45. USE, COINAGE, AND VALUE OF MONEY…

45. USE, COINAGE, AND VALUE OF MONEY

§ I. THE PRECIOUS METALS AS MONEY

[Sidenote: Money defined and reviewed]

1. Money we have defined as a material means of payment and medium of exchange, generally accepted and passing from hand to hand. The origin and function of money were set forth in the study of capital. The subject must now be approached from a different side and with the two-fold purpose of seeing whether there is anything peculiar in the relation of money to the general problem of value, and what is the influence of the action of the state on the value of money. The definition of money implies several ideas. First, the words "generally accepted means of payment" imply that money, as something bearing the stamp of social approval, has a peculiar social character, is not an ordinary good. Second, the definition implies that money itself must be a thing having value, otherwise it could not serve as a medium of exchange. Exchange means the taking and giving of things of value. Money is, therefore, not merely an order for goods, as a card or paper requesting payment; it is itself a thing of value, though this value may be due solely to its possessing the money function. This point is one of the most difficult in the subject. Third, the definition implies that money is a material thing. The telegram when transferring an order for the payment of money, the spoken word, the promise to pay, etc., are not money. Fourth, it implies that money passes from hand to hand, is a thing that can be handled, and is or can be bodily transported.

[Sidenote: Difficulty in applying the definition]

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. Even special students differ as to the border-line of the concept, but as to the general nature of money there is essential agreement. In many problems it appears to be at the same time like and unlike other things of value, and just wherein lies the difference often is difficult to determine. The use of money is of such social importance, and it touches so many practical interests, that it raises many questions of a political and ethical nature. There are perhaps more popular errors on this than on any other one subject in economics. Yet the general principles of money are as fully understood and as firmly established as any parts of economics.

[Sidenote: Standard, or primary, money]

[Sidenote: Gold-using countries]

2. The precious metals, gold and silver, are the standard, or primary, moneys in the world to-day. Primary, typical, standard money is the unit in which the value of the money of a country is expressed, no matter what its form is; the standard is a certain weight and fineness of a particular metal. Coins of this standard are called full, or real, money by some writers who deny the title of money to everything else. It has been shown before that there has been an evolution in the use of money. The more efficient forms, gold and silver, have competed with copper, iron, tin, cattle, salt, tobacco. In this contest silver had proved itself a few centuries ago to be the fittest medium of exchange, but in the last century gold has, among the leading nations, been displacing silver rapidly. In a higher degree than any other material, gold has the qualities of a good standard money in rich and industrially developed communities. The gold-using countries to-day are those of the western world. England for perhaps two centuries practically has had gold as its standard money; the United States since 1834 (except for the period of paper money from 1862 to 1879); France since about the year 1855, at which time she shifted from silver under the working of the bimetallic law; and Germany, then more backward industrially, since 1873. Australia and Japan have reached that result only within the last few years, and Italy, Russia, India, Mexico--even China and other Oriental countries--are striving to attain it.

[Sidenote: Subordinate kinds of money]

In all these countries other kinds of money are used side by side with gold and silver. The actual money consists of a wide and confusing variety: silver, nickel, copper, paper in various forms and issued by various authorities. But among all the kinds, either gold or silver is found standing preëminent and in a peculiar position. The difficulties of the money problem must be attacked at the point of standard money where it is nearest to ordinary value problems and is less complicated than when the various money substitutes are included. Most of the fallacies regarding money have arisen not about standard money, but about paper and light-weight silver.

[Sidenote: Coinage defined]

3. Coinage is the act of shaping and marking a piece of metal to be used as money so as to indicate its weight and fineness. The precious metals can and do circulate as money without coinage. Any other mark equally plain and equally recognizable serves for many purposes just as well as the government stamp on the standard metal. The use of metals in antiquity was without coinage, by weight and test of fineness. In backward countries to-day most payments are made by weight. International payments are made by means of gold ingots that bear the mark of some well-known banking-house, and for that purpose gold bullion is money without the coiner's stamp. But for most uses government coinage has marked advantages. It is far more convenient for the average citizen to handle coins uniform in size and design than the diverse coins that would be put out by private enterprisers.

[Sidenote: Technical features of coinage]

An established rate of fineness insuring uniform quality is a great convenience. In the United States all gold and silver coins are nine tenths fine; in Great Britain, eleven twelfths. The established weight of the gold dollar in the United States is twenty-three and twenty-two hundredths grains of fine gold or twenty-five and eight tenths grains of standard gold. The limit of tolerance is the variation either above or below the standard weight or fineness that a coin is allowed to have when it leaves the mint. The par of exchange between standard coins of different countries is the expression of the ratio of fine gold in them. Thus the par of exchange between the American dollar and the English sovereign (the "pound") is four and eighty-six and two third hundredths, that is, four and eighty-six and two third hundredths dollars contain the same amount of gold as an English gold sovereign. The embossed design, milled or lettered edges, and other similar devices are merely to make the coins easily recognizable and difficult to counterfeit.

[Sidenote: Seigniorage defined]

4. Seigniorage is the right the ruler or state has to charge for coinage, or it is the charge made for coinage. Coinage as a function of great importance politically as well as economically was early exercised by governments or rulers. The prince, king, or emperor stamped his own device or portrait upon the coin; hence the term seigniorage from seignior (meaning lord or ruler). The right to issue money came to be one of the most essential prerogatives of sovereignty. Coinage is rarely without charge, and often has been a source of revenue to the ruler. In the Middle Ages this right was frequently exercised by princes for their selfish advantage to the injury and unsettling of trade.

[Sidenote: Free or gratuitous coinage]

When no charge is made for coinage, the coinage is said to be gratuitous. Coinage is said to be free if the subject or citizen can take bullion to the mint whenever he pleases, paying the usual seigniorage. Coinage is limited if the government or ruler determines when coinage is to take place. Thus, coinage may be both free and gratuitous, when citizens are allowed to bring bullion whenever they please and have it converted into coins without charge or deduction. But coinage is free without being gratuitous when any citizen may bring metal to the mint, whenever he chooses, to be coined subject to the seigniorage charge.

[Sidenote: Money value under free coinage]

5. Where coinage is free and gratuitous the coin is worth the same as the bullion that is in it. This evidently and necessarily must be near the truth if the citizens exercise their right. They will not long keep metal uncoined in their possession when it is worth more in the form of money, nor will they long keep money from the melting-pot when it is worth more as bullion. Yet there may be a slight disparity between the bullion and the money values before the metal is converted into coin or the coin melted down into metal. A motive for action must exist before either change will be made; but a thing cannot have considerably different values in two different uses at the same moment.

[Sidenote: Adjustment of supply to value]

There is here no special problem of value. The value of gold as bullion and money is fixed by marginal demand. The several uses of gold are constantly competing for it: its uses for rings, pens, ornaments, championship cups, photography, dentistry, delicate instruments, and as a circulating medium. If the metal becomes worth more in one use, its amount there is increased and correspondingly diminished in the others. The supply likewise is influenced by changes in price. Gold-mining is one among various industries to which men may apply their labor and capital. Some mines are superior, others average, others marginal which it barely pays to work. There is, therefore, a rise and fall of the margin of production with change in price and change in cost of production. If at a given moment, when it barely pays to work a mine, gold becomes worth less, that mine will go out of use. As gold rises, some mines that did not pay before, come into use. A similar variation has been noted in the case of marginal land, marginal factories, marginal forges, and marginal agents of every kind.

[Sidenote: "What is a dollar?"]

The question was once asked in Parliament, "What is a pound?" and a good question to ask in beginning the study of money is, "What is a dollar?" The answer, so far as it refers to the standard money, is: a dollar is a convenient name applied to twenty-three and twenty-two hundredths grains of fine gold or twenty-five and eight tenths grains of standard fineness. The exchange value of gold varies in different places and conditions, but the name remains the same. A dollar exchanges for more wheat in Dakota than in New York or for more iron in Pittsburg than in Oregon, yet it is sometimes asserted that the value is always the same because the name is always the same. The fallacy of this may be seen in the equivalent expression that twenty-three and twenty-two hundredths grains of gold have the same value always and under all circumstances.

The problem of the bullion value of money metal, under gratuitous coinage, presents no special difficulties. The ordinary theory of value applies to it. The difficulties of the money question begin at the point where the money value is seen to diverge from, and depend on, something else than the value of the bullion. Yet in the principles just discussed are found a firm foundation for any further study of the question.

§ II. THE QUANTITY THEORY OF MONEY

[Sidenote: The money use]

1. The fundamental use that money serves is to apportion incomes of goods so as to make them yield the maximum gratification. Money first increases utility by increasing the ease with which exchange takes place. Like any tool or agent, it is valued for what it does or helps to do. But further, it enhances the sum of enjoyments by the division of goods into proper quantities, making them available at the best time. It follows from the principle of diminishing utility that the particular time at which goods are available for wants has an essential bearing on their value. A hundred loaves of bread in the hands of a single individual would mold long before they could be consumed. Money enables men in society to acquire these hundred loaves in a series so that they can be used when most needed. Money is the most successful device man has ever discovered for distributing the supplies of a journey along its course, and the goods of daily need over a period of time. The use of money as a storehouse of value is merely an extreme case of keeping things for the future when they will have a greater gratifying power.

[Sidenote: Concept of the money demand]

[Sidenote: Variation in the average]

The fact that money is essentially a valuable good kept on hand as the best possible provision against emergencies points to the essential nature of the money demand. Money is sought, in order to form a cash reserve, up to a point where the loss from keeping it balances the probable gain. The money use is subject to the law of diminishing utility; beyond a certain point its added convenience is purchased at too great cost. Every man may be thought of as having an average, or usual, money demand, which is that proportion of his income that gives him more utility retained in money form than if at once expended. A man with an income and expenditure of fifty dollars a month paid monthly has use ordinarily for no more than fifty dollars as his cash reserve. While under ordinary circumstances this is his maximum demand, various circumstances may diminish it. If his expenses are distributed in two equal parts (the one on pay-day, the other thirty days later) his average money demand is twenty-five dollars, not fifty dollars. If most of his purchasing is done at the beginning of the month, his average money demand may be perhaps ten dollars. Many a workman purchases on credit, spends his fifty dollars within an hour after he receives it, and goes without money for the rest of the month. The average demand of a community for money required as a reserve is affected by the methods of doing business. With a given method of use a reduction in the supply of money results in loss of time and waste of effort; an increase in the supply results in a lowering of its value relative to other things. In either case the equilibrium of the marginal utilities of income must be restored. The thought of an average, rational, money demand relative to money income is the fundamental requisite for clear thinking on the question of money, but to grasp this thought there is needed a certain power of scientific imagination lacking in some minds.

[Sidenote: The quantity theory of money]

2. The quantity theory of money is that, other things being equal, the value of money falls as its quantity increases, and vice versa. This is an abstract statement of a concrete and difficult problem. The phrase "other things being equal" betokens the statement of a tendency where there are several unknown factors. In recent discussion the quantity theory of money has been questioned by some critics; yet it is held by most economists to be merely the general law of value as applied to money. There are three sets of facts to be brought into relationship with each other in the quantity theory: (1) amount of business or exchanges to be effected; (2) the methods by which this is done; (3) the amount of money available to do it. According to the quantity theory we must expect that when conditions (1) and (2) remain fixed, the value of money will vary inversely as its quantity. This conclusion follows from the conception of the money demand as the value of circulating medium that bears an average proportion to the value of goods exchanged.

[Sidenote: Example of its application]

Let us consider various conditions. When a number of men, by reason of increasing gold supplies, get larger stocks of money than they have had, the former proportion between their money incomes and their money is altered. In reducing their stock of money by buying goods they bid up the prices of goods until the total value of goods exchanged again bears the same ratio as before to the total value of money. Taking an extreme case: if twice as many dollars get into circulation in a community, either some few men must have several times as many dollars as before, while others have the same; or every man will have his due proportion, just twice as much as before. The latter, "other things being equal," must be the logical result after equilibrium has been restored. Is any other result thinkable? Now if prices of goods remained the same as before, there would be twice as great a value of money available to effect exchanges. There is no reason why each should tie up twice as large a proportion of his income in a supply of the medium of exchange. If, however, there is a concerted movement to spend the surplus money, there results a general bidding down of the exchange value of money, a general bidding up of prices of goods. At what point will this movement stop? The rational conclusion must be that "other things being equal" equilibrium will be reëstablished only when the ratio between the value of money and the price of goods becomes the same as before. The money being doubled, prices must be double, and likewise for any other change in quantity.

[Sidenote: Objections made to the quantity theory]

3. The quantity theory is misunderstood, and is criticized on the ground that the facts oppose it. If but one kind of metal were used as money, and this were coined of uniform weight and fineness, the problem would be comparatively simple. But in fact gold and silver, full-weight and light-weight coins, circulate side by side. More mysterious still, the money in circulation is partly coin and partly paper. How can the quantity theory hold in these conditions? Several objections to the quantity theory are presented. It is said, first, that prices do not vary exactly with the per capita circulation of different countries at a given moment. The per capita circulation in Mexico may be five dollars and in the United States twenty-five dollars, while prices are much less than five times as great here as in Mexico. Secondly, it is said that prices do not vary directly with changes in the amount of money in a given country. There is now perhaps five times as much money per capita in the United States as fifty years ago and yet prices are not five times as high. Thirdly, it is said that credit methods change, and therefore that money does not fix prices. Fourthly, it is said that even if true of primary money the theory fails to apply to actual conditions with many forms of money in circulation side by side. Fifthly, it is said that there are too many unknown quantities to permit the rule to be used.

[Sidenote: The objections examined]

4. A reasonable interpretation of the quantity theory makes it a statement of the effect of a change in a single factor. The objections to the quantity theory assume that it is a statement of what occurs under all conditions, instead of what it is, an index to the working of one condition at a time. The foregoing objections need but to be further analyzed to show that in each of them it is not merely the quantity of money, but a number of other factors that differ in each of the propositions. We may note briefly in turn the defects in the arguments of the preceding paragraph.

[Sidenote: Not a per capita rule]

First, the quantity theory does not remotely imply that prices in different countries differ at a given moment according to the per capita money. In the case of the United States and Mexico not only the amount of exchange per capita but the method of exchange, and the rapidity of the circulation of money differ quite as much, doubtless, as does the per capita circulation. The quantity theory would lead any fairly careful student to a conclusion the exact opposite of that which its critics have twisted from it.

[Sidenote: Recognizes the growth of trade]

Second, the quantity theory does not imply that during a period of years when a country is changing in a multitude of ways, as in population, methods of industry, modes of exchange and transportation, and in wealth and income, the prices will vary directly either as the absolute or per capita amount of money does. In the light of the quantity theory the inquirer must be led to just the opposite of the ridiculous conclusion imputed to it.

[Sidenote: Recognizes use of credit]

Third, the theory does not overlook the effect of an increased use of credit, for it fully implies that any such a change, by economizing the use of money, would enable the same amount of money to support a higher scale of prices.

[Sidenote: Not confined to primary money]

Fourth, the theory does not overlook the variety of forms, and is not true merely of primary money. However great this variety, the money demand of individuals and of communities still represents a pretty definite ratio of the value of exchanges effected. If the primary money alone were doubled in quantity, while the various forms of substitute money (smaller coins, bank-notes, government notes, etc.) remained unchanged, the quantity of money as a whole would not be doubled, and according to the theory, prices would not be expected to double. Indeed, in such a case, the method of exchange would be very greatly altered, and the case is fully covered by the statement of the theory.

[Sidenote: Is a practical rule]

Fifth, despite the number of changing factors affecting the methods of exchange, the method of business, etc., the quantity theory is a rule usable at any moment. These various factors change slowly, and the quantity theory answers the question, What change occurs in prices as a result of an increase or decrease of the money in a given community at a given moment? Like the law of gravitation, the law of projectiles, and the statement of the chemical reaction to be expected when adding some substance to a given compound, the theory must be interpreted with practical limitations. When the quantity theory is thus stated and understood, its negation is unthinkable, as is evidenced by the involuntary use made of it constantly by every one of its few critics in explaining the simplest monetary phenomena.

[Sidenote: Practical application of the quantity theory]

[Sidenote: Recent price changes]

5. The quantity theory makes intelligible the great and rapid changes in price that have followed sudden changes in the money supply. Inductive demonstration of broadly stated economic principles is difficult, but in no other economic problem is laboratory experiment so nearly possible as in that of money. Many inflations and contractions of the circulating medium have occurred, now in a single country, again in the entire world, and the local or general results have served to exemplify richly the working of the quantity principle. With the scanty yield of silver- and gold-mines in the Middle Ages, prices were low. After the discovery of America, especially in the sixteenth century, quantities of silver flowed into Europe. The great rise of prices that occurred was explained by the keenest thinkers of that day along the essential lines of the quantity theory, though there were many monetary fallacies current at the time. The experience in England during the Napoleonic wars, when the money of England was inflated and prices rose above those of the Continent, led to the modern formulation of the theory by Ricardo and others. The discovery of gold in California and Australia, in 1848-50, increased the gold supply marvelously, and gold prices rose throughout the world. Between 1870 and 1890 the production of gold fell off greatly while its use as money increased and prices fell. A great increase of gold production has occurred in the period since 1890. In part the rising prices from 1897 to 1902 are explicable as the periodic upswing of confidence and credit, but in part doubtless they are due to the stimulus of increasing gold supplies. These are but a few of many instances in monetary history which, taken together, make an argument of probability in favor of the quantity theory so strong as to constitute practically its inductive proof.

46. TOKEN COINAGE AND GOVERNMENT PAPER MONEY

§ I. LIGHT-WEIGHT COINS

[Sidenote: Seigniorage and the value of coins]

[Sidenote: Saturation point for coinage]

1. When the number of coins issued is limited properly, a seigniorage charge does not reduce their money value; they are worth more as money than as bullion. The coinage thus far considered has been that of full-weight coins without seigniorage. The question now is, What is the effect of a seigniorage charge on the value of the coin as compared with the bullion that is in it? This is one of the most difficult phases of monetary theory. Two values must be thought of: one the value of the coin as money, the other the value of the bullion in it. When coinage is free and gratuitous, these two values are the same. How can they ever be different? The answer to the question is found in the theory of monopoly value. If the supply of coin is limited by the sole agency of issue, the value can be kept above the cost of production (i.e., in this case the bullion value), the seigniorage being the profit of the government. The limit within which the coinage must be kept is the number of coins that would circulate freely if they were made full weight without a seigniorage charge. This is the "saturation point" of the money demand of the country; it is a certain number of pieces of full-weight metal. If more than that amount gets into circulation it becomes worth less as money than as bullion, and it is melted or exported.

