Economics

Front matter

6^^

ECONOMICS

IN TWO VOLUMES

Part I. Money and Prices <•

1. Nature of economics problems 3

2. Origin and nature of money 11

3. Commodity money and the quantity theory 25

4. Fiduciary money, metal and paper 30

5. Price levels and the gold standard 54

6. Rising prices and the standard 70

Part II. Banking and Insurance

7. The functions of banks 91

8. Banking in the United States before 1914 107

9. ThQ Federal Reserve Act 117

10. Crises and industrial depressions 138

11. Institutions for saving and investment . . . . 158

12. Principles of insurance 176

13. Scientific life insurance 191

Part III. Tariff and Taxation

14. American tariff history 207

16. The policy of a protective tariff 246

17. Objects and principles of taxation 270

18. Property and corporation taxes 288

19. Personal taxes 304

Part IV. Wages and Labor

20. Methods of industrial remuneration 321

21. Organized labor 337

22. Public regulation of hours and wages 358

23. Other protective labor and social legislation .... 379

24. Social insurance 398

25. Population and immigration 417

Part V. Public Policy Toward Private Industry

26. Agricultural and rural population 441

27. Problems of agricultural economics , - 457

TABLE OF CONTENTS

PAGE

28. The transportation problem . 477

29. Railroad regulation 490

30. The problem of industrial monoply 505

31. Public policy in respect to monopoly 522

Pabt VI. Peivate Property versus Socialism

32. The\ present economic system 543

33. Public ownership 558

34. Methods of distribution 574

35. Socialism, present and future 588

Index 605

Foreword To The Revised Edition

In this revised edition every chapter has been rewritten with reference to the momentons events that have filled the years since 1916, when the first edition of this work appeared. The statements of facts and figures have so far as possible been brought down to date. The materials formerly constituting the first two chapters have been distributed under other headings. New sections appear in every chapter, and new chapters have been added in the treatment of money, insurance, transportation, and socialism. Numerous charts have been added which, it is hoped, will be helpful to the reader. Most of these have been reproduced from charts prepared for the use of the author's classes, and others have been taken from various sources. A brief list of references has been appended to each chapter.

The year 1921, in the depths of an industrial depression, does not mark the end of an era of normal economic changes in anything like the sense that did the year 1916. Rather it might be said that it is the half-way stage in another decade. After five years more the broader economic eifects of the world war can be much better appraised. It is the author's hope, however, that in its present form this volume will aid, in some measure, the earnest and open-minded reader to interpret the important changes now in progress.

The author makes renewed acknowledgment to those colleagues and other friends who assisted him in various ways in the preparation of the first edition. Thanks are due to the statistical officers of the Federal Reserve Bank of the Second District for permission to reprint diagrams that have appeared in the MonthUj Review, and to others named specifically in notes to the charts and maps.

Princeton, N. J., Jan. 2, 1922.

MODERN ECONOMIC PROBLEMS

Chapter 1 Nature Of Economic Problems

§ 1. Increase of economic problems. § 2. Opinions and feelings in economic discussion. § 3. False contrast of theory and practice. § 4. Superficial thinking and popular error. § 5. American economic problems in the past. § 6. Main factors in economic problems. § 7. Range of economic problems treated.

§ 1. Increase of economic problems. The present volume deals with various specific problems in economics, as an earlier volume deals with the general economic principles of value and distribution. The word "problem" is often on our tongues. Life itself is and always has been a problem. In every time and place in the world there have been questions of industrial policy that challenged men for an answer, and new and puzzling social problems that called for a solution. And yet, when institutions, beliefs, and industrial processes were changing slowly from one generation to another and men's lives were ruled by tradition, authority, and custom, few problems of social organization forced themselves upon attention, and the immediate struggle for existence absorbed the energies and the interests of men. But the present time of rapid change seems to be peculiarly the age of problems. The movement of the world has been more rapid in the last century than ever before — in population, in natural science, in invention, in the changes of political and economic institutioiis ; ill intellectual, religious, moral and social opinions and beliefs.

Some human problems are for the individual to solve, as whether it is better to go to school or to go to work, to choose this occupation or that, to emigrate or to stay at home. Other problems of wider bearing concern the whole family group; others, still wider, concern the local community, the state, or the nation. In each of these there are more or less mingled economic, political, and ethical aspects. Economies in the broad sense includes the problems of individual economy, domestic economy, of corporate economy, and of national economy. In this volume, however, we are to approach the subject from the public point of view, to consider primarily the problems of ' ' political economy, ' ' considering the private, domestic, and corporate problems only insomuch as they are connected with those of the nation or of the community as a whole. Our field comprises the problems of national wealth and of communal welfare.

