relation of silver to gold is well recognized in the history of the precious metals (see Chart X for the fall in the value of silver relatively to gold); that the effect of the second period on the value of silver has not been greater than was actually caused—it has not been small—is explicable only by the laws of the value of money. If you let the same amount of water into a small reservoir which you let into a large one, the level of the former will be raised more than the level of the latter. The great production of the first period was added to a very small existing stock of silver; that of the second period was added to a stock increased by the great previous production just mentioned. The smallness of the annual product relatively to the total quantity existing in the world requires some time, even for a production of silver forty-seven times greater than the gold production, to take its effect on the value of the total silver stock in existence. The effect of this process was beginning to be felt soon after the United States decided on a double standard. For this reason the value of silver was declining about 1800, and, although the annual silver product fell off seriously after 1820, the value of silver continued to decline even after that time, because the increased production, dating back to 1780, was just beginning to make itself felt. Thus we have the phenomenon—which seems very difficult for some persons to understand—of a falling off in the annual production of silver, accompanied by a decrease in its value relatively to gold.

This diminishing value of silver began to affect the coinage of the United States as early as 1811, and by 1820 the disappearance of gold was everywhere commented upon. The process by which this result is produced is a simple one, and is adopted as soon as a margin of profit is seen arising from a divergence between the mint and market ratios. In 1820 the market ratio of gold to silver was 1 to 15.7—that is, the amount of gold in a dollar (24-¾ grains) would exchange for 15.7 times as many grains of silver in the market, in the form of bullion; while at the mint, in the form of coin, it would exchange for only 15 times as many grains of silver. A broker having 1,000 gold dollars could buy with them in the market silver bullion enough (1,000 × 15.7 grains) to have coined, when presented at the mint, 1,000 dollars in silver pieces, and yet have left over as a profit by the operation 700 grains of silver. So long as this can be done, silver (the cheapest money) will be presented at the mint, and gold (the dearest money) will become an article of merchandise too valuable to be used as money when the cheaper silver is legally as good. The best money, therefore, disappears from circulation, as it did in the United States before 1820, owing to the fall in the value of silver. It is to be said, that it has been seriously urged by some writers that silver did not fall, but that gold rose, in value, owing to the demand of England for resumption in 1819.(237) Chronology kills this view; for the change in the value of silver began too early to have been due to English measures, even if conclusive reasons have not been given above why silver should naturally have fallen in value.

Chart X. Chart showing the Changes in the Relative Values of Gold and Silver from 1501 to 1880. From 1501 to 1680 a space is allotted to each 20 years; from 1681 to 1871, to each 10 years; from 1876 to 1880, to each year.

II. The change in the relative values of gold and silver finally forced the United States to change their mint ratio in 1834. Two courses were open to us: (1) either to increase the quantity of silver in the dollar until the dollar of silver was intrinsically worth the gold in the gold dollar; or (2) debase the gold dollar-piece until it was reduced in value proportionate to the depreciation of silver since 1792. The latter expedient, without any seeming regard to the effect on contracts and the integrity of our monetary standard, was adopted: 6.589 per cent was taken out of the gold dollar, leaving it containing 23.22 grains of pure gold; and as the silver dollar remained unchanged (371-¼ grains) the mint ratio established was 1 to 15.988, or, as commonly stated, 1 to 16. Did this correspond with the market ratio then existing? No. Having seen the former steady fall in silver, and believing that it would continue, Congress hoped to anticipate any further fall by making the mint ratio of gold to silver a little larger than the market ratio. This was done by establishing the mint ratio of 1 to 15.988, while the market ratio in 1834 was 1 to 15.73. Here, again, appeared the difficulty arising from the attempt to balance a ratio on a movable fulcrum. It will be seen that the act of 1834 set at work forces for another change in the coinage—forces of a similar kind, but working in exactly the opposite direction to those previous to 1834. A dollar of gold coin would now exchange for more grains of silver at the mint (15.98) than it would in the form of bullion in the market (15.73). Therefore it would be more profitable to put gold into coin than exchange it as bullion. Gold was sent to the mint, while silver began to be withdrawn from circulation, silver now being more valuable as bullion than as coin. By 1840 a silver dollar was worth 102 cents in gold.(238) This movement, which was displacing silver with gold, received a surprising and unexpected impetus by the gold discoveries of California and Australia in 1849, before mentioned, and made gold less valuable relatively to silver, by lowering the value of gold. Here, again, was another natural cause, independent of legislation, and not to be foreseen, altering the value of one of the precious metals, and in exactly the opposite direction from that in the previous period, when silver was lowered by the increase from the Mexican mines. In 1853 a silver dollar was worth 104 cents in gold (i.e., of a gold dollar containing 23.22 grains); but, some years before, all silver dollars had disappeared from use, and only gold was in circulation. For a large part of this period we had in reality a single standard of gold, the other metal not being able to stay in the currency.