[Sidenote: Example of seigniorage value in coins]

If this full supply of money at a given moment is 100,000 pieces or dollars, a seigniorage charge of ten per cent. could be made if the number of pieces were not increased above 100,000. The government alone having the right of coinage, the need of money would give the circulating medium a monopoly value. The value of the money would rise until the coin would buy one ninth more bullion than was in it, but if there were any further rise the citizens would begin to take coins to the mint. After the ten per cent. charge was taken out they would receive a coin which, though containing one tenth less bullion, would be worth very nearly the same as the metal taken to the mint. No considerable depreciation could take place unless the volume of business fell off so that less money was needed than at the old standard. In that case there would be no outlet for the excess of coins until they fell to their bullion value, i.e., till they lost the entire value of the seigniorage, the monopoly element in them. Melting or exporting them before that point was reached would cause the loss of whatever element of seigniorage value they contained.

[Sidenote: Example of excess and depreciation of coins]

Assuming that the volume of business, or sum of exchanges, remains unchanged, let us consider what will result if the government begins to issue "on its own account." The number of coins might be increased until at the bullion price the total money value were equal to the original 100,000 full-weight coins, at which point exportation would take place. There being nine tenths as much precious metal as before, it would require ten ninths as many pieces, or 111,111 pieces, to have as great a value as the 100,000 had before. At this point there is no further profit to the government in issuing coins of that weight. To make a further profit it must again reduce the amount of pure metal in the coin.

[Sidenote: Medieval examples of depreciation]

This is essentially what occurred often throughout the Middle Ages. A ruler debased the quality or reduced the weight of money, but for a time the new coin, having the same money use, circulated as freely as the old coin. If, as so often happened, the ruler yielded to the temptation to issue more in order to get the profit, the older, heavier coins at once began to go abroad or into the melting-pot. Then occurred a fall in value, mystifying alike to the prince and the people. The reason is now perfectly plain: the number of pieces issued had not been kept within the proper limits, and the coins went down to their bullion value.

[Sidenote: Difficulties with full-weight subsidiary coins]

2. Subsidiary coins of lighter weight than the standard, if properly limited, will remain in circulation at par. Money to serve all of its purposes must be of different denominations. The amount required of each denomination is determined by the volume of exchanges for which each is most convenient. Each kind of money, as the penny, nickel, dime, has its own peculiar demand and its saturation point. For the smaller denominations the standard metal is not suitable. A gold dollar cannot well be cut into twenty or a hundred pieces. Thus copper, nickel, silver remain in restricted use. When these are issued at their bullion value, difficulties arise; not only are they too heavy, but as they vary in bullion value, some of them become worth more as bullion than as coin, and suddenly disappear from circulation.

[Sidenote: Adoption of light-weight minor coins]

[Sidenote: Theory of light-weight coins]

This happened often throughout the Middle Ages and until the nineteenth century. Gold and silver generally were coined at a ratio of weight corresponding exactly to their market ratio at a given moment, and every time the market conditions varied, one kind of the money went out of circulation, and the country was left either without the larger gold coins, or without subsidiary coin, or "small change." At length the plan was hit upon of issuing a limited number of subsidiary coins of less than full bullion value, that is, as "token coins." By this plan there is given to the minor coins a value greater than that of the bullion in them. The small profit made by the government on every penny, nickel, or dime issued, is a seigniorage charge. These minor coins, in somewhat confusing variety, circulate side by side with full-weight money, their value depending on the monopoly principle. The result of a large issue of any one denomination would be a lowering of its value. In practice their issue is determined by the needs of business and by the requests of citizens for small coins in exchange for standard money. One needing "change" gets it at the bank; when the bank finds its supply falling short it gets more from the government mints. As business increased in 1898, the demand for nickels, dimes, and quarters became unprecedented, and the mints worked night and day to supply them.

[Sidenote: Gresham's law]

3. Gresham's law of the circulation of coins of different bullion value is: bad money drives out good money. This so-called "law" was stated in these circumstances: England had two kinds of metal money, silver and gold, which were coined at a fixed ratio in weight; and as the market value of the bullion changed, the new full-weight coins of the metal rising in value went out of circulation. The coining of the cheaper metal caused the melting or exporting of the one becoming dearer, and for those purposes the coins containing the most bullion were picked. Likewise full-weight coins disappear whenever money of less bullion value (either because containing more alloy, or because made of a cheaper metal or of paper) is poured into the circulation in large quantities.

[Sidenote: Proper interpretation of Gresham's law]

Gresham's law needs some explanation, for it is frequently misunderstood. "Bad" money means money that has not the bullion value equal to its money value, money that is either debased in quality or light in weight. But not every piece of bad money will drive out every piece of good money. If that were so, a single bad penny would drive out of circulation all the gold. The law applies only under certain conditions. The "good" will leave the country only if the total amount of money in circulation is in excess of what would be needed if all were of full weight or best quality. Paradoxically speaking, if there is not too much of the bad money, it is just as good as the good money. The good money may not leave the country. It may be hoarded, or be picked out by banks and savings-institutions to retain as their reserve, or it may be melted for use in the arts. Gresham's "law" is thus a practical precept: keep the amount of token or light-weight coin limited to the field of its peculiar use, or it will cause the other forms, the fuller weight money, to leave for a better market. That better market may be the melting-pot or it may be a foreign country.

§ II. PAPER MONEY EXPERIMENTS

[Sidenote: Nature of paper money]

[Sidenote: The legal-tender quality]

1. Government paper money may be defined as money for which a seigniorage of one hundred per cent. is charged. The order in the study of the money question is from seigniorage to paper money, because paper money embodies the principle of seigniorage in its extremest form. The issue of paper money grew out of the practice of debasing metal. The gain of seigniorage from paper money is greater and is just as easily secured. Government paper money is sometimes called "political money," in contrast with money whose value rests on the value of its material. In this sense, however, all coins containing an element of seigniorage, or monopoly value, are to that degree "political" money. The typical paper money is irredeemable, that is, it cannot be turned into bullion money on demand. It was simply put into circulation with the legal-tender quality. The "legal-tender" quality is the declaration of the government that the paper money must be accepted by citizens as a legal discharge for debts due them. The object of this is to compel people to use it as money whether they will or not. The purpose of the government in thus employing its power over the circulating medium is usually to profit, that is, to secure the value of the seigniorage for public purposes. Paper money differs from bank-notes in that it does not depend for its redemption on the credit of the issuer. It differs from bonds in that its value is not based on the interest it yields, but solely on its money uses. The issue of paper money may save the government the payment of interest on an equal amount of bonds. The promise to receive paper money in payment for taxes or for public lands, may help to maintain the value of the notes by reducing their quantity, but nothing short of prompt exchange for standard coins makes them truly redeemable.

[Sidenote: Examples of paper money in the eighteenth century]

2. The most notable examples of paper money in the eighteenth century were the American colonial currencies, the continental notes, and the French assignats. In all the American colonies before the Revolution notes or bills of credit were issued which were in most cases legal tender. Without exception they were issued in large amounts and without exception they depreciated. Parliament forbade the issues, but to no effect. The continental notes were issued by the Continental Congress in the first year of the war (1775), and for the next five years. The object at first was to anticipate taxes, and it was expected that the states would redeem and destroy the notes, but this was not done. The notes passed at par for a time, but depreciated rapidly as their number increased. The country had less than $10,000,000 of coin before the war, and when, in 1780, over $200,000,000 of notes were in circulation they were completely discredited; hence the phrase "not worth a continental." Specie quickly came back into use. A few years later the leaders of the French Revolution, failing to learn the lesson of the American experience, issued, on the security of land, notes called assignats in such enormous quantities that they became worth no more than the paper on which they were printed. In a figurative sense they may be said to have fallen to their "bullion" value.

[Sidenote: More recent examples of paper money]

3. Notable examples of paper money in the nineteenth century were the English bank-notes in the years 1797-1820, and the American greenbacks, 1862-79. There have been many other examples. During the Franco-Prussian War, France, through the medium of its great state bank, issued notes which only slightly depreciated. At the present time many countries--Russia, Austria, Portugal, Italy, all the South American republics--have depreciated paper currencies. But the English bank restriction of 1797-1820 is notable because it gave rise to the controversy which did most to develop the modern theory of the subject. The Bank of England was forbidden to redeem its notes in coin because the government wished to borrow all the coin the bank had. The result was the issue of a large amount of bank money not subject to the ordinary rule of redemption on demand. It was virtually government paper money. The notes depreciated and drove gold out of circulation, and not until 1820 was there a return to specie payments.

[Sidenote: The greenbacks]

The United States under the constitution did not try paper money till 1862 when paper notes (called greenbacks, because of the color of ink with which the reverse side was printed) were issued as a war measure to the amount of about $450,000,000. Other interest-bearing notes were issued with legal-tender quality and circulated as money to some extent. Greenbacks depreciated in terms of gold, and gold rose in price until, in June, 1864, it sold at two hundred and eighty a hundred. Fourteen years elapsed after the war before these notes rose to par, in terms of gold.

[Sidenote: Evil effects of political money]

4. Paper-money issues usually have had injurious effects on general industry. The purpose of the issue of paper money is generally to relieve the financial necessities of the government. It is a costly expedient, resorted to only in desperate extremities. A result usually unintended is the derangement of business and of the existing distribution of incomes. The rapid and unpredictable changes in prices give opportunity for speculative profits, but most legitimate business is injured. This incidental effect on debts and industry becomes the main motive of some citizens in advocating the issue. It is peculiarly liable to be the subject of political intrigue and of popular misunderstanding.

§ III. THEORIES OF POLITICAL MONEY

[Sidenote: Commodity-money theory]

1. The commodity-money theorists declare that government is powerless to influence value, or to impart value to paper by law. There are two extreme views regarding the nature of paper money, and a third which endeavors to find the truth between these two. First is that of the commodity-money theorists, or the cost-of-production theorists, who will not admit that there is any other basis for the value of money than the cost of the material that is in it. Money made of paper, on a printing press, has a cost almost negligibly small, and, therefore, they say it can have no value. The fact that it does circulate, and is treated as if it had value, is explained by the commodity theorists as follows: While the paper note is a mere promise to pay, with no value in itself, it is accepted because of the hope of its redemption, just as is any private note. Depreciation in this view is due to loss of confidence; the rise toward par measures the hope of repayment. Such a view overlooks the feature in which paper money differs from ordinary credit paper. The value of one's promise to pay depends on his reputation and his resources; the resources constitute the basis of value. Bonds have value because they yield interest and are payable at a definite time in standard money. But paper money, lacking this basis for its value, has another basis in its money use, in its power to buy goods. The money demand in connection with the monopoly power of government over the money supply, furnishes a satisfactory logical explanation of the value of paper money.

[Sidenote: Fiat-money theory]

2. The fiat-money advocates assert that government has unlimited power to maintain the value of paper money by conferring upon it the legal-tender quality. The meaning of fiat is "let there be," and the fiat-money advocates believe that the government has but to say, "let it be money," to invest paper with value. The typical fiat advocates in the United States were the "Greenbackers," those voters who wished to retain the paper money issued in the Civil War, and to increase its amount greatly. They saw in paper money an unlimited source of income to the government. They proposed the payment of the national debt, the support of the government without taxes, and the loan of unlimited money without interest to citizens. All might live in luxury if the extreme fiat-money theorists could realize their dream. There are still some survivors of this faith in the power of the government fiat. The depreciation that has taken place in every case where government notes have been issued, they declare to be due to a too mild enforcement of the law of legal tender. To them the fact that paper money may circulate for a time at par appears a reason why it always should. They do not admit that there is a saturation point in the use of money, and that its use is still further limited by the fear of larger issues. They do not see that the ultimate basis of the value of paper money is economic,--is in its money use, not in the fiat of the government.

[Sidenote: Theoretical possibility of a good paper money]

3. A sound theory of paper money makes it a special case of monopoly value. It has been seen that the power of almost every monopoly over price is relative, not absolute. As the power of a great private corporation over the price of its product is limited, so is that of the government over the value of political money. The money use is the source of value to the paper notes. Business conditions remaining unchanged, the limit of possible issue without depreciation is the number of units in circulation before the paper money was issued, the saturation point of full-weight and full-value coins. Because governments generally have not stopped at that point, paper money has depreciated. Popular error and selfish interests force legislation beyond the reasonable limit. In a few cases only have there been public integrity and courage enough to retrace the steps before great harm resulted. It is principally this lack of control that prevents paper money from being a good circulating medium.

[Sidenote: Influence of law on value]

It is sometimes said that government cannot affect value in any way, but it can do so in many ways. Certainly one of the most remarkable is by the use of its monopoly power over the medium of exchange, whereby it can, under certain conditions, cause a piece of paper to have the value of a piece of gold. Thereby at the same time it affects the interests of nearly every member of society, raising or lowering the value of many kinds of property, and of many incomes.

47. THE STANDARD OF DEFERRED PAYMENTS

§ I. FUNCTION OF THE STANDARD

[Sidenote: Definition of the standard]

1. The standard of deferred payments is the thing of value in which, by the law or by contract, the amount of a debt is expressed. A credit transaction is a lengthened exchange; one party fulfils his part of the contract, the other party promises to give an equivalent at a later date. The equivalent may be in any kind of goods; for example, in barter one may part with a horse on the promise of a cow to be received later; or a small horse on the promise of a large one; or a flock of sheep on the promise of its return at the end of the year with a part of the increase of the flock. A simple standard in which to express the debt is the thing borrowed, as horse, sheep, wheat, house, etc. This involves the use of the renting contract. Again, the thing to which the value of debts is referred may be a thing quite different from the goods borrowed, and with the growth of the money economy and the use of the interest contract, money comes more and more to be used as the standard. The parties express the debt in terms of the standard unit established by law.

[Sidenote: Increasing use of the interest contract]

2. The importance of the standard of deferred payments increases with the use of money and with the amount of outstanding debts. Until the use of money develops, the use of credit is difficult and limited; it becomes easy when the value of all things is expressed in terms of a common circulating medium. If all business were done for cash there would be no great interests affected when a change in the value of money occurred. Every dollar would change in value in the hands of the holder, but there the effect would cease. But the volume of outstanding debts expressed in terms of money now exceeds many fold the total value of the circulating medium. The value of all these debts changes in the same proportion as does that of the standard unit of money; when this is cheapened either by law or as a result of increasing supplies, a creditor to whom a thousand dollars are due loses the same as if he had a thousand metal dollars locked up in a strong chest.

[Sidenote: Great effects of money changes]

Outstanding contract debts may be roughly divided into three classes: short-time loans, running less than a year; medium-time, running from one to five years; long-time, running over five years. Fluctuations are rarely rapid and great enough to affect appreciably the debtors and creditors in the case of short-time loans. The results are greater in the case of long-time loans, such as national, state, and city debts, bonds of corporations, mortgages given by farmers on their land or by owners of city real estate. A multitude of interests are affected by a change in the value of money. When, as in the years 1873-96, money gains in purchasing power (prices fall) receivers of fixed incomes are gainers. When, as in the years 1896-1903, the value of money falls, the revenues from educational and charitable endowments, the salaries of public officials, and all fixed incomes, lose purchasing power. In a capitalistic age, therefore, almost every individual is affected in some way by a change in the value of money. In most cases the change escapes recognition; people do not trace out the relation that an industrial change bears to their own interests. In a few notable cases, however, the change has been revolutionary as in the period following the discovery of America, when the feudal dues had come to be expressed in terms of money instead of labor services. In modern times, the mass of debts being greater than ever before, such changes as those following the discovery of gold in California or the decrease in gold production between 1873 and 1890 have the gravest economic results.

[Sidenote: Merits of gold and of silver as standards]

3. The best standards of deferred payments available--the precious metals, gold and silver--are still imperfect. The good that is most convenient as a standard of deferred payments is the one used as money. Gold to-day is constantly expressing the value of all other things. Borrowers prefer to make loans in the form of the general medium of exchange. From the usage of speaking of all things in terms of money, the false idea arises that the value of other things changes, but that the value of gold is always the same. Money is no such a fixed objective standard as a foot-rule or a pound weight. The value of gold rests on the estimates made by men, and is constantly changing according to conditions. A fixed objective standard of value is not possible of attainment. The value of the precious metals is stable as compared with most things. The current new supply is comparatively regular. For generations at a time there may be no radical changes in the output of gold and silver. For centuries there was no change in the methods of extraction. Recent inventions, however, have considerably altered these conditions. The nature of the use of gold and silver, likewise, is such as to make the demand for them, under ordinary conditions, most stable. The precious metals are but slowly worn out; only a portion of the annual output is used in the arts; there is, therefore, a large reservoir into which flows steadily a small stream; the existing stock is twenty or thirty times the annual output. Yet the value of the standard metals is never quite stable, and sometimes several influences combine, as in the last century, to affect their value greatly and suddenly.

[Sidenote: Various standards suggested]

[Sidenote: Enjoyment]

[Sidenote: Sacrifice]

[Sidenote: Labor]

[Sidenote: Tabular standard]

4. Various ideals for a standard of deferred payments have been suggested--as return of equal enjoyment, of equal sacrifice, social expediency; and various standards--as labor, commodities, and the tabular standard. The ideal standard of deferred payments is one that will insure justice between borrower and lender. Different views have been taken as to what constitutes justice in this matter. The suggestion is attractive that the sum when returned should represent the same amount of enjoyment as it did when it was borrowed. Such a standard is impossible of realization in any general way, for men's circumstances are constantly changing. To insure even to the average man the same amount of enjoyment is only roughly possible. The same goods do not afford the same enjoyment when conditions have changed. Another suggestion is that the goods returned should represent the same sacrifice as those loaned. Here again the difficulty is in the lack of an objective standard. Whose sacrifice? That of the lender, who may be rich, or that of the borrower, who may be poor? Some have supposed the conditions of equal sacrifice were met by the labor standard, according to which the sum returned should purchase the same number of days of labor as when borrowed. But what kind of labor is to be taken, that of the lender or that of the borrower, or that of some one else? Labor is of many different qualities, which can be exactly compared only through their objective value in terms of some one good. The ideal of equal enjoyment has been supposed to be realized by the tabular standard, which consists of a number of leading commodities in fixed proportions. The money returned is to be enough to purchase the same goods at the expiration as at the making of the loan, and thus may be a larger or smaller sum than was borrowed. While this does not, as is sometimes claimed, insure equality of enjoyment, it averages the fluctuations of many goods, and thus prevents great extremes. This standard has been favored by notable monetary authorities, but the difficulties of its practical application are prohibitive.

It must be recognized that any possible concrete standard of deferred payments will sometimes work hardship to individuals. The best average results for justice and social welfare will be secured by measuring debts in goods that change least often, least rapidly, and in the least unpredictable manner. Gold thus far has proved itself worthy to serve as the standard.

§ II. INTERNATIONAL BIMETALLISM

[Sidenote: Examples of price fluctuations]

1. The fall of prices in 1873 and the following years meant a great change in the standard of deferred payments. The monetary changes following the discovery of America were due to the inflow to Europe of great quantities of silver taken by force from the native American rulers, and from the rich mines. Silver, at that time throughout Europe the main standard of deferred payments, was thus greatly lowered in value. This change lightened all outstanding obligations, lowered the money rents of the peasants, and the customary dues of labor wherever they had come to be expressed in money form. By the third quarter of the nineteenth century gold had become in Europe and America the main standard, though silver still served as such in some countries. The output of gold in 1849-57 caused the greatest money inflation that has occurred since the sixteenth century, favoring in a similar manner the debtor classes. The substitution of gold for silver by some countries at that time, by making a great additional market for gold, helped in some degree to check the fall in its value.