§ 2. Opinions and feelings in economic discussion. The student beginning economics, or the general reader, is likely to think that the study of principles is more difficult than is that of concrete questions. In fact, the difficulty of the latter, though less obvious, is equally great. The study of principles makes demands upon thought that are open and unmistakable ; its conclusions, drawn in the cold light of reason, are uncolored by feeling, and are acceptable of all men as long as the precise application that may justly be made of them is not foreseen. But conclusions regarding practical questions of public policy, though they may appear to be simple, usually are biased and complicated by assumptions, prejudices, selfish interests, and feelings, deep-rooted and often unsuspected. When the casual reader declares that he finds the study of practical questions in economics much easier than that of theory, he really means that the one seems to require little or no thought, while the other requires much.

In many questions feeling is nine tenths of reason, and one's

Ch. 1] NATURE OF ECONOMIC PROBLEMS 5

sympathies often dictate one's conclusions. In the following pages the reader is repeatedly warned when the discussion reaches such a danger point. When, however, in this work, outlooks and sympathies are expressed or tacitly assumed, they are not so much those personal to the author as they are those of our present-day American democratic society, taken at about its center of gravity. When the people generally feel different as to the ends to be attained, a different public policy must be formulated, though the logical analysis of the problems may not need to be greatly changed.

§ 3. False contrast of theory and practice. Still another word of caution should be given to those who find theoretical economic questions hard but who imagine that the understanding of "practical" economic questions is comparatively easy. The very contrasting of theoretical and practical study in this way is erroneous and misleading. The true understanding of every so-called "practical" question requires the understanding of theory, both the general theory (treated in Volume I) that underlies all economic activity, and the special theories that are related to the particular problems (treated in this volume). Indeed, theory as it is here used, and as it ought to be used, is hardly more than a synonym for * ' understanding " ; it is logical analysis, insight, orderly arrangement, in our thought, of the forces, motives, and material conditions that help to bring about certain results. The more clearly the student has thought through the general theories of value, price, time-preference, wages, etc., the better prepared he is to take up the study of such practical problems as money, banking, tariff, labor and capital, etc., every one of which involves more special theories of price levels, fiat money, international trade, the open shop, and minimum wage, respectively.

§ 4. Superficial thinking and popular error. A practical economic problem is alwaj's presented as a question: What is the right thing to do or the best course to pursue with respect to some matter that is tied up with many other matters ;

SO that the whole situation is usually very complex. The first answer of the untrained mind is almost certain to be a wrong one—just as to the natural man the earth seems flat, though it is round, the sun seems to circle around us, whereas we revolve on the earth's axis daily, and at the same time slowly circle around the sun ; the echo seems to be a mocking spirit answering us, whereas it is our own voice reflected back. Thousands of erroneous ideas were held by primitive man, and still are held by the savage, the child, and the untrained adult mind, regarding the simplest affairs of every-day life. In a like manner, the first answers to economic problems are usually superficial.

Since almost every economic matter affects various interests, there is the additional difficulty that some groups of persons, often influential and powerful, have something to gain by continuing to think superficially and by getting those who would benefit by the truth to keep on thinking superficially. Indeed, to think clearly, even if one suspects that it would be to his advantage to do so, is even for the ablest minds a difficult task, and for the mass of men, under the conditions, is often impossible. It should not surprise us, therefore, to find that nearly all economic improvements have been opposed not only by the few who would lose but by the many who would gain by the change; and to find, likewise, that the projects of reform that most quickly win the belief and support of the mass of men seeking relief from hard conditions have usually been as superficial and false in their theory as the ert'ors they were meant to displace. Truth, when at last found, is simpler than error, but often it is to be attained only by the hard road of analytic and abstract thought that follows through to the end the workings of each separate force and factor.

§ 5. American economic problems in the past. What, then, are the politico-economic problems in America? They are problems that are economic in nature because they concern the way that wealth shall be used and that citizens are enabled to make a living, but that are likewise political because they

Ch. 1] NATURE OF ECONOMIC PROBLEMS 7

can be solved only collectively by political action. With the first settlements of colonists on this continent politico-economic problems appeared. Take, for example, the land policy. Each group of colonists and each proprietary landholder had to adopt some method of land tenure, whether by free grant or by sale of separate holdings or by leasing to settlers. In one way and another these questions were answered; but rapidly changing conditions soon forced upon men the reconsideration of the problem as the old solution ceased to be satisfactory.