III. After our previous experience, the impossibility of retaining both metals in the coinage together, on equal terms, now came to be generally recognized, and was accepted by Congress in the legislation of 1853. This act made no further changes intended to adapt the mint to the market ratios, but remained satisfied with the gold circulation. But hitherto no regard had been paid to the principles on which a subsidiary coinage is based, as explained by Mr. Mill in the last section (§ 2). The act of 1853, while acquiescing in the single gold standard, had for its purpose the readjustment of the subsidiary coins, which, together with silver dollar-pieces, had all gone out of circulation. Before this, two halves, four quarters, or ten dimes contained the same quantity of pure silver as the dollar-piece (371-¼ grains); therefore, when it became profitable to withdraw the dollar-pieces and substitute gold, it gave exactly the same profit to withdraw two halves or four quarters in silver. For this reason all the subsidiary silver had gone out of circulation, and there was no “small change” in the country. The legislation of 1853 rectified this error: (1) by reducing the quantity of pure silver in a dollar’s worth of subsidiary coin to 345.6 grains. By making so much less an amount of silver equal to a dollar of small coins, it was more valuable in that shape than as bullion, and there was no reason for melting it, or withdrawing it (since even if gold and silver changed considerably in their relative values, 345.6 grains of silver could not easily rise sufficiently to become equal in value to a gold dollar, when 371-¼ grains were worth only 104 cents of the gold dollar); (2) this over-valuation of silver in subsidiary coin would cause a great flow of silver to the mint, since silver would be more valuable in subsidiary coin than as bullion; but this was prevented by the provision (section 4 of the act of 1853) that the amount or the small coinage should be limited according to the discretion of the Secretary of the Treasury; and, (3) in order that the overvalued small coinage might not be used for purposes other than for effecting change, its legal-tender power was restricted to payments not exceeding five dollars. This system, a single gold standard for large, and silver for small, payments, continued without question, and with great convenience, until the days of the war, when paper money (1862-1879) drove out (by its cheapness, again) both gold and silver. Paper was far cheaper than the cheapest of the two metals.

Relative values of gold and silver, by months, in 1876.

The mere fact that the silver dollar-piece had not circulated since even long before 1853 led the authorities to drop out the provisions for the coinage of silver dollars and in 1873 remove it from the list of legal coins (at the ratio of 1 to 15.98, the obsolete ratio fixed as far back as 1834). This is what is known as the “demonetization” of silver. It had no effect on the circulation of silver dollars, since none were in use, and had not been for more than twenty-five years. There had been no desire up to this time to use silver, since it was more expensive than gold; indeed, it is somewhat humiliating to our sense of national honor to reflect that it was not until silver fell so surprisingly in value (in 1876) that the agitation for its use in the coinage arose. When a silver dollar was worth 104 cents, no one wanted it as a means of liquidating debts; when it came to be worth 86 cents, it was capable of serving debtors even better than the then appreciating greenbacks. Thus, while from 1853 (and even before) we had legally two standards, of both gold and silver, but really only one, that of gold, from 1873 to 1878 we had both legally and really only one standard, that of gold.

It might be here added, that I have spoken of the silver dollar as containing 371-¼ grains of pure silver. Of course, alloy is mixed with the pure silver, sufficient, in 1792, to make the original dollar weigh 416 grains in all, its “standard” weight. In 1837 the amount of alloy was changed from 1/12 to 1/10 of the standard weight, which (as the 371-¼ grains of pure silver were unchanged) gave the total weight of the dollar as 412-½ grains, whence the familiar name assigned to this piece. In 1873, moreover, the mint was permitted to put its stamp and devices—to what was not money at all, but a “coined ingot”—on 378 grains of pure silver (420 grains, standard), known as the “trade-dollar.” It was intended by this means to make United States silver more serviceable in the Asiatic trade. Oriental nations care almost exclusively for silver in payments. The Mexican silver dollar contained 377-¼ grains of pure silver; the Japanese yen, 374-4/10; and the United States dollar, 371-¼. By making the “trade-dollar” slightly heavier than any coin used in the Eastern world, it would give our silver a new market; and the United States Government was simply asked to certify to the fineness and weight by coining it, provided the owners of silver paid the expenses of coinage. Inadvertently the trade-dollar was included in the list of coins in the act of 1873 which were legal tender for payments of five dollars, but, when this was discovered, it was repealed in 1876. So that the trade-dollar was not a legal coin, in any sense (although it contained more silver than the 412-½-grains dollar). They ceased to be coined in 1878, to which time there had been made $35,959,360.