[Sidenote: The recent great fall of prices]

The decline in the output of gold was a change of the opposite character, causing a fall of prices and increasing the burden of debts. From 1873 to 1896 there was almost constant decline of the prosperity of the agricultural classes, due in part to this money influence, but in part to influences which cannot be dwelt upon here, as they had nothing to do with the money question. There was complaint, agitation, and demand for relief on the part of many interests in France, Germany, England, and the United States.

[Sidenote: Bitmetallism defined]

2. Bimetallism, the use of two metals as standard moneys, was the remedy proposed. Bimetallism is legally complete when both metals are admitted to the mints for free coinage at an established ratio of weight; it is halting or limping when one of the metals is not freely coined. Bimetallism may be legally authorized, but not actually working. As soon as the legal ratio varies appreciably from the market value, only one of the metals will in fact be brought to the mint. National bimetallism is confined to a single country, as that in the United States before the Civil War, or in France before 1867. International bimetallism is an agreement among several nations to use two metals on the same terms, the only case in history being that of the Latin Union, which included France, Italy, Switzerland, and other countries. The discussion of international bimetallism in recent years has been on the proposal to make a much larger league of states than the Latin Union, embracing all the leading countries.

[Sidenote: Object of international bimetallism]

3. The main object of international bimetallism is to prevent the fluctuations of the standard of deferred payments. Commercial dealings between gold-using and silver-using countries are of great magnitude, and the use of different standards leads to many difficulties. Fluctuations in the ratio of the two metals occasion much uncertainty and loss to individual traders. The rise in the value of gold meant an increase in the burden of the public debts of silver-using countries which collect their revenues in silver, but which must pay their debts, principal and interest, in gold.

[Sidenote: Its theory]

The theory of bimetallism is that the government can act on the value of the two metals through the principle of substitution. The metal tending to become dearer will not be coined, the other will be coined in greater quantities. The degree of influence that can thus be exerted on the value of the two metals depends on the size of the reservoir of the metal that is rising in price. When it all leaves circulation, the law on the statute book permitting it to be coined becomes a mere sounding phrase. In such a case there is bimetallism de jure, but monometallism de facto. The greater the league of states, the greater is the likelihood that the scheme will work. The economic theory of bimetallism was recognized by a majority of economists to be abstractly sound, but the political difficulties in the way of international agreements are great, and have proved to be insurmountable.

§ III. THE FREE-SILVER MOVEMENT IN AMERICA

[Sidenote: Conditions leading to the demand for free-silver]

1. International bimetallism, despite many efforts, failed of adoption. This brief proposition sums up the history of the movement, from 1878 to 1892, to form a league of states and an agreement for international bimetallism. International conferences were held, and taken part in by the leading financiers of the world. France at first favored the policy, and the United States was always foremost in advocating it, while England in the main was opposed. Some of the advocates of bimetallism argued that the fall of prices was due not alone to economic forces, but also to a money conspiracy which had influenced legislation to introduce and continue the gold standard. This, of course, was strenuously denied. It is true that the commercial classes found gold the form of money most suitable to large business, and no doubt class interests entered into the question in some measure. The difficulties of the debtor class in America were peculiarly great, owing to the inflated paper currency, from 1862 to 1879, which had made our conditions quite abnormal. In the period of speculation following the Civil War an enormous mass of debts had been accumulated. The hopes of thousands of tillers of the soil suffering from a fall in prices, and of the great debtor class, clamoring for relief, were centered upon the success of this movement. Banking and other large business interests in general opposed it.

[Sidenote: Purpose of the free-silver movement]

2. The plan of the free-silver advocates was to legalize national bimetallism in the United States at a ratio between gold and silver very different from the market ratio. Gold had become, long before 1860, the real standard of our money system, and after 1873 it was the only metal admitted to free coinage. Silver, little by little, was losing purchasing power in terms of gold, until from being worth, in 1873, one sixteenth as much, ounce for ounce, it became, in 1896, worth but one thirtieth as much as gold. It must be recognized that the power of silver to purchase general commodities fell much less than the change in its ratio to gold would indicate, gold having risen in terms of most other goods as well as of silver. Nevertheless, the proposal to open the mints to free silver at sixteen to one in the year 1896 meant a sudden and marked cheapening of money. The prime purpose was to lighten the burden of debts by making the standard of deferred payments cheaper. It was at first a debtors' movement, but to succeed it had to enlist the support of other large classes of voters. And thus, by force of political necessity, but doubtless in large part naïvely, it developed into the more sweeping theory that wages, welfare, and prosperity called for a larger supply of money independently of the effect on debts.

[Sidenote: The free-silver theory]

In its extreme form the free-silver plan was a fiat scheme, for some of its supporters believed that by the mere passage of the law the two metals could be made to bear to each other any ratio desired. But its most intelligent and high-minded advocates (who were moved to its support by a sincere sympathy and concern for the distressed agriculturalists) recognized fully that the force of the law was limited by economic conditions. The extreme opponents of the plan, ignoring the evident fact that the adoption of a metal as a standard money is one of the most essential of the market conditions, denied that government action could in any way affect the value. Most of the arguments presented on either side in the political campaigns showed little evidence of a sound theory of money. The victory of the gold standard in 1896 and 1900, it would seem, was due more to the well-founded fear that a sudden change of the money standard would cause a panic, than to a thorough understanding of the question.

[Sidenote: Increase of gold production]

3. The increase of the gold output has for the present checked the fall of prices. Before 1890, for a number of years, the average output of gold was shrinking till it reached a scant hundred million per year. At the same time, nations which recently had gone over to the gold standard were striving to secure large stocks for their banks and general circulation, and those great reservoirs, as a result, became better filled than they ever were before. After the opening of new gold-yielding territory in South Africa and in the Klondike, the annual output of gold became greater than it had ever been, being at the opening of the South African War in 1898 nearly three times that of ten years earlier. The present methods of extracting gold resemble those of fifty years ago as civilized industry resembles that of savages. Intricate machinery has taken the place of crude tools, chemical processes have been introduced, and the principal product results from the regular and certain working of deep mines rather than from chance surface discoveries. Great masses of debris can now be reworked profitably. In many parts of the world are enormous deposits of low-grade ores, before useless, that can be worked economically by present methods. For a generation at least the world's supply of gold is likely to continue larger than ever before in history, and prices in terms of gold probably will rise.

[Sidenote: Rising prices the temporary solution]

Though no change seems likely or possible at the present time, the free-silver advocate has been justified by events against those gold advocates who said that the amount of money has nothing to do with prices. Prices have gone up as gold has increased. The free-silver advocates have gotten what they wanted through a change for which neither party can claim the credit. Yet the present situation is unsatisfactory and undeveloped. A standard better than a single metal, more stable than a single commodity, is desirable if it can be found. The money question must arise again and in a new form before many years. The difficulty has not been finally settled; it is but postponed.

48. BANKING AND CREDIT

§ I. FUNCTIONS OF A BANK

[Sidenote: The essential banking function]

1. A bank is a business whose income is derived chiefly from lending its promises to pay. Banks have passed through many changes in the past three centuries. Originating on the street corner for exchange of money, they have evolved into great institutions of many forms, and performing many functions. The definition seems paradoxical, but it expresses what in modern thought is the essential feature of a bank: the lending of its credit. A reserve of money is needed by the man of business. But for the banks each man would have to keep his reserve in his own till. Except the small sum needed for current uses, a bank can keep this reserve more economically than individuals can. It has the advantages of large production similar to those of a large factory. The process of lending credit is called deposit and discount. It grew out of the deposit of actual money for safe keeping and the loaning to borrowers by the method of discounting their notes. The term now has a somewhat different meaning, for a merchant may obtain a deposit to-day without putting any money in the bank. He gets the bank to discount his notes or collateral security, and to enter the sum to his credit as a deposit. He becomes a depositor by borrowing, not by lending to the bank. The sum is under the borrower's control; he can check it out when he wishes; but he usually keeps a certain balance to his credit. The bank's gain is larger than ordinary interest, because it gets a discount on the large sums left in its possession. The bank increases its funds also by attracting deposits from those who do not care to borrow.

[Sidenote: Other functions usually performed]

2. Functions not essential to banking are ordinary money-lending, money-changing, exchange to distant points, safe deposit, and issue of bank-notes. Banks often lend in the ordinary way, allowing borrowers to draw the money out at once, but this is not the business they prefer. Many individuals and corporations, such as endowed charities, colleges, insurance companies, lend great sums of their own money without thereby partaking in any degree of the peculiar character of banking. Money-changing (the exchange of coins of different countries) is done by banks, but likewise by many other agencies not sharing the essential banking character. Foreign and domestic exchange is the issue and cashing of "drafts" for money payments between distant places. Most banks are well fitted to perform this function, but some banks do not undertake it, and it is performed also by some business houses that are not banks. Safe deposit is the keeping of things to be returned in identical form, as silverware, notes, and papers. By banks in small towns this is sometimes done freely, sometimes for a slight charge; but in large cities safe-deposit vaults are generally quite unconnected with banks. Even bank-note issue is not essential to banking; most banks in the United States issue no notes, others issue very few. All these functions may be united under one management, but the essential banking function is deposit and discount.

[Sidenote: Sources of the income of banks]

3. The income of banks is derived from discounts, interest on their own capital, charges for exchange and collection, rents on investments, and profit from the loan of their bank-notes. The income of banks is drawn from different sources, according to the size of the community, and the nature of the banks. While in the villages and smaller cities they perform a number of functions, in the larger cities they usually specialize in a far greater degree. Like every other enterprise, a bank must start in business with some paid-up capital as a guarantee of credit. Further security is afforded by the limited liability of shareholders for losses, in proportion to their capital stock. The same amount of money could be loaned with less trouble and more cheaply without starting a bank, but used as a banking capital a part of it can be loaned while still serving to attract money deposits. Charges to smaller customers for exchange are a source of income to some banks, but in many cases this service is freely performed for regular customers and becomes a considerable expense. Banks make few investments in real estate or other physical property; it is, in fact, their duty to keep out of ordinary enterprises, but they are forced sometimes to take for unpaid debts things that have been held as security. Profits on bank-notes have at times been the main, possibly the sole, motive for starting banks; but that is not the case to-day when the right of issue is so strictly limited.

[Sidenote: Productive services of banks]

4. Banks are productive economic agents performing important industrial services. False ideas have long been entertained about the magic power of banks to produce wealth from nothing. To many, banks are a mystery much like paper money. Their opponents sometimes have pictured them as vampires fattening on the blood of industry. That they have shown abuses at times is undeniable, but, like other economic agents, they are to be judged by their net efficiency. The bank is a tool performing services similar to those of money. For some purposes money is an awkward and costly agent in comparison with banks. For remitting payments from New York to San Francisco or Hong Kong, money is a medieval device. Money can more safely be entrusted to a bank than to a strong chest in one's own house. The man who refused to make use of banks in this day would isolate himself economically, and would soon find himself out of any but the smallest business. He could no more get along without the banks than without the post, the telegraph, or the telephone.

[Sidenote: The bank as a labor-saving device]

The gathering of loanable funds by the banks, making them available at once, reduces hoarding, makes money move more rapidly, and creates a central market between borrowers and lenders for the sale of credit. While not creating more physical wealth directly, it adds to the efficiency of wealth; it oils the bearings of the industrial machine. To abolish banks would be to destroy labor-saving machinery. Banks perform incidentally a further service in developing better business methods in the community. In supplying credit to active business, banks are constantly passing judgment on the collateral security presented to them and on the solidity of the enterprises that are seeking support. They enforce promptness and exactitude in business dealings.

Because in their public nature banks are very analogous to money, they have always been looked upon as properly subject to more supervision than most private business, and government has always exercised a considerable measure of control over them, sometimes for good, sometimes for evil.

§ II. TYPICAL BANK MONEY

[Sidenote: Nature of typical bank money]

1. Typical bank money consists of notes issued by banks on the credit of their general assets, without special regulation by law. As no two leading countries have quite the same system of bank-notes, the subject is a difficult one. It is well to begin, therefore, with a clear conception of typical bank money, unregulated by government. Such a form of note is one with which few now living in the United States have had any experience, as the present national bank-notes differ in essential ways from the typical form. Typical bank-notes are notes issued by banks as a means of loaning their credit. The borrower, instead of receiving a credit balance at the bank subject to check, gets notes which he hands on to other men. These notes are returned for redemption to the issuing bank as soon as any one wishes specie in their stead. The limit of the issue of such notes is the need of the community for that form of money, and if they are promptly redeemed in gold on demand, they never can exceed that amount. A holder of a note (in the absence of special regulations) has the same claim on the bank that a depositor has. As it is to the interest of the bank to keep in circulation as many notes as possible, there is a temptation to abuse the power of note-issue, to which many banks yielded in the period of so-called "wild-cat banking" before the Civil War.

[Sidenote: Bank-notes viewed as commercial paper]

2. Bank-notes are viewed by some as a form of commercial credit. Typical bank-notes are not legal tender, and every one has the legal right to take or refuse them as he pleases. It is therefore said by some that bank-note issue is of no special concern to the state, that it can safely be left to individual self-interest. It is said that if one has little faith in a note, he may refuse to accept it. But in reality every one is compelled to take the money that is current. The average citizen cannot know the credit of distant banks, and thus has not the same power of judging wisely in taking bank-notes that he has in making deposits in the bank of his own neighborhood. Between bank-notes and ordinary promissory notes, there are other differences of a nature pretty generally recognized. Bank-notes pass without endorsement and thus depend on the credit of the bank alone, not like checks, on the credit of the person from whom received. They yield no interest to the holder. They are intended to be used as money and are so used. Thus they come near to paper money in their nature, and the banks are near to exercising the right of coinage.

[Sidenote: Bank-notes viewed as a form of political money]

3. By others, bank-notes are considered to be almost identical with government paper money. Some opponents of bank-note issue declare that it is a usurpation of the prerogatives of government, and that no power but the sovereign state should issue money. While many in America to-day hold this view, the comparison probably is false and strained. Typical bank-notes, unlike inconvertible paper money, depend for their value on the credit of the bank, not on their legal-tender quality and on political power. They must be redeemed on penalty of insolvency; government notes need not be, and yet will circulate at par if properly limited.

While these differences mark off government paper money pretty sharply from typical bank-notes, it must be noted that in many cases actual bank-note issues have been far from this typical form. In the days of "wild-cat" banking, bank-notes were issued in excess and fell below par, yet the man in a Western community who dared to ask the bank to redeem the notes in specie was not only frowned on by the bank, but condemned by the public, which felt that business was endangered by such a demand. Redemption on demand would have required a reduction of the amount of money in circulation and would have caused a fall in prices. Inflation of the bank currency went on with results almost identical with those following an excessive issue of government paper money. Not formal law but public opinion made such bank-notes essentially political money.

[Sidenote: Policy of public regulation of bank-notes]

4. The public nature of bank money has led to many forms of public regulation of their issues. Bank-notes thus stand midway in their economic nature between political money and private notes, sharing something of the character of each. An extreme analogy in either direction is misleading. It is of great social importance that the circulating medium should be reliable. The least possible amount of the citizen's energy and thought should be required to decide whether the money is good or bad. Nevertheless, those opposed to state interference in industry declare that if the citizen is not left to look out for himself, the growth of stupidity will be encouraged; and they say that it is no more essential for the state to guarantee the quality of bank-notes than the quality of woolen cloth or of sugar. Few, however, take so extreme a view, and it is generally held that it is a function of the state to insure in a greater or less degree the quality of the money in circulation. The actual bank-notes of the leading countries are thus of many varieties. The Canadian notes are the most nearly typical bank-notes issued to-day; those of Germany come next, while those of the United States have little of the typical character.

§ III. BANKS OF THE UNITED STATES TO-DAY

[Sidenote: Forms of banks in the United States]

1. The three forms of banks in the United States are private, state, and national. Any one with a little capital may become a private banker. There are "curbstone brokers" in almost every town, and some of the great financial houses are private banks. But the law will not allow this to go very far. Some states will not allow a man to put up a sign announcing himself as a banker unless he complies with certain banking laws. In some states even private banks are subjected to the same inspection as the state banks and are required to make the same reports to the state officials. State banks are those organized under special state banking laws. They are usually subject to inspection by state-bank commissioners, must make regular reports, and are required to comply with certain rules as to their reserves, rates, and investments. In any case they do not issue bank-notes, because the national laws now tax the notes of state banks so heavily that they are unprofitable. National banks, the largest and most important portion of our banking system, were authorized by law in 1863, during the Civil War. They are subject to stricter regulation and inspection than are other banks, and that regulation is perhaps an advantage to them, as it strengthens public confidence in their stability. Yet this regulation does not insure the depositors against loss, as some national banks fail every year. They may be organized with twenty-five thousand dollars capital in towns of less than three thousand population, with fifty thousand dollars in towns of less than six thousand, with one hundred thousand dollars in cities of less than fifty thousand, and with two hundred thousand dollars in larger cities.

[Sidenote: Nature of our national bank-notes]

2. Our national bank-notes have no essential mark of typical bank money. The one marked peculiarity of the national banks of the United States as compared with those of other countries, is their mode of note-issue. They perform all the other functions of banks, essential and unessential, and perform them well, but the issue of bank-notes is optional with them, and some of them do not issue any bank-notes. The legal condition to their issue is that bonds of the United States shall be purchased in the open market and deposited with the treasurer of the United States. Until 1900, notes might be issued only to ninety per cent. of the value of the bonds deposited; but now they may be issued up to the par value of the bonds. The notes, being secured by the value of the bonds, rest on the credit of the government, not on the credit of the bank. These notes are not promptly sent back for redemption to the banks issuing them, as is done with typical bank-notes. They may circulate thousands of miles away from the bank that issued them, and for years after that bank has gone out of business. They are not an "elastic currency" increasing or diminishing with the needs of business. The changes in their amount depend upon the chance of the banks to make more or less in this way than by any other use of their capital, and this in turn depends largely on the price of bonds and on the rate of interest they bear. From 1864 to 1870, fortunes were made from this source, but in recent years there has been little opportunity of gain from note-issues. Our present bank-note issues are not on a logical basis, and satisfy no one entirely. They are of importance neither to the bank, to which they afford little or no profit, nor to the public, for which they do a service equally well done by silver certificates, greenbacks, or coins.

[Sidenote: Suggested reforms of the bank-note system]

Along with the discussion of the currency has gone, since 1896, a vigorous discussion of the banking system. The two problems are so closely related that a change in the one suggests readjustment of the other. One extreme plan is to abolish bank-notes entirely and to replace them with additional issues of greenbacks; the other extreme plan is to authorize the issue of almost typical bank-notes. A modification of the Canadian banking system, which has great merits, is held up for imitation. Bills have been repeatedly before Congress authorizing the maintenance of a general guarantee fund with which the notes of failed banks could be redeemed, and at the same time authorizing branch banks such as those in Canada. Public sentiment has never strongly favored this plan, however, and there is more likelihood of the passage of a bill providing for emergency notes in time of financial stress, after the plan followed in Germany.