In large part our political history is but the reflection of the economic motives and economic changes in the national life. Thus the American Revolution arose out of resistance to England's trade regulations, commercial restrictions, and attempted taxation of the colonies. The War of 1812 was brought on by interference with American commerce on the high seas. The Mexican War was the result of the colonization of Texas territory by American settlers and the desire of powerful interests to extend the area of land open to slavery. The Civil War arose more immediately out of a difference of opinion as to the rights of states to be supreme -in certain fields of legislation, but back of this political issue was the economic problem of slave labor. Illustrations of this kind, which may be. indefinitely multiplied, do not prove that the material, economic changes are the cause of all other changes, political, scientific, and ethical; for in many cases the economic changes themselves appear to be the results of changes of the other kinds. There is a constant action and reaction between economic forces and other forces and interests in human society, and the needs of economic adjustment are constantly changing in nature.

§ 6. Main factors in economic problems. The particular economic problems in America at this time are determined by the whole complex economic and social situation. Two main factors in this may be distinguished : the objective and the subjective, or the material environment and the people composing the nation. The one is what we have, the other is what we are. These factors are closely related : for what We are as a people (our tastes, interests, capacities, achievements) depends largely on what we have, and what we have (our wealth and incomes) depends largely on what we are.

I. The objective factor presents two phases :

(a) The basic material resources, consisting of the materials of the earth's surface and the natural climatic conditions which together provide the physical conditions necessary for human existence, and which furnish the stuff out of which men can create new forms of wealth.

(b) The industrial equipment, consisting of all those artificial adaptations and improvements of the original resources by which men fit nature better to do their will. These two (a and b) become more and more difficult to distinguish in settled and civilized communities, and become blended into one mass of valuable objects, the wealth of the nation.

II. The subjective factor presents two phases:

(a) The people, considered with reference to their number, race, intelligence, education, and moral, political, and economic capacity.

(b) The social system under which men live together, make use of wealth and of their own services, and exchange economic goods.

The particular economic problems that are presented to each generation of people are the resultant of all these factors taken together. A change in any one of them alters to some extent the nature of the problem. The problems change, for example, (la) with the discovery or the exhaustion (or the increase or decrease) of any kind of basic material resources; (lb) with the multiplication or the improvement of tools and machinery or the invention of better industrial equipment; (II a) with the increase or decrease of the total number of people, and the consequent shift in the relation of population to resources; (II b) with changes in the ideals, education, and capacities of any portion of the people whether or not due to changes in the race composition of the population.

Ch. 1] NATURE OF ECONOMIC PROBLEMS 9

Many examples of these various changes may be found in American history, and some knowledge of them is necessary for an appreciation of the genesis and true relation of our present-day problems.

§ 7. Range of economic problems treated. Of numberless economic problems that are calling for solution in a modern nation like the United States of America, only the more important in relation to present needs can be discussed in their main aspects within the limits of a single volume. The ones here chosen, as may be seen by referring to the table of contents, include a wide range, from the more impersonal financial questions connected with money and the medium of exchange, to the most burning issues of class interests and conflicts; and from those that seem to do merely with the individual (as incomes or wages or taxes) to the most fundamental questions of the form of economic organization and the displacement of private property by communism. In truth, these contrasts are often misleading; for the welfare of individuals is affected in many ways, often remote and unsuspected, on the one hand by impersonal factors such as the production of gold or the invention of machinery, and on the other hand by the form and function of the social organization of which each of us is a part.

Some conceive of the economist's task narrowly as being merely the study of market prices ; others broaden the field to include the study of individual valuations and gratifications; and still others make it include the solution of all problems of economic legislation affecting the general welfare of society. No practical problem in the field of economics can be rightly solved as if it were an economic problem in any narrow sense untouched by political, moral, and social considerations. In this volume the broadest of these conceptions is taken, prices and values being studied because of their bearing upon social welfare. "Welfare economics rather than price economics is our ideal.

References: The titles of the chief encyclopedias of economics and of several good collections of general readings are given in the Manual of references and exercises in economics, for use with the author's Economic Principles, published by the Century Co., New York. (References to the author's Source Book in Economics [1912] have been dropped in this edition, as that work is now out of print.) Several American general texts on political economy treat more or less fully the questions taken up in the present volume. Some of the texts are listed here, and are not referred to specifically in connection with the various chapters following.