IV. In February, 1878, an indiscreet and unreasonable movement induced Congress to authorize the recoinage of the silver dollar-piece at the obsolete ratio of 1834 (1 to 15.98), while the market ratio was 1 to 17.87. So extraordinary a reversal of all sound principles and such blindness to our previous experience could be explained only by a desire to force this country to use a silver coinage only, and had its origin with the owners of silver-mines, aided by the desires of debtors for a cheap unit in which to absolve themselves from their indebtedness. There was no pretense of setting up a double standard about it; for it was evident to the most ignorant that so great a disproportion between the mint and market ratios must inevitably lead to the disappearance of gold entirely. This would happen, if owners could bring their silver freely, in any amounts, to the mint for coinage (“Free Coinage”), and so exchange silver against gold coin for the purpose of withdrawing gold, since gold would exchange for less as coin than as bullion. This immediate result was prevented by a provision in the law, which prevented the “free coinage” of silver, and required the Government itself to buy silver and coin at least $2,000,000 in silver each month. This retarded, but will not ultimately prevent, the change from the present gold to a single silver standard. At the rate of $24,000,000 a year, it is only a question of time when the Treasury will be obliged to pay out, for its regular disbursements on the public debt, silver in such amounts as will drive gold out of circulation. In February, 1884, it was feared that this was already at hand, and was practically reached in the August following. Unless a repeal of the law is reached very soon, the uncomfortable spectacle will be seen of a gradual disarrangement of prices, and consequently of trade, arising from a change of the standard.

In order that the alternate movements of silver and gold to the mint for coinage may be seen, there is appended a statement of the coinage(239) during the above periods, which well shows the effects of Gresham’s law.

Ratio in the mint and in Period. Gold coinage. Silver dollars the market. coined. 1:15 (silver lower in 1792-1834 $11,825,890 $36,275,077 market) 1:15.98 (gold lower in 1834-1853 224,965,730 42,936,294 market) 1:15.98 (gold lower in 1853-1873 544,864,921 5,538,948 market) Single gold standard. 1873-1878 166,253,816 ........ 1:15.98 (silver lower, 1878-1883 354,019,865 147,255,899 but no free coinage)

From this it will be seen that there has been an enforced coinage by the Treasury, of almost twice as many silver dollars since 1878 as were coined in all the history of the mint before, since the establishment of the Government.

It may, perhaps, be asked why the silver dollar of 412-½ grains, being worth intrinsically only from 86 to 89 cents, does not depreciate to that value. The Government buys the silver, owns the coin, and holds all that it can not induce the public to receive voluntarily; so that but a part of the total coinage is out of the Treasury. And most of the coins issued are returned for deposit and silver certificates received in return. There being no free coinage, and no greater amount in circulation than satisfies the demand for change, instead of small bills, the dollar-pieces will circulate at their full value, on the principle of subsidiary coin, even though overvalued. And the silver certificates practically go through a process of constant redemption by being received for customs dues equally with gold. When they become too great in quantity to be needed for such purposes, then we may look for the depreciation with good reason.(240)

There are, then, the following kinds of legal tender in the United States in 1884: (1) Gold coins (if not below tolerance); (2) the silver dollar of 412-½ grains; (3) United States notes (except for customs and interest on the public debt); (4) subsidiary silver coinage, to the amount of five dollars; and (5) minor coins, to the amount of twenty-five cents.

The question of a double standard has provoked no little vehement discussion and has called forth a considerable literature since the fall of silver in 1876. A body of opinion exists, best represented in this country by F. A. Walker and S. D. Horton, that the relative values of gold and silver may be kept unchanged, in spite of all natural causes, by the force of law, which, provided that enough countries join in the plan, shall fix the ratio of exchange in the coinage for all great commercial countries, and by this means keep the coinage ratio equivalent to the bullion ratio. The difficulty with this scheme, even if it were wholly sufficient, has thus far been in the obstacles to international agreement. After several international monetary conferences, in 1867, 1878, and 1881, the project seems now to have been practically abandoned by all except the most sanguine. (For a fuller list of authorities on bimetallism, see Appendix I.)