[Sidenote: Bank regulation a protective measure]

That the control of banking is an important duty of government is the conclusion of the practical world. The various banking systems of the leading countries embody different plans for the one purpose of the adequate control of banking in the public interest. Government control of bank-notes is felt to be of the same nature as factory inspection, that is, to be a protective measure. When public interests are at stake and private interests conflict with them, government acts to forbid one citizen from doing harm, and to protect other citizens from injury.

49. TAXATION IN ITS RELATION TO VALUE

§ I. PURPOSES OF TAXATION

[Sidenote: Taxation defined]

1. Provision for the expense of organized government is the fundamental purpose of taxation. Taxation may be defined as the taking by the government of private property for public uses. This implies a certain degree of compulsion. When the national government accepts ten million dollars in trust for the Carnegie Institution, it is not taxation, though wealth is given for public uses. The effects of taxation pervade all industrial affairs, but they will be discussed here only in relation to the value of goods and to the distribution of incomes. By taxation the government interferes with the individual's free choice and with the impersonal economic forces. It expends income in different ways from those which would be chosen by the individual.

[Sidenote: Taxation for public defense]

The primary purpose of taxation is public defense. War often has driven men into closer social relations. Public defense requires sacrifice on the part of the family and of the individual. In family or patriarchal communities all share a common income and combine in the common defense, but self-preservation compels such small communities to form a larger, stronger state for the common defense. Personal service in the field gives place to money taxes permitting a more regular, continuing, and perfect organization of military forces.

[Sidenote: To preserve domestic order]

Next comes the need of civil government to insure domestic tranquillity. As political unity grows, the citizens need less often protection against foreign foes, and they need more often, relatively, defense against the aggressions of some of their own countrymen. The preservation of domestic order requires police, courts of justice, and other agencies. The ideal of the anarchist to do without government is nowhere realized. Everywhere there must be government to preserve peace and to protect property. Unfortunately, this need grows with the growing density of population. Crime increases when men swarm in great cities. To maintain and operate the social machinery requires ever-increasing resources. The courts which settle disputes between men, and which interpret their contracts, are agencies of peace, displacing physical contests. Many other public expenses tend to enlarge, as those for legislative bodies, public buildings, statistical inquiries, the printing of public documents. Government on these accounts has become in modern times an increasingly costly institution.

[Sidenote: Developing public wants; social and industrial welfare]

2. The promotion of the social and industrial welfare of society has come to be an important purpose of taxation. Some functions of government, less essential than the primary ones just mentioned, seem naturally to grow out of them. In a democratic society, popular education is one of the necessary conditions of good government, as it appears that domestic order is not possible in a democratic state without intelligent citizens. Step by step the functions of government are widened. Some industrial functions are performed by the government in connection with the primary needs. Lighthouses are necessary to guide the navy, but they also serve to guide the merchant marine and to aid industry. The post was established as an agent of political and military government to connect the ruler with the outposts (a fact the name post indicates), but the postal service has grown in every country to be a great industrial and social agency. The consular service, beginning in the political need of keeping official representatives in foreign lands, has grown to be a great economic agency. Consuls are commercial travelers, advancing the trade-interests of their countries in all quarters of the globe. These social and industrial functions have been increasing of late. As the national and local governments engage more in industry, they usually make larger demands in the shape of taxation.

[Sidenote: The sphere of the state expands]

It is along the border-line between the primary and the secondary purposes of taxation that the contest goes on regarding the proper functions of government. If they are to stop short of the extreme of socialism, where shall the line be drawn? The movement has been of late toward greater government activity; more of the wants of men are thus supplied through the agency of the state. That year by year a greater sum is taken by taxation and spent for the citizen is a fact that may be recognized without debate here. The toll-road becomes a public road, the toll-bridge becomes free, more is supplied by taxation for schools, for advanced research, and for technical training. In our country great wealth was given by the Morrill Act to scientific and technical schools. The state universities, against much opposition, have become in many states of the Union the dominant educational force. Moreover, taxation often is used as a means not merely of raising revenue, but of discouraging one kind of industry and encouraging another. One industry wanes or dies under increasing burdens, another waxes strong by fostering exemptions and bounties. A large share of this "protective legislation" is done under the guise of taxation.

[Sidenote: Government as a consumption good and as a means of production]

3. Shifting of the limits of state action and corresponding changes in the weight of taxation are constantly affecting value and incomes. Society as a whole is made up of many groups of industry. Government is the largest of these, collecting and expending more than any individual or corporation. Government is in one aspect a consumption good. In return for its collective cost men collectively get the enjoyment of social organization, markedly in contrast with the uncertain ties and hazards of primitive communities. But government becomes also a mode of social investment, an indirect agent, a productive enterprise. Wealth applied through it secures a greater product than is possible by individual action. Government can maintain lighthouses more economically than individuals could otherwise secure them.

[Sidenote: Apportioning of the cost]

But when the government undertakes these various tasks, the expense falls unequally on individuals and affects differently their incomes. When free schools take the place of private schools, the law compels every one to contribute to education. To many individuals it is a matter of indifference whether they pay tuition or taxes, but the wealthy bachelor sometimes grumbles when forced to help in educating the day-laborer's family of twelve. The average result may be right, but individuals diverge from the average and thus have constantly a motive to attempt to change the limits of governmental action. Happily the subject is not always viewed with selfish eyes. The ethical and patriotic thought is not, "How will this affect my interests?" but, "How will it affect the general interests?" But as the question of value is always involved, men are usually found favoring or opposing a measure of taxation according as it affects their own income. Thus taxation is inevitably an economic question.

§ II. FORMS OF TAXATION

[Sidenote: The various forms of taxes]

[Sidenote: On incomes]

[Sidenote: On property]

[Sidenote: On expenditure]

[Sidenote: On business]

1. Taxes usually are a portion taken from the income arising from labor or from wealth. In rare cases more than the net income of wealth may be taken, but the aim of taxation in general is to take only a portion of the income for public uses. As economic income has many sources, it may be intercepted at many different points, and taxation may take various forms. First, private income may be appropriated by a tax on income. This is the simplest in thought, but the administrative difficulties of the income-tax are great in practice. It is not easy to determine the money value of the various sources of enjoyment that come into a man's possession in the course of a year, including, as the ideal requires, the immaterial gratifications along with the material. A second form is a tax on property in proportion to value. Since the value of material wealth is the capitalization of the rentals at the prevailing rate of interest, the property tax, so far as it applies to material wealth, should take an approximately equal proportion of incomes. If it were accurately assessed, it would be in some respects better than a tax on actual rents, for it reaches the prospective, or speculative, rental. A third form of tax is one on consumption, or expenditure. This is but another mode of attacking income, for in the long run income is spent, not always by the individual who earned it, but by some one, and thus it is reached by a tax on expenditure. The principal consumption taxes in the United States are the tariff duties and the internal revenues of the national government. In time of war, internal revenues are extended in the United States to a multitude of articles, but usually they are limited (with minor exceptions) to liquor and tobacco. A fourth form of tax is one on selected agencies of industry; such are business taxes, licenses, taxes on investment in business, corporation taxes, etc. These burdens are diffused and rest eventually on some income, not always exactly ascertainable. Actual tax systems combine these forms in great variety, subtracting many minute fractions from each citizen's income in ways unsuspected by him.

[Sidenote: Changes of taxation and in capitalization]

2. The immediate effect of a change in the form of taxation is a change in the market value of goods. If the new tax reduces the net rent of any productive agent, it reduces likewise its value, which is but the capitalization of its net rental. If taxes are taken off of factories and put upon farm rents, factories rise and farm-land falls in value. The immediate change in value is much greater than the annual tax, for if five dollars is to be taken permanently from the annual rental of the farm, nearly one hundred dollars is taken at once from its selling value.

Taxes are reckoned by enterprisers as a part of the cost of production whenever the conditions of competition and of substitution make it possible to do so. In such a case the products rise in price and most of the tax falls upon the consumers. In the Civil War an increase in the tax on whisky increased its selling price, and distillers who owned stocks on which a smaller tax had already been paid reaped profits of millions of dollars. When recently the tax on tea was increased in England, all dealers who had accumulated a stock before the law went into effect were gainers. Every change in taxation inevitably affects, either favorably or unfavorably, many interests. The chance to anticipate a change in tax laws or to get, from those in power, information of a proposed change, makes speculation possible and political corruption profitable.

[Sidenote: Shifting and incidence of taxation]

3. After every change in taxation, competition among bargainers goes on and a new equilibrium of prices results. The citizen who pays a tax into the public treasury is not always the one whose income is reduced in the long run. In most cases the final and regular burden of the tax is distributed over a number of incomes. The passing on of the burden is called the shifting of the tax; the location of the final burden is called the incidence of the tax. The lawmaker cannot tell exactly where the weight will fall. The principles of value give some guidance in the inquiry, but the workings of the principle are difficult to follow. Certain it is that the new tax, both in its collection and in its expenditure, becomes a new influence in industry. Some occupations are made more attractive, others less so. Some places are made more, others less, desirable to live in. As property thus fluctuates in value, as investments become more or less remunerative, the market price of corporation stocks rises and falls. The rate of adjustment varies greatly under different conditions. The inflow and the outflow of labor and capital are more or less rapid in the various industries.

[Sidenote: Many personal incomes affected]

The fact that a change in taxation is a disturbing element in price is not to be thought insignificant merely because "all comes out right in the end." Every change in taxation is an element of uncertainty in business and increases the fortunes of some men at the expense of others. Hence no considerable change should be made without good reasons in its favor. The older taxes have the virtue of stability, but in many cases they have grown out of harmony with the industrial conditions. While, therefore, from time to time there is a real need of a reform in the tax system, it should not be undertaken without recognizing the many and complex interests involved.

§ III. PRINCIPLES AND PRACTICE

[Sidenote: Various standards of justice suggested]

1. Taxation should be adjusted with reference to the general social interest. Many standards have been suggested to measure the distribution of the burden of taxation, such as benefit, equality, and ability. Each of these terms is capable of various interpretations which have changed from time to time. The benefit derived by any citizen from most of the public services evidently cannot be measured with exactness. The standard of equality cannot be applied in any literal sense to strong and weak, to rich and poor. It is possible, however, to interpret equality with reference not to objective goods, but to the psychic sacrifice occasioned by taxation. Ability thus is of many kinds and may be differently understood. Some think ability to bear taxation is "in exact proportion to the money income"; others believe that it increases at a greater rate than money income, and favor, therefore, progressive taxation, that is, higher rates on the larger incomes.

[Sidenote: Social welfare as the aim]

The conflicting interests of the classes in each period are to some degree softened by the social conscience, and taxes are adjusted according to a vaguely held ideal of the social welfare. Social expediency, more or less broadly interpreted, determines who shall be taxed and what will give the best social results. The exemptions from taxation in feudal times were great, and viewed from our standpoint were inequitable, for it was the upper classes who escaped while the peasants bore all the burdens. The landlords and nobility who were assumed to be performing important social functions, often had outgrown their usefulness. Exemptions are granted liberally in most states to-day for some purposes and to some classes of citizens; to educational, religious, and charitable institutions; to the homes of priests and ministers; to homesteads purchased with pension money, etc. California alone of all the states in the Union continued until 1903 to tax churches and private schools. The social interest requires that taxes be both elastic and productive, so that the needs of the government shall be amply provided for. The harmonizing of these needs in the laws of taxation requires a high degree of wisdom, of foresight, and of integrity, in the legislator and in the citizen. No hard-and-fast rule for the apportioning of taxes can be laid down. The decision must be made in each generation by social opinion, guided by the social conscience.

[Sidenote: Principles of administration]

2. The administration of taxation should be economical, certain, and uniform. Whatever taxes are adopted, whether on property or income, whether at a proportional or a progressive rate, their justice and expediency depend largely on their administration. Principle and practice in this as in most affairs may go far apart. Some laws are more easily and economically executed than others. The time of collection should be as convenient as possible for the citizen, and the mode of payment should be the most simple. As to the time, method of payment, and amount, the utmost certainty is desirable. Taxation that is variable, shifting, dependent on personal whim and favoritism, is despotism. Above all, the administration of the law should be uniform and impartial,--yet this is a principle most frequently departed from in practice. The assessment of taxes has to be intrusted to men with fallible judgment, imperfect knowledge, and selfish interests. The assessor is as near a despot as any agent of popular government to-day. Not infrequently it is to men incapable of earning two dollars a day in any private business that the power is given of passing judgment on the value of millions of dollars' worth of property. Under the circumstances, evils are to be expected and they occur. The small property-owner often is crushed under the unequal assessment while the large owner comes lightly off. Political friends are favored, political foes are made to suffer. Woman nearly everywhere pays more than her fair share of taxes, a fact that the advocates of woman suffrage do not fail to urge as an argument for their cause, although women's disadvantage in this matter is little greater than that of any man without special political influence.

[Sidenote: Importance of taxation as a public question]

3. The relation of taxation to private incomes makes it one of the largest public questions of the day. The discussion of taxation has accompanied the growth of free government in England and America from the time of Magna Charta. The control of the public purse frequently was the occasion of conflict between the monarch and the people. Taxation was a leading issue in the American Revolution. While, therefore, it cannot be said that the subject has been of no great importance in the past, it is true that in our own national history since the adoption of the Constitution, taxation has not been much discussed, except in the one aspect of the tariff. Constitutional and political questions, states rights, and the question of slavery, long absorbed the interest of citizens and legislators. But with the aroused interest of the public in economic problems, taxation is attracting, and is certain to attract in the next few years, increasing attention in local, commonwealth, and national politics.

50. THE GENERAL THEORY OF INTERNATIONAL TRADE

§ I. INTERNATIONAL TRADE AS A CASE OF EXCHANGE

[Sidenote: The motive of individual gain in foreign trade]

1. International trade is exchange between individual men, and has the same object as other exchange of goods. The term international trade should not be misunderstood as meaning that nations rather than individuals engage in it. International trade differs from domestic trade only in the fact that the parties are citizens of different sovereign states. Exchanges between men in the same village, between those in neighboring villages, and between those in different countries, are prompted by essentially the same economic motive--the wish to increase the want-gratifying power of goods. In every such case both parties gain or think they are gaining. In international trade there is the same chance for mistake as in domestic trade, but no more. In a single transaction in either domestic or foreign trade one party may be cheated, but the continuance of trade relations is dependent on continued benefits. The once generally accepted maxim that the gain of one in trade is the loss of another, is rarely applied now except to international trade. The starting point for the consideration of this subject is in this proposition: Foreign trade is carried on by individuals, for individual gain, with the same motives and for the same benefits as are found in other trade.

[Sidenote: Natural differences affecting foreign trade]

[Sidenote: Political boundaries and trade]

2. As commerce has grown, the territorial division of labor has correspondingly increased. Although economic motives have had influence in political affairs and have helped to determine political groupings and the limits of modern nations, there is to-day no very close correspondence between political and economic boundary lines. Both industrial and political conditions have changed so rapidly that the lines often have tended to diverge rather than to agree. It is common for two portions of a nation to exchange far less than do two portions of entirely different nations. The great territorial divisions of industry are determined first and mainly by differences of climate, soil, and natural resources. Thus trade arises easily between north and south, between warm and frigid climes, between new countries and old, between regions sparsely and regions densely populated. Foreign trade with distant lands is as old as history. In medieval times the luxuries of the temperate zone were mostly articles produced in the tropics. Political divisions usually have not been large enough to embrace widely varied soils and climates, the Roman Empire being an exception in marked contrast with the comparatively small political units of the Middle Ages. Before modern methods of transportation, a large free federal state like our republic was impossible. As in recent centuries the large political units have been formed, the question has arisen, Shall the political boundary be likewise the economic boundary marking the limits of trade? The firm constitutional Union of the American states arose out of difficulties with regard to trade. The German Zollverein, the forerunner of the modern German Empire, had a similar origin. The Australian Federation consummated within the last few years has grown out of the need of adjusting tariffs and tariff boundaries. These larger political units containing such varied resources can in larger measure, but never completely, become independent of the rest of the world if they will.

[Sidenote: Differences in culture and industry]

Territorial division of trade is determined secondly by differences in the accumulation of wealth, in the development of capital, of invention, and of organization, in the degree of intelligence of the workers, and in the grade of civilization. It is mainly trade due to this second group of causes, and carried on between old and new countries of about the same latitude, that is the subject of discussion in economic treatises on international trade.

[Sidenote: Comparative costs as between individual workers]

3. The doctrine of comparative costs is that relative, not absolute, advantages of production determine for a country the benefits of international trade. The free-trade question in any country is whether it is for its interests as a whole to permit trade between its citizens and the citizens of other countries. The question appears especially difficult where both countries have natural resources of about the same character (as iron and coal in the case of England and America), and where, therefore, both can produce the things that are exchanged. If American labor can produce as much iron in a day as English labor,--or more,--is it not foolish and wasteful, it is asked, not to produce that wealth? Now, exactly the same case is presented in simple neighborhood exchanges. The merchant may be able to keep his books better than does the bookkeeper whom he employs. The proprietor may be able to sweep out the store better than the cheap boy does it. The carpenter may be able to raise better vegetables than can the gardener from whom he purchases, and yet the merchant and the carpenter do not quit their better-paying work and turn to clerking or to raising vegetables.

[Sidenote: As between communities differing in advantages]

It often happens that both countries can technically produce both the articles that are internationally exchanged. It may frequently happen that one of the two countries has an advantage in amount of sacrifice and effort, as to both articles; but if the advantage is greater in one article than in the other, the foreigners, like the low-paid clerk, will be willing to exchange at a ratio that will make it profitable to specialize in the product wherein the greater superiority lies. Therefore not the advantage as to a single product, enjoyed by one country over the other is most important in determining whether to produce at home or to exchange, but the comparative advantages enjoyed in the production of the two articles in question.

[Sidenote: Examples of comparative costs]

It must be remembered that comparative cost as here used refers to cost in effort, not to money cost,--a point on which there is often confusion. The money cost of a certain product is often greater in a new country because wages are high, and wages are high just because psychic cost is low, that is, because labor can produce so much. At the time of the great gold discoveries in 1849-50, the price of goods in California was much higher than in the East, and much higher in Australia than in Europe. A day's labor doubtless would produce as much food in Australia and in California as in New England and in Norway, but it produced far more gold. Hence butter and cheese were shipped by long routes from Norway to Australia and from New England around Cape Horn to California, to be exchanged for gold. One of the standing arguments against foreign trade is based on the idea that a country cannot profitably import goods unless it is at an absolute disadvantage in their production. It is declared that as our country can produce these goods "as well" as foreign countries (meaning with as few days' labor), there is a loss on every unit imported.