Carver, T. N., Principles of political economy, 1919.

Same, Principles of national economy. Boston. Ginn & Co. 1921.

Fisher, Irving, Elementary principles of economics. New York. Macmillan. 1912.

Ely, R. T., Outlines of economics. Rev. Ed. New York. Macmillan. 1908.

Clay, H. Economics. (American Revision.) New York. Macmillan. 1918.

Seager, H. R., Principles of economics. New York. Holt. 1913.

Seligman, E. R. A., Principles of economics. 3d ed.

Taussig, F. W., Principles of economics. 2 vols. New York. Macmillan. 1911.

Turner, J. R., Introduction to economics. New York. Scribners. 1919.

Chapter 2 Origin And Nature Of Money

§ 1. Origin of money. § 2. Money as a tool. § 3. ]Money defined. § 4. Qualities of the original money-good. § 5. Industrial changes and forms of money. § 6. The precious metals as money. § 7. Varying extent of the use of money. § 8. Relative importance of money. § 9. Standard-commodity money. § 10. Commodity money without coinage. § 11. The money -material in its commodity uses.

§ 1. Origin of money. Everywhere in the world where the beginnings of regular trade have appeared, some one of the articles of trade soon has come to be taken by many traders who did not expect to keep or use it themselves, but to pass it along in another trade.^ This made it money, for money is whatever comes to be used as a general price-good. The character of a general price-good clearly distinguishes money from goods bought and sold by a particular class of merchants, such as grain, cattle, etc., to be sold again. It is only in so far as a particular good comes to be taken by persons not specially dealing in it, taken for the purpose of using it as a price-good to get something else which they desire, that a thing has the character of money. The thing called money thus is a durative good passing from hand to hand in a community, and completing its use in turn to each possessor of it only as he parts with it in exchange for something else.

The use of money is of such social importance that it would be impossible for modern industrial society to exist without it. The discussion of money touches many interests; it raises many questions of a political and of an ethical nature. There

1 See Vol. 1, pp. 15-16. 50-53, and 26|2-264,for an introductory statement of the origin and functions of money.

are perhaps more popular errors on this than on any other one subject in economics, but the general principles of money are as fully understood and as firmly established as are any parts of economics.

§ 2. Money as a tool. Money is often, by a figure of speech, called a tool. A tool is a piece of material taken into the hand to apply force to other things, to shape them or move them. Figuratively, this is what money does : it moves things into one's control. A man takes it, not to get enjoyment out of it directly, but to apply force, to move something, and that which he moves is the thing he buys. Money thus (as money) is always an indirect agent. Adam Smith aptly likened money to the roads and wagons that transport goods, thus gratifying desires by putting goods into more convenient places. The fundamental use that money serves is to apportion one's income conveniently as it accrues and as it is spent. The use of money increases the value of goods by increasing the ease with which trade can take place. Like any tool or agent, money is valued for what it does or helps to do. It enhances the value of the goods that it buys and sells by dividing them into quantities convenient for use and by making them available at the right times.

It has been said that the service performed by money is to overcome the difficulty in barter of the double coincidence of wants and possessions. For example, a man may possess a horse that he is willing to sell, and he wants in place of it not just one thing, but a group of things, say a cow, a bag of flour, a pair of shoes, and several other small commodities, perhaps preferring not to have them all at once, but distributed over a period of some days or some weeks. Now, it is not likely that these things would exchange at such ratios in the market that the horse would just be of equal value to the group of other goods. Little less than a miracle would be needed to find a man desiring a horse, and who at the same time possessed just that group of goods to exchange for it. So, either no trade at all could take place, or there must be a series of trades

Ch. 2] ORIGIN AND NATURE OP MONEY 13

in which the man takes some of the things he wants (say a cow) and other things "to boot," in the hope that later these may be traded for the right things. Evidently, when the "possession" is one large thing and the "wants" are many (or vice versa), the coincidence required is much more than double. In the light of the principles of diminishing gratification and of time-preference, it is clear that the amounts in which and the times at which goods are available have an essential bearing on their values. Money is the most successful device ever discover,ed for distributing the supplies of a journey along its course and the goods of daily need over a period of time. The use of money as a storehouse of value by hoarding it is merely a more extreme case of keeping income until a time when it will have a greater value to the owner than it has in the present.^

§ 3. Money defined. Money may be defined as a material means of payment and medium of trade, passing from hand to hand and generally accepted as the most usual price-good. The definition contains several ideas. Trade means the taking and giving of things of value. Money passes from hand to hand, is a thing that can be handled and is, or can be, bodily transported. The words "generally accepted" imply that money has a peculiar social character, is not an ordinary good. As a price-good, money itself must be a thing having value ; otherwise it could not be accepted.

The application of the definition is not always easy, for money shades off into other things that serve the same purpose and are related in nature. Money is not merely an order for goods, as a card or paper requesting payment; it is itself a thing of value (though this value may be due partly or solely to its possessing the money function). Such things as a telegram when transferring an order for the payment of money,

2 The old-fashioned miser, however, withdraws his hoarded jrold for the time from its usual monetary function as an indirect agent, and treats It as a direct good yielding to him psychic income by its mere possession.

as the spoken word, and as a mere promise to pay, are not money. Even checks and drafts are merely written evidences of credit, and are nsed as substitutes for money.

In many problems money appears to be at the same time like and unlike other things of value, and just wherein lies the difference it is often difficult to determine. Even special students differ as to the border-line of the concept, but as to the general nature of money there is essential agreement.

§4. Qualities of the original money-good. The selection of any money-commodity has not been made by chance, but has been the result of that object being better fitted than others to serve as a medium of exchange. The main qualities that affected the selection of primitive forms of money were as follows :

1. Marketability (or salability) ; that is, it must be easy to sell. The first forms of money had to be things that every one desired at some time and many people desired at any time. That was the essential quality that made any one ready to take it when he did not wish its direct use himself. Many kinds of food and of clothing are very generally desired goods. But few of these classes of goods have in a high measure certain other important qualities, now to be named.

2. Trans'porta'bility ; that is, the money material must be easy to carry; it must have a large value in small bulk and weight. To carry a bag of wheat on one's back a few miles requires as great an effort ordinarily as does the raising of the wheat; and the cost of carriage for fifty miles, even by wagon, will often equal the whole value of the wheat. Cattle, while not comparatively very valuable in proportion to weight, and not possessing the other qualities of money in the highest degree, have the advantage that they can be made to carry themselves long distances, and therefore they have been much used as money in simpler economic conditions.

3. Cognizability; that is, the money-good must be easy to know, and to judge as to quality. If expert knowledge or

Ch. 2] ORIGIX AND NATURE OF MONEY 15

special apparatus is needed to test it in order to avoid counterfeits, few could be ready to take it, and trading would be a costly process.

4. Durahility ; that is, the money-good must be easy to keep without much loss in amount or in quality, perhaps for long periods, until it can be passed on in trade. Few kinds of food answer very well to this last requirement, bfeing organic and perishable. But all four qualities above named were pretty well embodied in primitive times in rocksalt, in rare flints and bits of copper suitable for tools and weapons, in furs in northern countries, and in many articles of personal adornment, such as beads, feathers, jewels, and metal ornaments.

5. Divisibility; that is, the quality in the monetary material that permits it to be divided/' easijly i'nto smaller amounts and then to be united again into larger masses at little cost and without loss in amount or in quality. This quality is present only when the material is homogeneous throughout the whole mass, a condition fulfilled more completely by the metals than by any other goods. - This quality makes it possible to put the governmental stamp upon the money material, and to produce pieces some of which are exact duplicates and some exact multiples, of others. In this manner pieces of money are provided suitable for transactions of different magnitudes, down to small fractional amounts. A monetary system of this kind aids greatly the development of the sense and habit of exact estimation of price.

§ 5. Industrial changes and the forms of money. The money use, as has just been shown, is a resultant of a number of different motives in men. The changing material and industrial conditions of society change the kind of money that is used. Things that have the highest claim to fitness for money with a people at one stage of development have a low claim at another. The final choice of the money-good depends on the resultant of all the advantages. Shells are used for ornament in poor communities, but cease to be so used in a higher state of advancement, and thus their salability ceases. Furs cease to be generally marketable in northern climes when the fur-bearing animals are nearly killed off and the fur trade declines. "When tobacco was the great staple of export from Virginia, everybody was willing to take it, and its market price was known by all. It served well then as the chief money ; but, as it ceased to be the almost exclusive product of the province, it lost the knowableness and marketability it had before. In agricultural and pastoral communities where every one had a share in the pasture, cattle were a fairly convenient form of money; but in the city trades of to-day their use as money is impossible. Thus, in a sense, different commodities compete, each trying to prove its fitness to be a medium of trade ; but only one, or two, or three at the most, can at one time hold such a place.