[Sidenote: Selection of the most paying industries]

4. The equation of international exchange is that adjustment of prices which results in the equalizing of the imports and exports of the country. The superiority of a new country over an old one is not equally great in every line of industry. It is almost certainly most marked in those enterprises where natural resources are employed. To compete with the older country in less favored industries, capital and labor in the new are forced to take a lower rate than they can earn in the more favored. Without any government supervision, therefore, but simply through the choice of enterprisers seeking the best investment of capital, industries are developed in which the country is either most markedly superior or least inferior to its neighbors.

If the productive energies of men interchanged between industries and between countries with perfect readiness, a perfect equilibrium of advantage would everywhere result. In every country, in every occupation, labor and capital of given quality and amount would receive the same reward. But the interchange of labor and capital between countries is never without friction. Adam Smith said that "a man is of all sorts of luggage the most difficult to be transported." The higher wages in a new country are sufficient to attract constantly from the older lands a portion of their labor supply; the higher rate of interest in the new countries attracts constant additions of capital; yet, despite these forces working toward equalization, the inequality may remain and through the working of other influences even increase in the course of years.

[Sidenote: Persistence of the differences]

The laborers, enterprisers, and investors in the one country are thus in a position of more or less enduring advantage relative to those of the other countries. The advantage is sometimes said to be a "monopoly" which they, or the country as a whole, enjoy; but in the absence of any contractual limiting of competition, this is a misuse of the term monopoly. This variation in the degree of scarcity of agents in different territories is not peculiar to nations as a whole. Differences of the same nature exist between the Northern and the Southern states of the American Union, have continued for decades between Eastern and Western states, and are found even between neighboring counties. The differences between two countries, however, are likely to be more marked, the circulation of factors being so active within a country that it is allowable to speak broadly of prevailing national rates of wages and of interest.

[Sidenote: The ratio of international demand defined]

Every exchange of goods between the countries is made at a ratio that reflects, or expresses, this abiding difference in comparative costs. The imports into the favored country represent regularly the results of more units of labor of a given grade than do the corresponding exports. The ratio which expresses the disparity of advantage of productive factors is called "the equation of international demand." This does not mean that the money value of the imports exceeds that of the exports, or vice versa. On the contrary, the equation itself embodies a maxim of international trade that "in the long run," or "on the average," imports and exports must be equal in value (i.e., equation of demand). This brings us to the theory of foreign exchanges, which is essential to an understanding of this feature of international trade.

§ II. THEORY OF FOREIGN EXCHANGES OF MONEY

[Sidenote: Purpose of foreign exchange]

[Sidenote: The rate of foreign exchange]

1. Foreign exchange of money is the purchase and sale of the right to receive a given kind and weight of metal at a specified time and place. Par of exchange is the number of units of the standard coin of one country that contain the same amount of fine gold (or silver) as the standard coin of the other country. Usually the English pound is taken as the basis in the tables which express the ratio of the gold in the standard coins of different countries. The gold shipping point is par of exchange plus or minus the cost of moving the actual metal; it varies with means of transportation and communication. The par of exchange between England and America being $4.866 and the cost of expressing and insuring a gold pound between New York and London being approximately .03, the shipping point for the export of gold from New York is $4.896. At the upper and lower limits, there is a motive for shipping gold as a commodity. If each transaction were independent of all others, the cost of exchange would be the weight of metal called for, plus grains enough more to pay for loss of interest, cost of freight, risk, and trouble. In such a case it would cost $4.896 to remit one pound; while a debt of one pound payable in London would at the same time be worth $4.836 to the creditor in New York. When, in New York, a number of men having bills to pay in London meet a number of owners of bills receivable in London, a market for London drafts is created and a rate of exchange results somewhere between the shipping points. In this is the explanation of the variation of the rate, and of the facts that the cost of outward exchange sometimes is less than the par of exchange and that the value of foreign drafts sometimes is above par.

[Sidenote: Variation about par of exchange]

The balancing of foreign exchanges is of essentially the same nature as the domestic cancelation of indebtedness. It is going on constantly between two merchants in the same town, between two banks in the same town who represent groups of merchants, between men in neighboring towns, between distant states like New York and California, and between the trading nations of the world. The price of exchange to the individual is reduced by the specializing of the business in the hands of a few dealers, permitting cancelation of indebtedness or offsetting of exchange, and greatly reducing the amount of bullion to be transported. Exchange varies above and below par as conditions change. When the movement of money is into the country, drafts on London are bought and sold for less than par, for every pound draft thus remitted to London reduces the need of shipping gold to this country, while every London draft collected in New York at such a time increases the need to ship gold.

[Sidenote: The cash balance of international trade]

2. International shipment of money is always just the amount needed to balance the accounts due. The proposition that in the long run the value of imports must equal the value of exports, while the fundamental truth in the theory of international trade, must be understood in a broad sense. Into the balance between the traders of two nations enter many items: the cash values of the imports and exports of each; freights, insurance premiums, and commissions; the expense of Americans traveling in foreign lands, and the cost of the foreign service of this government (such as the salaries of consuls and of diplomatic representatives) which count as the importation to America of an equivalent amount of food, clothing, and sundry services; subsidies and war indemnities to foreign nations representing, as they do, an expenditure, which at the moment may be paid in coin, but which, as is to be more fully explained, must be offset ultimately in some way by exports.

[Sidenote: Various credit items entering into the balance]

Many credit transactions affect the balance one way or another until settled. The loans made by European capital to the American government or to individuals and corporations in America, as well as the European capital expended in purchasing American enterprises, require the remitting of gold to New York, and thus offset many imports of goods to New York otherwise calling for the remitting of gold to London. In the direction opposite to this, act the interest payments and the eventual repayment of the principal loan, for these require either money or goods to be exported from America to the value of the obligations. Loans that run for years thus offset annually (in their accruing interest) a portion of the exports of the debtor country. An excess of exports may therefore at any given moment indicate either that the country is in debt or that it is getting out of debt. An excess of exports is generally looked upon as an evidence of national prosperity; but it is absolutely inconclusive on the point. Finally, after all the items of imports and credit paper purchased abroad are set opposite the items of exports and promissory papers sold abroad, the balance is paid in gold bullion and is shipped one way or the other. Evidently the amount of gold shipped is but a small fraction of the total volume of transactions.

Industrial indebtedness is represented in various forms: bills of lading for goods shipped, drafts made by the creditor on his debtor for goods shipped or property sold, checks or letters of credit of travelers, bonds and notes public and private. These are the objects dealt in by the bankers who are the agents to carry on the work of exchange.

[Sidenote: Relations of the international flow of goods to the flow of money]

3. The territorial distribution of money is both a determined and a determining factor in international trade. It appears to be determined in that the balance of all accounts for or against the country must be settled eventually in money. After any such a settlement one country has less, the other more money than before. The change in the amount of money at once reacts on prices and becomes a determining factor in international trade. The flow of money out of a country causes money to tighten, interest rates on short loans in the large cities to stiffen, and prices slightly to fall. When prices fall, imports decline, as the country is not so good a place to sell in; when prices rise, imports increase, as it is a better place to sell in. As the opposite effect is produced on exports, there occurs immediately a change in the quantity of money which continues until the national credits and debits balance and for a brief time remain in equilibrium. If the trade of a country with its neighbors continued long to give a balance of imports of goods and of debit items (exclusive of money) it would ultimately be drained of all its coin, and would default payment or cease to import. If the trade constantly gave a balance of exports and credit items, money would continue to flow in, until prices rose to unexampled heights. In fact no such extreme is even remotely approached, for a slight movement of money in either direction at once influences prices and sets in motion counteracting forces. Decade after decade the circulating medium of leading countries changes only slightly in amount, and the fluctuations during periods of so-called "favorable balance of trade" and of "unfavorable balance of trade" represent only the smallest fraction of the value of goods passing through the ports of the country.

§ III. REAL BENEFITS OF FOREIGN TRADE

[Sidenote: Fallacious explanations of the gains from foreign trade]

1. The direct advantages of foreign trade consist in the increased efficiency it imparts to productive forces. In explanation of the advantages of foreign trade it is said to be a vent for surplus production and to give a wider market to what would otherwise go to waste. This involves the same fallacy as the "lump of labor," the destruction of machinery, and the praise of luxury. If backward nations now give a vent for products which would otherwise rot in the warehouses, at length a time will come when the world will have an enormous surplus unless neighboring planets can be successively annexed. Again it is said that the great purpose of foreign trade is to keep exports in excess of imports so that money may constantly increase in amount. The ideal of such theorists is an impossible condition where the country would constantly sell and never buy. In the commercial view the sole object of foreign trade is to afford a profit to the merchants, regardless of the welfare of the mass of the citizens.

[Sidenote: The real advantages of foreign trade]

The main advantage of foreign trade is the same as that of any other exchange. It is hardly necessary to review the explanation here: the increased efficiency of labor when it is applied in the way for which each country is best fitted; the liberation of productive forces for the best uses; the development of special branches of industry with increasing returns; the larger scale production with resulting greater use of machinery and with increased chance of invention; the destruction of local monopolies.

The moral and intellectual gains of foreign commerce were formerly much emphasized. Commerce is an agent of progress; it stimulates the arts and sciences; it creates bonds of common interest; it gives an understanding of foreign peoples and an appreciation of their merits; it raises a commercial and moral barrier to war; and it furthers the ideal of a world federation, the brotherhood of man.

[Sidenote: Conflict between general and special interests]

[Sidenote: Prevalence of protective tariffs]

2. Free foreign trade thus has in its favor the presumption of advantage to the citizens; but various interests may be adversely affected. The general attitude of economic students for a century and a half has been favorable to a large measure of freedom in foreign trade. But the actual practice of nations is opposed to the principles laid down by the philosophers and accepted by nearly all serious students of the question. Germany adopted very restrictive measures under Bismarck in 1879 and by a recent law has discouraged trade still further. France, Italy, and other smaller nations of Europe have strong protective tariffs. The United States has followed a restrictive policy for the last century almost unvaryingly. The explanation of this contradiction is not entirely simple. Free trade is not the most desirable thing for every one. Great interests are affected by foreign trade and certain of these interests are able to dominate legislation. The general proposition of free trade between nations, as advocated by most economists since Adam Smith, is rejected by a majority of the people, by the politicians, and by the legislators.

51. THE PROTECTIVE TARIFF

§ I. THE NATURE AND CLAIMS OF PROTECTION

[Sidenote: Nature of a tariff for revenue]

1. A protective tariff is a schedule of import duties so arranged as to give appreciably more favorable conditions to some domestic industries than they would enjoy with free trade. Tariff duties were first laid to get revenues for the government. The first effect of the tariff is the same as that of any tax that enters as a new factor into enterpriser's cost--the domestic price of the taxed article tends to rise. Other results then follow. If the article cannot be produced within the country (as oranges, spices, and coffee, in England, Norway, and Sweden), its consumption is reduced. The lessening of demand may affect somewhat the price in the producing country and may compel the foreign producers to sell each unit for less than before. As such a tariff does not increase home production, it is for revenue, not for protection.

[Sidenote: Effects upon home industry]

But if the article can be produced in the importing country at the new price, "home industries" will start. If the whole demand at home is thus supplied, imports stop and therewith stop all revenues to the government from that source. This is a prohibitive or completely protective tariff. Most tariffs combine the characters both of revenue and protective measures. Where the freight charges are low along the coast and on the main lines of transportation, some imports take place; while farther inland, where freight charges are high, some home production of the same goods takes place. A tariff that reduces imports but does not cut them off entirely is either a revenue tariff with incidental protection or a protective tariff with incidental revenue. The difference is partly one of legislative intention, partly one of degree only.

[Sidenote: The beginning of the tariff under the Constitution]

2. The tariff question has been the most discussed of economic questions in American politics. The tariff bill passed by the first session of Congress in 1789 was primarily a revenue measure with rates averaging only about five per cent.; but incidentally it was protective (as most tariffs are), being laid on imports of iron and cloth, the production of which had been undertaken to some extent before, but which thus were further encouraged. Between 1808 and 1812, the United States and England were in constant disagreement, and our government repeatedly laid an embargo on British commerce, closing our ports to British ships, and British ports to our ships. The war from 1812 to 1815 almost annihilated American trade on the ocean. Added to this discouragement of foreign trade was the high tariff imposed, in the vain effort to get revenue from greatly decreased imports. Altogether these causes almost completely stopped importation and forced the American people to rely on their own efforts for such goods. Some industries having been "stimulated" in a high degree, their destruction was threatened by the repeal of the high war tariffs. Many investments and interests were at stake, and the tariff became a most important question.

[Sidenote: The tariff controversy before 1865]

The first period of real discussion of the protective policy was between 1816 and 1846. The result of the first twelve years was an increase of the tariff rates which, in 1828, reached a high point. By the compromise of 1832, the rates were reduced by steps till 1841. Again from 1842 to 1846 was a brief period of higher duties, followed by a policy which, relatively speaking, was one for revenue, from 1846 to 1860. Again in the Civil War, 1861-65, the rates were steadily increased without much discussion, the tariff not being the leading question at a time when the prosecution of the war was absorbing nearly all attention.

[Sidenote: Recent discussion of the tariff]

The latest period of discussion was from 1874 to 1892. In the Tilden and Hayes campaign of 1876 the tariff was made the leading issue and the advocates of a lower tariff were very nearly successful. In 1880, protection again triumphed in the election of Garfield. In the election of Cleveland in 1884, the issue of tariff reform had some part, but no effective legislation on the subject was enacted in the next four years. In 1888, Cleveland was defeated in a campaign fought mainly on the tariff issue, and Harrison was elected as a pronounced protectionist. In 1892, Cleveland was reëlected on the issue of tariff reform. From that time, however, there has been a lull in the discussion of the tariff question. The campaign of 1892 was the last presidential election in which the tariff was the dominant issue. Since 1896, the money question and imperialism have quite crowded the tariff issue off the stage.

[Sidenote: The "balance of trade" argument]

3. A leading argument in favor of a protective tariff is that by encouraging an excess of exports it maintains a favorable balance of trade. This notion of the favorable balance of trade appears in several forms. One of these, already discussed in connection with foreign exchanges, is that the exports of a country in the form of merchandise must exceed the imports if the country is to prosper. The ideal cherished is to keep more merchandise constantly flowing out of the country than comes in. An interesting commentary on this delusion is the fact that this is the usual situation in poor debtor countries having constant interest payments to meet; while the opposite of the ideal is the situation in rich creditor countries. England for many years in the period of her greatest prosperity has had a constant excess of imports, these being goods to the value of the interest payments due to Englishmen from investments abroad.

[Sidenote: "To keep money at home"]

4. Another argument is that the protective tariff keeps money at home which, if trade is free, will be sent abroad to buy foreign goods, thus impoverishing the country. This is the "favorable balance of trade" argument, with the emphasis on money rather than on goods. A superficial glance at the trade relations of an old and rich country with a new province seems to give evidence for such a belief. The older country is lending capital (which it sends to the debtor country in the form of goods) and it has at the same time a larger supply of money. These two facts--the lack of money and the poverty of the newer country--are looked upon by the protectionist as due to the importation of goods. The real cause of the imports to the newer country and of its scanty money-supply, it need hardly be said, is its comparative poverty. Europe and the United States, in their trade with China and South America, do not get gold in exchange, but merchandise of various sorts. It is true that in the trade of England and New York with great gold-producing districts, such as California, South Africa, and Alaska, gold is received in return for merchandise, for to these districts gold is merchandise and its export does not drain them of their supply. The richer states in the Union do not drain the poorer states of money. A few years ago the states of Kansas, Nebraska, Iowa, and their neighbors were filled with resentment against the money-lenders of the Eastern states. There was a widespread belief that hard times were due to an insufficient currency. Attempted action took the form of the greenback and free-silver movements, which were defeated by the opposition of the East, but there can be little doubt that if the Federal Constitution had not forbidden it, the discontented states would have established a protective tariff "to keep their money at home." Few advocates of protective tariffs are ready to admit that the money-supply of the country is dependent on the general wealth of the country, and on the methods of doing business, rather than on a protective tariff.

[Sidenote: The "two profits" argument]

5. It is said that the tariff keeps "two profits" at home, foreign trade gives but one. The word "profits" is here used in the popular sense of gain from a single transaction. This argument becomes somewhat confused, for certainly in the admission that there are "two profits" in a trade, the notion that "one man's gain is another's loss" is rejected. Both parties are said to profit and both profits are thought to be secured at home when two citizens are forced to trade with each other. There is an error in elementary arithmetic here, both as to the number and as to the aggregate amount of profits. The purpose of a protective tariff is to compel two of the citizens of a country to trade with each other instead of trading with two citizens of a foreign state; the number of profits is therefore not increased by substituting domestic for foreign trade. What, then, as to the size and aggregate amount of the profits? The margin of advantage is not the same on all exchanges; the exchange is made if there is a margin to both parties, no matter how small it is; but the generous "profit" on one transaction where the conditions of the two parties are very different may be greater than the total of petty margins on a dozen exchanges between two traders of evenly matched powers. Can it safely be assumed that every trade with a foreigner is less advantageous than one with a fellow-citizen? Diamond cuts diamond, but two shrewd Yankees left to themselves surely should not be worsted in bargains with the universe. If they could exchange to better advantage with each other they probably would discover it as soon as the interested manufacturers and political orators who can prove so eloquently that they know the other man's business better than he knows it himself. Forcing the home trade is doubtless to the advantage of one citizen, but it is not likely to be to the advantage of both citizens.

[Sidenote: The claim that protection raises wages]

6. The most effective popular argument for protection is that it raises, or maintains, the general scale of wages in the country. This argument is two-fold: first, when wages are low in a country it is claimed that a tariff is needed to raise them; and, secondly, when wages are high it is argued that a tariff alone can preserve them. In Germany the fear is of the higher paid and more efficient labor of England. In America, where wages at all times have been higher than in England, it was first argued that because of the greater cost of production, due to high wages, the tariff was needed to start certain industries; but after the tariff had long been established and the old argument had been forgotten, it was said that the tariff was the cause of the high wages and must be maintained to protect against the (so-called) "pauper" labor of the older countries. That wages generally are higher in new countries and where a tariff prevails is always claimed to be one of the chief fruits of a protective policy. The cause of the high wages in America appears to be the productive efficiency of industry under existing conditions. Labor is surrounded here with advantages in the forms of rich natural resources and of mechanical appliances such as never before were combined. Because of the scarcity of workers in particular protected industries, wages may be higher in them than in some other industries; but such workers form a small fraction of the population. The claim that the general scale of wages in all occupations is raised by the tariff protecting this fraction, is no less invalid than the sweeping claims in favor of trade-unions.

§ II. THE REASONABLE MEASURE OF JUSTIFICATION OF PROTECTION

[Sidenote: Political arguments for protection]

1. For military and political reasons an otherwise uneconomic tariff may be justified. It usually is admitted by the believers in free trade that in the interest of diplomacy, to secure proper concessions, tariffs may sometimes be levied. Even in England, where protective arguments long have had little acceptance, Mr. Chamberlain, with his eye on a tariff union and imperial federation of England and her colonies, has been advocating this policy. In such a case there is no pretense that the justification of the tariff is its immediate economic advantages; it is an expenditure for ultimate gain. By the same argument a protective tariff is upheld as a means of defense--to encourage the building of ships, arsenals, and factories for munitions. It is always questionable whether an outright expenditure would not be better, whether the government cannot build its own arsenals, ship-yards, etc., more cheaply than it can foster private enterprise by means of a tariff.

[Sidenote: The infant-industry argument]

[Sidenote: Applied to America]

2. Protection may be defended as encouraging infant industries and thus diversifying the industries of the country. Most free-trade writers concede a limited validity to this argument. If the natural resources of a land are adapted to an industry, it may be called into being early by a fostering protective tariff. This is merely anticipating and hastening the natural order of progress. In the American colonies the manufactures of iron, cloth, hats, ships, and furniture sprang up not only without "protection," but despite numerous harassing trade restrictions made in the interest of the English merchants; and they continued in some cases despite their absolute prohibition by Parliament. Can it be doubted that many of these industries would have developed and flourished in America under no other fostering influences than those of rich resources and of economy in freights? The growth of industries in the Middle West in the last twenty-five years has been phenomenal. The discovery of natural gas and the presence of abundant coal, ore, and timber have enabled them to develop without protection against the Eastern states. Industries capable of eventual self-support must in most cases naturally appear in due time. Economic forces will bring them out. It is a trite but valid remark that protective tariffs are often like hothouse culture, anticipating the season by a few weeks and at great cost. The question is whether the mere possession of the hothouse is a luxury worth the price, if meantime the products can be gotten more cheaply by exchange. English manufactures flourished because they were well established, had excellent coal supplies, great stores of iron ore, and low-paid labor which did not have the opportunity of better alternatives, as did the American workman. If America had imported more (it would not have been all) of her iron and coal, the English mines would have been exhausted earlier, and America's advantage surely would have asserted itself in time. Her iron manufactures undoubtedly were hastened--they cannot truly be said to have been created--by the protective tariff.

[Sidenote: Social effects of the tariff]

Industries are forced into an earlier diversification by tariffs. The peculiar advantages of a new country attract labor and enterprise into a few lines. Is it an evil? Contrast Iowa, Dakota, and Minnesota, or Kansas, if you please, with New York and Pennsylvania. Is it so certain that a dense population congested in cities and crowded in factories and mines is a more ideal social aggregation than is a community of prosperous farmers? The smoky industrialism fostered by protection often puts a premium on a low grade of immigrant and keeps him an alien to the American spirit. It would be surprising if Americanism on the Western plains were not as good as in the Eastern cities. But the infant-industry argument appeals strongly to the enterprise and the speculative spirit of Americans, who like to do all things rapidly and on a large scale. Every village aspires to be a great industrial center. Americans are impatient of the suggestion that things "will come in time"; they like things to come at once.

[Sidenote: The "home-market" argument as to freights]

3. The tariff develops a home market for the products of agriculture. It has been especially hard to reconcile the farmers in America to the tariff. While in England the protection that existed before 1846 was almost entirely for the benefit of the landholding interests, the tariff in America has been peculiarly favorable to manufactures. The "home-market" argument is the protectionist appeal that has proved most effective with the American farmers. This argument, which takes on several aspects, is akin to the "two-profits" argument when it declares that the shipping of food to Europe and the importing of manufactures involve a great cost for freight which could be saved by manufacturing "at home." Of course the farmer is supposed to pay this cost, although there is nothing in the argument to show that it is not all paid by the European, either the manufacturer or the food consumer. Home trade "saves the freights" for the farmer only in case he can buy goods under a tariff with less of his own labor and products than under free trade. The payment of freight charges is true economy when the goods can be bought at a distance on more favorable terms than near home. The freight-argument proves too much, for it condemns every exchange, within the country, of goods produced a stone's throw away from the consumer.

[Sidenote: As to security of trade]

Again, the home-market argument dwells on the greater steadiness of domestic trade. War or political changes, it is said, may change the demand for products. This is true, but no other changes have affected American agriculture so radically as the peaceful development of domestic transportation and the opening of the West.

[Sidenote: As to the value of farm-lands]

The home-market argument is strongest when addressed, not to all farmers, but to one class of farmers, those whose lands are situated nearer the manufacturing cities. The higher value taken on by land as it is converted from the extensive cultivation of corn and wheat to dairying, fruit, and market-gardening, is pointed to as a benefit of protection. The decaying agriculture and deserted farms throughout the great industrial states during the past twenty-five years are pathetic evidence that this benefit has failed to come to the average farmer just where it should be most expected. There is, however, a partial validity in the argument as applied to a comparatively small number of farmers, who gain as landholders, not as tillers of the soil.

[Sidenote: Exports and exhaustion of the soil]

4. The tariff may keep some of the natural resources of a new country from becoming quickly exhausted. The export of food takes out of the soil and out of the country fertile qualities never to be returned. The shipment of several hundred million dollars of food products year after year represents a tremendous drain from the soil of the United States. The assumption, however, that the use of the food in this country would preserve the fertility of our own fields has been in the main mistaken. The fertile material in the food shipped for human consumption five miles away from the field is almost absolutely lost. Engineering skill has as yet succeeded in saving hardly a fraction of the fertile organic matter that flows into the sewers, that is dumped into river and ocean, and that is buried in heaps at the borders of our cities. On the other hand, the increased use of iron, coal, and timber, as a result of encouraging manufactures, has very effectually aided in exhausting the natural resources of the country.

[Sidenote: Protection as a monopoly measure]

5. A new country has a limited potential monopoly in certain kinds of products; a tariff may make it effective. The opening up of a new country with rich natural resources may be a great gain to the average consumer in the older countries, although it causes a loss to a special class of landowners. Whether the citizens of the older or of the newer country shall reap the greater benefit in the trade depends on the reciprocal demand for the two classes of goods, as was seen in discussing the equation of international demand. A wide margin of advantage may go to one party and a narrow margin to the citizen of the more favored land. To put it concretely: if America, having great natural resources for agriculture, continues to exchange food for manufactures up to the narrowest margin of advantage, England reaps most of the benefits of the trade. An American tariff on manufactures from England will, under such conditions, check the demand for English products and compel some Americans to leave farming. This reduction of the American supply of wheat or corn and of the American demand for English manufactures compels a new ratio of exchange. It is conceivable that exchanging fewer goods at a larger margin of advantage, will give a larger total of gain to the favored nation. Thus, by the shifting of the ratio of exchange, foreigners may be compelled to pay a part of the tariff to enjoy the favored market. This is but a special case of the monopoly principle; the government by law artificially limits the supply of goods offered by its citizens.

[Sidenote: Limited monopoly advantages of America]

This argument is somewhat subtle, but probably is the soundest one in the theory of protection. The supposed conditions seldom occur, but they may exist, and probably have existed in America. When the great system of internal transportation was developed in the United States before that of the other new countries, this country had such peculiar advantages for the production of food that the quantity was enormously increased and the prices fell. At such a time the tariff may work toward retarding the unfavorable turn in the ratio of exchange and toward reëstablishing early a more favorable ratio. But the limited application of the principle must be recognized. The potential competition of undeveloped countries on all sides, seeking to develop their resources, to raise their own food, and to profit by the higher prices in the world-market caused by the tariff, threaten the peculiar advantages of the favored land. A great nation with its manifold interests is not eminently fitted to practice the gentle art of monopoly.

§ III. VALUES AS AFFECTED BY PROTECTION

[Sidenote: Influence on the value of capital]

1. An increase of the tariff is favorable to many capitalists and to many owners of natural resources. A denial of large general advantages in protection is not the denial of all its influence on value. On the contrary, it cannot be too strongly emphasized that manifold interests are affected by the tariff. Owners of natural mineral resources are among the first to benefit. When the price of iron is low, many iron- and coal-mines may yield no rent and have small prospective values. A tariff forcing home production opens the marginal resources and gives them a large capital value. Factory sites and surrounding lands leap from the level of rural prices to that of city real estate. The owners of farms situated near the new industries have a home market and get scarcity prices, as they alone can supply the needed fresh vegetables and dairy products. Wealth less favorably situated, however, is in many cases depressed in value because its products exchange for smaller amounts of other products.

[Sidenote: The special gains and the general burden]

2. A tariff is immediately favorable to some enterprises and to special classes of workmen. Enterprisers already acquainted with and engaged in a business always may hope to gain by the higher prices immediately following a rise in the tariff rates on their particular products. Though they are granted no enduring monopoly by the protection, they for the time enjoy the advantage of being on the ground and reap the first fruits of the favoring conditions. The enterpriser usually profits when the price of his product suddenly rises. Usually skilled workmen are affected slowly by competition when there is any considerable increase of their special industry. The burden of higher prices is very soon distributed to a number of less favored citizens. A part of it may be borne by the retail merchant, a part by his customers. The weight falling on each is usually small, often unsuspected, always hard to measure. The increased benefit is concentrated in a few industries and accrues to a comparatively few producers. Here is a recipe for riches: get everybody to give you a penny; they'll not miss it, and it will mean a great deal to you. Something like this happens in the case of many protected industries; every consumer of the article pays a penny more, a few wage-earners gain, and a few enterprisers wax wealthy.

[Sidenote: Sudden tariff reduction injurious]

3. A sudden reduction of the tariff causes local crises and may bring on a general crisis. The repeal of the tariff works in a direction the reverse of its enactment. The benefits of the lower prices are diffused; the immediate injury is concentrated and acute. Factories are closed, capital is depreciated, labor is thrown out of employment. The organic nature of local industry causes the evil to be felt by many classes. Merchants, professional men, servants, and skilled laborers that are tributary to the depressed industry, suffer. The effects are transmitted to commercial and financial centers and credit is shaken. The readjustment of industry is slow and much capital is lost in the process.

[Sidenote: The two policies in political discussion]

It is rarely appreciated how great is the tactical advantage enjoyed in political contests by the advocates of a high tariff. They can so easily impress the popular judgment with the evident fruits of their own policy, and with the immediate dangers of the policy of their opponents. The low-tariff advocates in America undoubtedly have made the mistake of underestimating or of quite overlooking these immediate effects. They have been too abstractly doctrinaire, and have argued too absolutely for the merits of free trade. They have opposed one extreme system by another, with no thought of the inexpediency and injustice of sweeping changes. There is a strong feeling among business men that any tariff, be it high or low, is better than a shifting policy. Despite the great preponderance of domestic production over foreign trade, it is perhaps too much to say that the tariff is unimportant in our present conditions. It can, however, be said that the tariff agitation has taught that radical changes, especially sudden and large reductions, are fraught with evils, and that business can adjust itself in large measure to any settled conditions. The future of the tariff discussion in America is hard to prophesy. The infant-industry argument now is of little force. With the widening of our international relations are growing interests favorable to reciprocity or to other freer trade relations.

52. OTHER PROTECTIVE SOCIAL AND LABOR LEGISLATION

§ I. SOCIAL LEGISLATION

[Sidenote: City growth and new social problems]

1. Under modern conditions many laws restricting free competition are required to secure the health and convenience of the citizens. The rapid growth of city populations has brought new social and economic problems. The friction in social relations is greater when men are crowded together. In 1790, three per cent. only of our population lived in cities of over eight thousand; to-day the percentage is thirty-three. Then the city dwellers numbered one hundred and thirty-one thousand; now they number twenty-five millions. Then there were but six cities of eight thousand or over; now there are five hundred and forty-five. Then the largest city (Philadelphia) numbered fifty thousand persons; to-day the largest city (New York) numbers three millions. Many laws are survivals suited only to the older rural conditions. In London, these problems were first forced into prominence, and a law passed after the great fire of 1665 to regulate the rebuilding of houses, streets, sidewalks, and sewers, foreshadowed alike the American law of special assessments and the modern tenement-house legislation. A mass of laws wise and foolish has resulted from the attempt to meet the new conditions. The laws of nuisance and of sanitation have been rapidly changing.

[Sidenote: Need of social regulation]

Why not leave such subjects to individuals? It is for the interest of every one that his back yard should not be a place of noisome smells and disagreeable sights. But men are at times strangely obstinate, selfish, and neglectful, and through one man's fault a whole community may suffer. The refusal of one man to put a sewer in front of his house would block the improvement of a whole street. The obstinacy of one may bring an epidemic upon an entire city. There must be a plan, and by law the will of the majority must be imposed upon the unsocial few. Where voluntary coöperation fails, compulsory coöperation often is necessary. Thus health laws, tax laws, and improvement laws regulate many of the acts of citizens, limit the use of property, and compel men to a course against their own wishes and judgments. The justification for these limitations on the right of private property, on free choice of the individual, on "free competition," must be found in the social result secured.

[Sidenote: Tenement-house laws in cities]

[Sidenote: Interests affected]

2. Tenement-house legislation is an important recent expression of this social protective policy. As city population grows denser, land increases in value, and the evils of bad housing threaten the welfare of the great majority of city dwellers. Light, sun, air are shut out, and cleanliness, decency, and home life are made impossible. Two policies are open to the public. It may be left to private enterprise to solve the problem. If the tenant agrees to rent a disease-breeding house, he is the first to suffer. The interests of investors, it is said, will supply as good a house as each tenant can pay for. The other policy now adopted is to set a minimum standard of sanitation and comfort, to which all builders and owners must attain. Property owners are no longer left free to determine plans, height of building, proportion of lot built on, lighting, materials, and workmanship. Complying with the legal requirements, they are left quite free to collect whatever rent they can get. Such legislation is partly in the interest of the body of landowners as against the selfish desires of some individuals. One bad building may bring down the rent of all on the street. Partly, however, the regulation is in the interest of the tenants and of society as a whole, and against that of the landlord. The rents from slum property are threatened; hence the strong opposition always manifested against tenement-house legislation by some landlords, architects, and contractors, who fight it bitterly as an interference with their interests and as a confiscation of their property. It is not quite certain how marked will be the effect of this policy in making the rents too high for the poorer tenants and driving them into the country. But this result, predicted by the enemies of the policy, is not so undesirable, and the enlightened sentiment of the public to-day favors all efforts to destroy the breeding-places of disease, misery, and crime.

[Sidenote: Public inspection of goods used in the homes]

3. Laws forbid adulteration of products for domestic use and provide for public inspection. English laws of the Middle Ages forbade false measures and the sale of defective goods, and provided for the inspection of markets in the cities. Recent legislation in many lands has developed much further the policy of insuring the purity or the safety of articles consumed in the home. The oleomargarin law passed by Congress was, however, designed as protective legislation in the interest of the farmer. Usually, the self-interest of the purchaser is the best safeguard for the quality of goods; but personal inspection by each buyer frequently is difficult and time-consuming, requiring special and unusual knowledge of the products, and special costly testing apparatus. The state undertakes, therefore, to set a minimum standard of quality, and to apply it by the economical method of social coöperation. This policy extends only to staple products and to a comparatively few articles. It would be impossible as well as unwise to apply it to art products, except to protect the morality of the community. This inspection sometimes raises the price, but the evils are small compared with the convenience and the benefits resulting to the citizen. He is assured that the article he buys is of standard quality, and if he wishes a cheaper quality there is no law to prevent his adulterating it for his own use.

[Sidenote: State support of education]

4. Other kinds of social amelioration undertaken by the state, through free, compulsory education, charity, and temperance legislation, are likewise interferences with competition and freedom of contract. Many of these are so customary that they are not thought of in this light. Schools are productive enterprises, education is industry, and the supply of this service is always in large measure undertaken by private enterprise and could be left entirely to it. But free elementary education is the established policy, and is no longer debatable in America and France. In England the policy is still debated, much as is that of public ownership of trolley lines in America. One by one the states are passing compulsory education laws, and thus interfering still further with the freedom of the individual. The affection of parents can in most cases be trusted to provide for the education of children, but when family affection fails, the child and the state are the victims of the resulting ignorance, crime, and pauperism. State support of higher education is more in dispute. It is a universally accepted view that social welfare requires a more generous support for higher education than could be secured if it were sold at a competitive price; but while in eastern America its provision is left mainly to private gifts, in the West and South it is undertaken largely by the state. The justification of this policy must be found, not in the benefit to the particular students, but in the benefit diffused throughout the commonwealth by the encouragement of science, arts, and letters.

[Sidenote: Public charity]

[Sidenote: Temperance legislation]

The system of public relief for the defective classes of blind, deaf, insane, feeble-minded, and paupers, are examples of the social protective policy. The public interest undoubtedly is served by having these suffering classes systematically relieved, but the extent and nature of the provision are questions ever in debate. Still more debated is temperance legislation, both as to licensing and as to prohibiting the liquor traffic. Nowhere is the manufacture and sale of intoxicating liquor treated quite like the traffic in most other goods, because it is recognized that the public interest is affected in a different way. While it is beyond question that society should protect itself against the drunkard, it is more doubtful whether it owes to the man, for his sake, protection against his own blunders. Not even the gods can save the stupid. Temperance legislation is strongest in its social aspect. The opponent of it usually champions the individualist view; its partisans uphold, in varying degrees, the social view.

[Sidenote: Other laws to protect public morals]

Similar questions arise regarding lotteries, gambling, betting, horse-racing, etc. When a man backs a worthless horse against the field, money probably is transferred from the stupider to the shrewder party. The philosopher may say that the sooner a fool and his money are parted the better; but the broken gambler remains a burden and a threat to honest society. Gambling, lotteries, and speculation cause embezzlement, crime, unhappy homes, and wrecked lives. Here are to be found with difficulty the true boundaries between ethics and expediency. A busybody despotism may protect the fool, but it thereby helps to perpetuate and multiply his folly; yet if the fool is left alone, he too often is a plague to the wise and the virtuous.

[Sidenote: Usury laws as social legislation]

5. Usury laws are found almost universally in civilized lands. By usury was formerly meant any payment for the loan of goods or money; now it means only excessive payments. In former times moralists and lawmakers were opposed to all usury or interest. Most loans were made in times of distress. The sources of loanable capital and the chances of profitable investment were fewer in the past than to-day. For the last four centuries there has been on the question of usury a gradual change of opinion, beginning in the commercial centers and most rapid in the countries with more developed industry. A moderate rate of interest is now everywhere permitted; but in all but a few communities the rate that can be collected is limited by law, and penalties more or less severe are imposed on the usurious lender. It has been noted in another connection that usury laws are practically evaded in a number of ways within the letter of the law. Many writers maintain that usury laws do more harm than good even to the borrower, whom they are designed to protect. In a developed credit economy, where a regular money-market exists, they are superfluous, to say the least, as most loans are made below the legal rate. Such laws, however, have a partial justification. In a small money-market they to some extent protect the weak borrower at the moment of distress from the rapacity of the would-be usurer. Their utility is disappearing, but in simpler industrial conditions usury laws are fruits of the social conscience, a recognition of the duty to protect the weaker citizen in the period of his direst need.

§ II. LABOR LEGISLATION

[Sidenote: Growth of child-labor legislation]

1. Factory laws now limit in many ways the employment of women and children, and the hours of work. Factory legislation began in England, early in the nineteenth century, to check some of the worst evils then showing themselves in the factories. It has since increased in England and has been copied rapidly by other countries. Some of the agricultural states of the Union have as yet no factory laws, but the states industrially more advanced have many. They are made, first, to apply to children. The evil of forcing children into factories is easily recognized. The child, subject to the commands of his parents or guardians, is not a free agent. At times a lazy father is tempted to support himself in idleness on the wages of his young children. Often poverty leads the parents to rob their children of health, of schooling, and of the joys of childhood. Child-labor depresses the wages of adults and the evil grows. Children laboring long hours in close and grimy factories, and growing into blighted and ignorant manhood, are a threat to society. In agricultural conditions, such as have prevailed generally in America, there is far less need of limiting the hours of work and the age at which children may begin to work. The barefoot boy trudging over clover-fields to carry water to the harvesters may be the happier, healthier, and better for his work.

[Sidenote: Women's work and shorter hours]

The work of women in factories tends to depress the wages of men, is inevitably harmful to family life, and, when the work is arduous and continuous, the evils are visited upon succeeding generations. In the early days of the factory system in England, the hours of work were lengthened in order to make the machinery earn as much as possible. The first laws regulating hours applied especially to women and children, limiting their work to ten or twelve hours daily. Later, this regulation was made to apply to men, and now is found in most civilized lands. In recent years the agitation has been for an eight-hour day, and doubtless it will some day be adopted in the majority of trades.

[Sidenote: The workmen's remedies for injuries]

2. Many laws provide for the health and safety of workers in factories and mines. Both workman and employer are in many ways interested in providing against danger from fire, bad ventilation and lighting, bad sanitation, unprotected and dangerous machinery, and bad moral conditions in the factories and other places of work. What can the workman do to protect himself? (1) He may refuse to work whenever the conditions are bad. But this requires that he inspect the factory and judge of the sanitary conditions in each case, and that he then resist the temptation to accept employment of which he may be sorely in need. (2) He may ask higher wages to compensate for the added risk. But this is not practically possible with his insufficient knowledge of conditions, and it supposes an equal caution in many other workers. It is well that individual men are not excessively cautious, or the state would lack brave citizens and defenders. It is better that the forethought be in part exercised by the community collectively. (3) The person injured in health or limb may sue for damages. But this, with his means and knowledge, is often impossible, and is a costly process, yielding a pitiful recompense for a blighted life.

[Sidenote: Factory laws to reduce accidents]

The employer is interested in attracting better workmen at lower wages, and in avoiding damages by making the conditions of work favorable. The law seeks the same end by more economical ways when it sets a minimum standard. Experience shows that certain safety appliances should always be present to prevent the evils; for a state to leave their provision to self-interest, is to trifle with the welfare of its citizens. Factory legislation usually is opposed by employers because of the expense it causes; but if the regulations apply to all factories, the expense becomes a part of the cost of production and is shifted, like the other expenses of production, to the general body of consumers, of which the employers form only a small part.

[Sidenote: Legal regulation of wage-payment]

3. Laws regulate the form, time, and methods of payment in manufactures and mining. Companies sometimes keep stores and pay the workers in mines and factories in goods, instead of money. Such a store in the hands of a philanthropic employer might easily be made, without expense to himself, a great boon to his workmen, giving them more than the benefits of consumers' coöperation. But the usual result is told by the fact that such stores are known as "truck stores," "pluck-me stores." They are most often found where some one large corporation dominates in the community, as in mines, where the workers are in a very dependent condition. If the higher prices demanded practically lower real wages, it would seem that the worker had an immediate remedy in his power to demand higher money-wages. Recognizing that this is for the most part an illusion--for it is just in such places that the conditions for free competition are least present--the law in many states prohibits these stores. It regulates also the measuring of work, fixing the size of screens and of cars used in coal-mining. The law is especially favorable to the hand-laborer in regard to the collection of his wages, requiring regular monthly or fortnightly or sometimes weekly payments. Mechanics' liens give to workmen in the building trades the first claim on the products of their labor.

[Sidenote: Limitation of freedom of contract]

4. In some cases the law forbids "contracting out," and the courts fix the terms of the contract. In general, the law does not interfere with the right of the citizen to make any formal contract he chooses. It confines itself to providing rules and agencies for interpreting and enforcing the contracts when made. Employers often compel workmen to sign a release from damages in case of accident. This practice was forbidden even by common law, and many recent statutes have specifically provided that employers cannot "contract out" of the right to claim damages. The courts are particularly watchful of the interests of children, who are usually deemed incapable of entering into contracts binding them to their injury. Sailors, likewise, have long been protected and guarded by the law, because, journeying far from home, they are peculiarly in the power of their employers. The English courts may even change the contract if the sailors have been coerced by their masters. The rights of married women to mortgage their property is limited in some states in recognition of the undue influence that may be exercised by their husbands. The attempts in the last twenty years to settle the Irish land-question have resulted in a steady increase of the interference of law and courts with the freedom of contract between tenant and landlord. Though in many ways freedom of contract is thus limited, competition is not entirely destroyed; it is turned in other and usually better directions.

[Sidenote: General nature of this social legislation]

[Sidenote: Economic or moral objects primary]

5. This group of social laws resembles protective tariffs in preventing free competition, but differs from them in varying ways and degrees. Writers class all such laws as protective legislation, in that they depart from the rule of free trade taken in its broadest sense. It does not follow, however, that all these laws stand or fall together,--that if the protective tariff is wrong, all are wrong. The justification of every such measure is limited and relative, and therefore of varying strength. All protective measures are alike in that the free choice of the citizen is forbidden by law. The argument for the tariff is economic and political. The tariff does not seek to prevent a moral evil; foreign trade is morally as good as other trade. In a large majority of social laws the moral purpose is fundamental. It is the demand of humanity that competition be placed on a higher plane. Tariff legislation is primarily in the interest of a special well-to-do class, with which other citizens are compelled unwillingly to trade. Most social legislation is to protect the weak from being forced into contracts injurious to their welfare and happiness. In any case, social legislation is not to be justified by any but the most general abstract principle,--the attainment of the best social result. The best test of social protective laws is their contribution to a higher independence and to a freer competition on a higher, more worthy, and more humane plane.

53. PUBLIC OWNERSHIP OF INDUSTRY

§ I. EXAMPLES OF PUBLIC OWNERSHIP

[Sidenote: The kinds of political units]

1. Local political units generally acquire only industries whose products must be used in the place where produced. The word industry is used here in a broad sense, including agents of psychic income not usually so classed, such as public parks. The grouping of publicly owned industries according to the size and importance of the political units cannot be exact, because some classes of industries are owned by several kinds of political units. Yet, especially with application to American conditions, an approximate classification may be made on this principle. Federal states consist of three main groups of political units: national, provincial, and local. Provincial units are the largest subdivisions, as the American "states," or commonwealths, the German states, and the provinces in other countries. The term local political unit is more complex and may mean county, township, village, city, and school or sanitary district; but most of what is to be said of local ownership refers to cities or to incorporated villages.

[Sidenote: Municipal ownership of parks, libraries, &c.]

[Sidenote: Of bridges, markets, waterworks, &c.]

Nearly all public parks and recreation grounds are owned by cities. As population has become more dense, private yards of any extent become impossible, in cities, for all but the wealthy. Public ownership of parks insures recreation grounds to the common man in the most economical way. Of late the movement for large and small public parks and playgrounds has gone on rapidly in American cities. Related to parks are public baths, public libraries, art collections, museums, zoölogical gardens, etc. Some have declared that such a policy stops little short of a paralyzing socialism for the masses. Reason and experience fail to reveal any such danger so long as the things supplied gratify the higher tastes--as art, music, literature, innocent social recreation. Not until the necessities of life, as bread, clothing, and houses, are supplied, is encouragement given to the increase of improvident families and to the breaking down of independent character. The means of local communication--streets, roads, bridges--were once owned largely by private citizens. Here and there still are found toll roads and toll bridges built under charters granted a century ago, but tolls on public thoroughfares are for the most part abolished. A public market, where the producer from the farm and the city consumer can meet, is an old institution that is now being established anew in many cities. The providing of apparatus for extinguishing fires is always a public duty; the conveyance of waste water is increasingly a public function; and the supply of pure water, while often a private enterprise in villages, and sometimes in large cities, is increasingly undertaken by public agencies. Public ownership of gas and electric lighting is less common, as the utility supplied is not so essential and the industry is somewhat less subject to monopoly; but the difference is one of degree only. Street-railroads are often under public ownership in Europe; but there has thus far been no case of the kind in the United States, and only one in Canada.

[Sidenote: American failures in state industry]

2. The American state owns and conducts industries mainly whose products have a wider territorial use. The American commonwealth has retired from some fields where once it was engaged in industry. Students of American history know that between the years 1830 and 1840 some states engaged largely, even wildly, in the building of canals and undertook to construct railroads, to start banks, and to engage in other enterprises. The undertaking of these industries was determined often by political and by selfish local interests, and their operation often was wasteful. A few enterprises succeeded, the most notable of these being the Erie Canal in New York. The unsuccessful ones remained worthless property in the hands of the state or were sold to private companies, as in the case of the Pennsylvania railroad. This reckless state enterprise was a bitter lesson in public ownership, and even after seventy-five years is not without effect on public opinion. For a long time no proposal for public ownership could have a fair hearing in America. But railroads and canals are publicly owned, and more or less successfully operated, in many foreign countries, as in Prussia and other German states, in Switzerland, and in the new states of Australia.

[Sidenote: State ownership of various kinds]

There has been recently a rise of interest in forestry in America. This is especially likely to be a state enterprise wherever the forest tracts are entirely within the limits of the state, as is the case of the Adirondacks in New York. Most of the forests in Germany are either communal or state-owned. The schools, a great industry for turning out a product of public utility, are largely conducted by the American state and by local units rather than by the nation or by private enterprise. The state encourages researches in the arts and sciences, and gives technical training. A variety of minor enterprises have been undertaken by states to supply salt, phosphate, banking facilities, even some manufactures. In the prisons and public institutions, states, such as New York, that have adopted the system of labor on public account engage in agriculture and manufacturing on a large scale, the products, amounting to millions of dollars annually, being used almost entirely by public agencies.

[Sidenote: National ownership of various kinds]

3. The nation owns and controls many industries of the widest use and most general interest. Some industries grow out of the political needs of government. Established as a means of communication with military outposts, the post became a convenient means of communication for merchants and other citizens and grew into a great economic institution. In most countries the telegraph is publicly owned and has been annexed to the post, to which it is very closely related in purpose. The national improvements connected with rivers and harbors were first political--that is, they were for the use of the governmental navy; they became, secondly, commercial--for the free use of all citizens engaged in trade; and they continue to unite these two characters. Forestry is most largely undertaken in this country by the national government, doubtless because the large forest areas in the West extend over state boundaries, and because large tracts of public lands were still unsold at the time public attention was attracted to the subject. Since 1890, the policy of reserving great areas for forests, and picturesque districts for national parks, has developed greatly. In some countries mines are thought to be peculiarly fitted for national ownership and control. In Germany, the state owns some coal, salt, and other mines. Coinage and banking are everywhere looked upon as a function of sovereignty, and yet it is no more necessary for a nation to own its own mint in order to control the monetary system than for it to print the bank-notes in order to regulate their issue. The American government has its own printing office and therewith its share of troubles with organized labor. The fish commission, and the various branches of the department, coöperate with private industry in many ways. In Germany, compulsory insurance is provided for the workingman. This hasty survey suggests that the industries undertaken by government are both varied in nature and large in extent, although small in proportion to the mass of private industry.

§ II. ECONOMIC ASPECTS OF PUBLIC OWNERSHIP

[Sidenote: The primary need of public ownership]

1. Public ownership is primarily to control the essential agencies of government. A large part of public ownership and activity in industry develops from political functions. As society evolves, what was unessential to political life becomes essential. Civilized government requires the use of a number of material agents. Buildings for legislative and executive officers, custom-houses, post-offices, lighthouses, can be rented of private citizens, as post-offices usually are in small places; but it is obviously economical and convenient in large cities for the government to own the public buildings. Government can reduce to a minimum its employment of labor by "farming out" the taxes, as all countries once did to some extent, and as France continued to do up to the French Revolution. It is now the settled policy for government to own or control its essential agencies, but this does not involve in every case the employment of day-labor direct to clean the streets, to collect garbage, etc. The more simple political functions shade off into the economic. To coinage usually are added the issue of legal-tender notes and certain banking functions; the post carries packages, transmits money, and in some cases performs the function of a savings-bank for small amounts. The only open question is as to the proper limit to this development.

[Sidenote: Conflict of public and private interests]

2. Public industry expands to supply as free goods many essentials of good citizenship, and to insure cheaper and more bountiful supplies of others. It is the ideal of Herbert Spencer and of a small surviving group of laissez faire philosophers that government should confine itself exclusively to the most essential political functions, leaving the economic functions absolutely alone. It should keep the peace, prevent men from beating and robbing each other, and preserve the personal liberty of the citizen. They assume that all of the economic needs will be provided by competition, in the best way humanly possible, in quantities and at the rate needed. In many cases, however, the general interest fails to harmonize with that of the individual. The forest has an immediate utility to the consumers of lumber, and it has also a diffused utility in its influence on industry, on climate, and on torrents and floods. Yet, as the private owner cannot control enough of the forest to affect the climate, and could not sell climate even if he could affect it, he will cut down the tree whenever he can gain by doing so. In this situation either government control or government ownership of forests is essential.

[Sidenote: Social economy of some public industry]

In some cases the difficulty of private ownership is in the excessive cost of collecting for the service. The cost of maintaining tollhouses at short intervals on a turnpike sometimes exceeds the amount collected. Collection in other cases, as for the service of lighthouses to passing ships, is impossible. Public industry secures, through the economy of large production, a cheaper and more efficient service, the benefits and costs being diffused throughout the community. The benefits of the work of experiment-stations for agriculture are felt immediately by the farmers, but are diffused to all citizens. A manufacturer able to keep his methods secret, or to retain his advantages for a time, can afford to undertake experiments in his factory, but the farmer seldom can. The public ownership of parks for the use of all gives a maximum of economy in the production of the most essential utilities--fresh air, sunshine, natural beauty, and playgrounds in the midst of crowded populations. Municipal ownership of waterworks is an extension of the same idea. Not only because large amounts of water are used by the public, but because cheap, pure, abundant water is an essential condition to good citizenship, speculation should in every possible way be eliminated from this industry.

[Sidenote: Monopolistic nature of localized industries]

3. Public ownership tends constantly to include the industries of a monopolistic nature, locally supplying general necessities. This is no abstract principle; it is merely a statement of what is seen to be happening. Some industries are of such a nature that they drift inevitably into monopolistic control. Waterworks, gas, electric lighting, street-railways, telephone systems, are among these. However fierce may be the competition for a time, sooner or later either one company drives out the other or buys it up, or both come to an agreement by which the public is made to pay higher prices.

[Sidenote: Localized production favors monopoly]

A feature favoring the growth of monopoly when such industries are left to private enterprise, is the need to produce and supply the utility at a given locality. While two street-railways can compete on neighboring streets, it is physically impossible for two or more to compete on the same street. Two systems of water-mains or gas-mains can be put down, as sometimes is done, but this is not only a great economic waste, but the tearing up of the streets is an intolerable public nuisance. This difficulty is less marked in the case of telephones and electric lighting, and some persons still cling to faith in competition to regulate the rates in those industries; but faith in competition between water-companies and between gas-companies has been given up by nearly all students of the subject.

[Sidenote: Gains from large production favor monopoly]

4. A second feature favoring monopoly in such industries is the marked advantage of large production in them. These industries are usually spoken of as "industries of increasing returns." This advantage is enjoyed in some degree by every enterprise, but it is gradually neutralized and limited (as has been noted elsewhere). The need to extend an expensive physical plant to every point where customers are to be served, and the very much smaller cost per unit of delivering large amounts of water, gas, electricity, transportation, etc., on the same street, offered a greater inducement for one competitor to crowd out or buy out the other at a more than liberal price. Even then, larger net dividends and correspondingly larger capitalization are secured than were before possible to both companies combined.

[Sidenote: Uniformity of products favors monopoly]

5. A third feature favoring monopoly is uniformity in the quality of the product furnished. It is a general truth that competition is most persistent where there is the greatest range of choice open to the customer, and consequently the most individual treatment required in the enterpriser. An artist, even a storekeeper, attracts about him a body of patrons who like his product (for the merchant's manner and method of dealing are a part of the quality of his goods), and who cannot be tempted away by slight differences in price. Rival companies in the stage of competition are seen to claim superiority for their particular goods and to improve their service in every way possible. A new telephone company, entering where a monopoly has held the field, works at once a wonderful betterment in rates, courtesy, and service. But as the product of all competitors attains the highest technical standard possible at the time, the rivalry is reduced to one of price, and it is usually a "fight to the finish."

[Sidenote: Franchises favor monopoly]

6. A fourth feature favoring monopoly in these enterprises is the necessity of making permanent and exceptional use of the public streets and alleys. If this right were granted by a general law to every citizen, this feature would be sufficiently implied in the foregoing discussion. As it would be intolerable to allow private interests to use public property in whatever way they wished, the legislative body makes special grants in such cases in view of the circumstances. Not only is the legislature (or council, or county board of commissioners, etc.) induced by the economic difficulties to withhold a charter to a second company, but it is exposed to the greatest corrupting influences by the one already established. The knowledge of the opposition to be encountered in getting a franchise must keep competitors out, even though monopoly prices are maintained.

In view of these several features, which are so closely related that they form a common character, more or less fully shared by various industries, and especially in view of the necessity for the formal granting to them of peculiar privileges in the form of a public franchise, the public, in order to protect the general interest, is forced to undertake an exceptional control of these industries.

[Sidenote: Modes of controlling public utilities]

7. Several courses are open to the public, acting in its political capacity, to retain these monopoly advantages for the general welfare. First, it may do nothing, trusting vainly to competition to regulate the rate, or consciously leaving the result to be worked out by the monopoly principle; this is what in most cases has been done in the past in America. Second, in granting the franchise it may attempt to fix near cost the charge for the service or product, so that the franchise will be worth little or nothing. Third, it may leave the rate to be fixed by the monopoly principle, but charge for the franchise so much that the value of the monopoly is appropriated into the public treasury. Fourth, it may have public officials carry on the business, either selling the product at cost or making monopoly profits that go into the public treasury. Various combinations of these plans are followed in practice, the most common plan being the fixing of maximum rates which, with improved methods, generally become ineffective. It is difficult to fix a uniform rate that is equitable, because conditions change, and, further, because a uniform rate must be applied to all parts of the town, although the cost of service varies greatly. It is difficult to sell the franchise for near what it is worth, because of the uncertainty, of the political blackmail, and of the limited number of competent bidders. There remains only the policy of public ownership to secure the profits of monopoly to the public, either directly or in a diffused manner.

[Sidenote: Economic basis of public ownership]

[Sidenote: Cost under public or private ownership]

8. Public ownership is economically justified when it secures a utility of widespread consumption, otherwise impossible, or insures the public a better quality or a lower price. The question of public ownership is not exclusively an economic question. There are incidental problems, such as its effects on enterprise and on political integrity, with which it is not possible here to deal. In the main, however, public ownership is simply a business proposition which must be justified by its economic results. In the case of a general social benefit not to be secured without public ownership, as popular education or the climatic effect of forests, the only question to answer is whether the utility is worth the cost. In the case of industries already in private hands, as waterworks, gas and electric lighting, there is needed, to make a wise decision possible, a knowledge of the effect a change to public ownership will have on value. If public officials can furnish some goods cheaper than they are furnished by private enterprise, it is because of the wide margin of monopoly profit, not because there is any magic in public ownership. The same general items of cost must be met. The first cost of the plant and the annual interest payments are much the same. Experience shows that, because of political influence, wages are likely to be higher under public ownership, but salaries of officials are higher under private ownership. On the whole, public industry in these respects probably has no advantage. Some items of cost may be less under public management. Public collection of dues along with taxes is an advantage not enjoyed by private companies. Several public officials sometimes share the same office and thus reduce expenses. In small towns the public electric lighting and waterworks have been operated more economically under one roof. Public industry does not have to meet the cost of lobbying and blackmail which are often forced upon private companies. But the greatest source of saving in public ownership is the value of monopoly privileges that, under private management, go into private pockets.

[Sidenote: Character of public officials]

[Sidenote: Limits and effects of public ownership]

The temptation to political corruption may be more insistent when a large force of men is constantly employed, and when large supplies are constantly purchased, by public officials, but the temptation is not so strong or so centralized as it is in the granting of franchises to wealthy corporations. Public industry is weakened by the absence of certain motives to excellence that are present in private business. The income of public officials not being dependent on the economy of management, the spur and motives of competitive industry are lacking. No social discovery has made individual honesty and civic virtue useless to good government.

The decision in any specific case is one dependent on local conditions, and the exact limits of public ownership are not fixed. Industry is changing so rapidly that new experience is needed each year. The main outlines of public ownership, however, are now in large part determined. Some industries do well, others ill, under public management, and between these lie many debatable cases. Waterworks and probably electric lighting, because of the comparative simplicity of their operation, are more suitable for public ownership than are gas-works. No absolute line divides the one group from the other. But whatever the changes, the student of the theory of value must never overlook the fact that the increase of public ownership is altering in manifold ways the prices of goods, and is reacting also on the production, distribution, and consumption of incomes.

54. RAILROADS AND INDUSTRY

§ I. TRANSPORTATION AS A FORM OF PRODUCTION

[Sidenote: Productivity of transportation]

1. Transportation of goods and men is one of the most important modes of production. When utility was thought of as inherent in things rather than as resulting from a relation between things and wants, it was usual to consider only those industries as truly productive that brought something physical into existence, as do agriculture and the extractive industries. Even after it was recognized that a change of form also imparted value, it was still denied that a changing of place could be truly productive industry. But when production is seen to be the bringing of things into right relations with wants, transportation may be deemed to be the primary and typical mode of increasing income. Movement is necessary to the existence of animals. The animal, in the order of evolution a higher form of life than the more fixed plants, goes to seek food, and has open to it a wider range of possibilities in life. With slight exceptions, it is true that the only way in which animals can bring about better place-relations between their wants and goods is by moving themselves. To this power man has added that of moving goods and thus adds enormously to income. Agents being valued in accordance with their net productiveness, the nearness to market and the ease of transporting the product are large factors in price. The location of a field enters into its value as truly as do the chemical qualities of the soil. A rocky field near a market may be richer, in an industrial sense, than the richest soil far remote, which can be used by men only at the cost of their alienation from society. Means of transportation set a limit to social and political groupings, to the size of the market, and to the possibility of exchange. Indeed, all exchange value is conditioned upon the possibility of transportation.

[Sidenote: Original local advantages]

2. Natural differences in the grades of fertility and of accessibility determine first the most valued locations. Primitive man, dependent on the bounties of nature, had to take things as he found them. Few places unite the best grades of the essential things: water, food, fertile soil, a favorable climate, protection against enemies. Between tribe and tribe went on ceaseless war for the few favored spots of the earth. Where transportation is possible, trade can supply one or more of the missing elements. International trade began early, wherever it could, to strengthen economically the weak localities. Advantages in transportation are sometimes better than fertile soil and rich resources. The early centers of civilization were on the banks of rivers and the shores of seas. Around the Mediterranean were the ancient empires. Trading-towns grew up at ports and at the favored points of trade: Tyre, Sidon, Carthage, Florence, Genoa, Venice, Antwerp, London, New York. The early settlements in America were grouped along the coast. Without the cheap communication afforded by water, the colonies would have been cut off from the benefits of continuing contact with the older civilization. It would have been a great price to pay, even for a rich continent.

[Sidenote: Influence of waterways on local advantages]

3. The opening up of new water-routes of travel has profoundly altered the prosperity of nations. Sometimes the relation of cause and effect is the reverse of that just noted. The conquest of Asia Minor by the Turks closed the lines of travel with the East, destroyed the trade of the Italian cities, and stimulated exploration for new routes. The War of 1812 in America stopped the coast trade and forced on the wagon-roads between the New England and the Southern states a great traffic, which declined quickly at the close of the war. Again, the growth of population and industry shifts the center of trade, as it did from the south to the north of Europe, and as it is doing from England to America. The discovery of new routes, however, has wrought the most rapid and sweeping changes. These three causes united, about the time of the discovery of America, to overthrow the prosperity of the older cities of Europe, while the opening of the resources in America, the abundance of silver and gold, trade with the colonists and the Indians, showered wealth and trade into the lap of Spain, Holland, Belgium, England, and the northern cities of Germany. Such changes continue under our eyes. The Erie Canal has an influence on values in every township from New York to Buffalo, and along the lake shores to the head of Lake Superior. The Suez Canal marked an epoch in ocean travel. The American Isthmian Canal will affect the value of many investments, from the Gulf of Mexico to the Pacific Coast. A marked change in transportation thus shifts the level of values in a locality. Fortunes are made and lost. One community rises and another sinks. Increments and decrements of value on a great scale are unearned, and all classes of goods are affected, though in varying degrees.

§ II. THE RAILROAD AS A CARRIER

[Sidenote: Technical vs. economic efficiency of transportation]

1. Different modes of transport are more or less economical relatively to the other industrial conditions. Not only new routes but new agents of travel change the scale of values. In early societies, undeveloped industrially, first men, then domestic animals, were used as beasts of burden. The first vehicles are technically simple in design and construction; on land are used drags, sleds, carts; on waterways are used rafts, canoes, barges, and boats. Primitive means of transportation had to be inexpensive, for poverty and the uncertainty of early society forbade the tying up of large resources in them. Technical efficiency of means of transportation may be contrasted with economic efficiency. Technical goodness is absolute, and is measured in speed and weight of cargo; economic efficiency is relative, and varies with the money cost and money value of the services. A turnpike is more efficient than a mud road, yet in some districts it is bad economy to build it. A railroad is more efficient than a cart, yet in some places even pack-horses are more economical. To be economical, the expenditure needed to supply the efficient agent must be warranted by the volume and value of traffic.

[Sidenote: Economic advantages of natural waterways]

2. The most economical means of transportation before the railroad were the waterways, natural and artificial. Some natural waterways still afford the most economical means of transportation between favorably situated ports. Coal is shipped most cheaply in sailing vessels from Wales around Cape Horn to ports along the western coasts of America. A part of California's regular fuel-supply is obtained in this way. Coal has been shipped from Pennsylvania to Europe, and in the anthracite coal-strike in 1902, some was shipped from England to America. Invention has reduced the cost of construction and operation of vessels and has increased their safety and speed, thus multiplying the efficiency of the natural waterways. The large cities in America are situated on waterways, usually where there is a break in transportation requiring reshipment, as, for example, at New York, San Francisco, Buffalo, New Orleans, Cincinnati, Chicago, Minneapolis, and St. Paul. Likewise many of the small cities and villages, serving as local trading centers, owe their existence to similar though less powerful influences.

[Sidenote: Merits and defects of canals]

Canals are begun as connecting links in a system of natural waterways to extend the advantages of cheap transportation. The Erie Canal not only serves the three hundred miles of territory along its banks, but it opened to commerce all the lands tributary to the Great Lakes. The great advantage of canals is cheapness of operation due to the simplicity of the machinery needed and to the great loads that can be moved with small power. A cent a ton-mile is a paying rate on a canal. For heavy, slow-moving freight, the railroads can hardly rival the canals at their best. As canals, however, can be built only along a level country and where the water supply is at a high level, their construction is limited to a small portion of the country. The law of extensive diminishing returns applies strongly to the construction of canals. The first canals are easily constructed and economically operated, but it is only with greater cost and difficulty that the system can be successively extended. In temperate climates their use is limited by ice to a part of the year, and the summer's drought sometimes limits it still further. At its best, therefore, the small land-locked canal is fitted only to be a supplementary agent in the system of transportation wherever industry demands high speed and great regularity. Far different is the case of the oceanic canal in a tropical climate.

[Sidenote: Superior advantages of railroads]

3. The railroad is rapidly surpassing in importance every other agency of transportation. Even in respect to cheapness, the unique virtue of waterways in favored localities, the railroad has been making rapid gains. Improvements in roadbed, rails, cars, engines, and other equipment are reducing greatly the cost of conducting traffic on the main lines of roads. The adaptability of the railroad excels that of any other agent of transportation; it can go over mountains or tunnel through them. In certainty its superiority is marked; floods and snows may delay it for a day, but there is no seasonal stoppage of traffic. In speed, the railroad so far excels that the canal can survive only by dividing the traffic, taking the lower grades of freight, and leaving to the railroad the passenger traffic and fast freight.

[Sidenote: Results of the rapid growth of railroads]

Because of these qualities, the extension of the railroads in the last fifty years has been so rapid that it has not given time for a gradual adaptation of industry. It has worked in many places revolutionary changes. The building of railroads in the Mississippi valley in the seventies lowered the value of Eastern farms, ruined many English farmers, and depressed the peasantry in all western Europe. With the prices that resulted when the fertile lands of the Western prairies were opened to the world's markets, the stony and worked-out lands of the older districts could not compete. Great regions are still to be opened in this manner in Russia, Siberia, Africa, and South America. While one can only speculate upon the effects this development will have, the changes promise to be less sudden and tremendous than those of the last twenty years. Many minor changes, of no less moment in limited districts, result from the building of railroads. Local trading-centers decrease in importance. Villages and towns, hoping to be enriched by the railroads, see trade going to the cities. Commerce becomes centralized. Enormous increase of value at a few points is offset by losses in other localities.

§ III. DISCRIMINATION IN RATES ON RAILROADS

[Sidenote: Monopoly power of railroads]

1. The railroad has more monopoly power in fixing rates at points along its lines than is the case with other agents of transportation. The ownership of the wagons, ships, and canal-boats of a country is usually divided. Every point along the line of the turnpike or the canal and at ocean ports enjoys competition between carriers, the great shipping combinations not having been successfully formed as yet. In the early days of the railroads it was believed that a company or the government would own the rails and charge toll to the different carriers, who would own cars and conduct the traffic as was done on the canals. Experience soon showed the utter impracticability of this scheme and the need of unified management. The railroad, therefore, has a monopoly at all points on its line not touched by other carriers. This, like all other monopoly, is limited by the need to secure some business and to meet competition at terminal points. The railroads in private hands early began to "charge what the traffic would bear" at every station, thus practising various forms of discrimination disastrous in their effects on the citizens.

[Sidenote: Discrimination as to goods]

2. Discrimination as to goods is charging more for transporting one kind of goods than for another without a corresponding difference in the cost. When reasonably understood, this proposition does not apply to a higher charge for goods of greater bulk, as more per pound for feathers than for iron, the "dead weight" of car being much greater in one case than in the other. It does not apply where there is a difference in risk, as in carrying bricks and powder, or coal and crockery; nor where there is a difference in trouble, as in shipping live stock and wheat. Any difference that can reasonably be explained as due to a difference in cost is not discrimination; on the other hand a difference in cost without a difference in rate is discrimination. Discrimination as to goods may be by value, as low rates for heavy, cheap goods and high rates for lighter, valuable ones. Coal always goes at a low rate as compared with dry goods, and sometimes more is charged for coal to be used for gas than for coal to be used for heating purposes. Discrimination as to goods is the most usual and, if reasonably employed, one of the most justifiable of the various kinds of rate discriminations.

[Sidenote: Local discrimination]

3. Discrimination between places (local discrimination) is charging different rates to two localities for substantially the same service. This occurs when local rates are high and through rates are low; when rates at local points are high and at competing points are low; when less is charged for shipments consigned to foreign ports than for domestic shipments; when more is charged for goods going east than for goods going west. The causes of local discrimination are: first, water-competition, found at great trade centers such as New York and San Francisco; second, differences in terminal facilities, making some places better shipping-points than others; third, competition by other railroads, which is concentrated at certain points, only four thousand (one tenth) of the stations of the United States being junctions; fourth, the influence of powerful individuals or large corporations and the personal favoritism shown by railroad officials.

[Sidenote: Its effects]

The effect of discrimination is to develop some districts and depress others; to stimulate cities and blight villages; to destroy established industries; to foster monopolies at favored points; and to sacrifice the future revenues of the road by forcing industry to move to the competing points to get the low rates. The power of railroad officials arbitrarily to cause rates to rise or fall is happily limited in practice by the need of earning as large and as regular an income as possible, but even as exercised it has been at times as great as that possessed by many political rulers.

[Sidenote: Personal discrimination]

4. Discrimination between shippers (personal discrimination) is charging one person more than another for substantially the same service. This most odious of railroad vices, rarely practised openly, is done by false billing of weight, by wrong descriptions or false classification to reduce the charge below published rate-sheets, by carrying some goods free, by issuing passes to one and not to all patrons under the same conditions, or by donations or rebates after the regular rate has been paid. In some cases a subordinate agent shares his commission with the shipper, and the transaction does not appear on the books of the company. In other cases favored shippers are given secret information that the rate is to be changed, so that they are enabled to regulate their shipments to secure the lower rate.

[Sidenote: Causes of personal discrimination]

One group of reasons for personal discrimination is connected with the interests of the road. It is to build up new business; it is to make competition with rival roads more effective by favoring certain agents, as is very commonly done in the Western grain business; it is to exclude competition, as by refusing to make a rate from a connecting line or to receive materials for a new railroad which is to be a competitor; and it is to satisfy large shippers whose power, skill, and persistence make the concession necessary. Another group of reasons has to do with the interests of company officials. It is to enable them to grant special favors to friends; or it is to build up a business in which they are interested; or it is to earn a bribe that has been given them.

[Sidenote: Evils of personal discrimination]

That the evils of personal discrimination are great, need hardly be said. It introduces uncertainty, fear, and danger into all business; it causes business men to waste, socially viewed, an enormous fund of energy to get good rates and to guard against surprises; it grants unearned fortunes and destroys those honestly made; it gives enormous power and presents strong temptations to railroad officials to injure the interests of the stockholders on the one hand and of the public on the other.

Apart from government, the railroad represents the greatest single economic factor in personal distribution. It has introduced a new form of problem into economic society. It has created a monopoly comparable to the prerogatives of feudal lords. No other industrial agency in private hands so affects all the producing forces of society and exercises such a potent influence on values.

55. THE PUBLIC NATURE OF RAILROADS

§ I. PUBLIC PRIVILEGES OF RAILROAD CORPORATIONS

[Sidenote: Public nature of railroad franchises]

1. Railroads enjoy peculiar public privileges through their charters, franchises, and the right of eminent domain. Railroads in our country are owned by private corporations and are managed by private citizens, not, as in some countries, by public officials. They have been built under the motive of private enterprise, in the interest of the investor, not as a charity or as a public benefaction. Railroad-building appears thus at first glance to be a case of free competition where public interests are served in the following of private interests. But, looked at more closely, it may be seen to be in many ways different from the ordinary competitive business. Competition would make the building of railroads a matter of bargain with proprietors along the line, and an obdurate farmer could compel a long detour or could block the whole undertaking. But the public says: a public enterprise is of more importance than the interests of a single farmer. By charter or by franchise the railroad is granted the power of eminent domain, whereby the property of private citizens may be taken from them at an appraised valuation. The manufacturer, enjoying no such privilege, can only by ordinary purchase obtain a site urgently needed for his business. Why may the railway exercise the sovereign power of government and invade other private property rights? Because the railway is peculiarly "affected with a public interest." The primary object is not to favor the railroads, but to benefit the community. These charters and franchises are granted sparingly in most European countries. In this country they have been granted recklessly, often in general laws, by states keen in their rivalry for railroad extension. When thus great public privileges had been granted without reserve to private corporations, it was realized, too late in many cases, that a mistake had been made and that an impossible situation had been created.

[Sidenote: State and National aid to American railroads]

2. In America and in many other countries, large grants of lands and money have been made to railroads on the ground of their peculiar public nature. Railroads were granted not only peculiar powers and privileges, but also material aid. The railroad enterprise was uncertain, the possibilities of its growth could not be foreseen, and private capital would not invest without great inducements. In European countries where capitalists were less enterprising or venturesome than in America, railroad extension was very slow except where the state in some manner extended its aid to the enterprise. The American states abandoned the principle of non-interference most recklessly, and vied with each other in giving lands, money, and privileges, in loaning bonds, in subscribing for stock, and in releasing from taxation. These protective measures fostering a special enterprise were expected by increasing wealth to diffuse a greater welfare throughout the community. Many of the states were forced to the point of bankruptcy by their reckless generosity, and some of them repudiated the debts thus incurred. The national government then took up the same policy and granted lands to the states to be used for this purpose. The first example of this was the grant to the Illinois Central road, in 1850, of a great strip of land through the state from north to south. Grants were made in fourteen states, covering tens of millions of acres of land. Then the national government, between 1863 and 1869, aided the building of the Pacific railroads by granting outright twenty square miles of land for every mile of track and by loaning the credit of the government to the extent of fifty million dollars--a debt settled by compromise only after thirty years.

[Sidenote: Railroad grants by localities]

Counties, townships, cities, and villages along the line of projected roads then entered into keen competition to secure them. Bonds, bonuses, tax-exemptions, and many special privileges were granted. To obtain this new Aladdin's lamp, this great wealth-bringer, localities mortgaged their prosperity for years to come. The promoters bargained skilfully for these grants, playing off town against town, cultivating the speculative spirit, punishing the obdurate. Not the civil engineer, but the financial engineer platted the devious lines of many a railroad on the level prairies of America. The effects of these grants were in many cases disastrous, and since 1870 they have been forbidden in a number of states by legislation and by state constitutions. But before this era of generosity ended, probably the railroads had received more public aid than has ever been given to any other form of industry in private hands.

[Sidenote: Investors' view of railroads' obligations]

3. The railroads are now generally held to have peculiar public duties corresponding to their privileges. Do all these grants in the past make the railroads other than mere private enterprises? One answer, that of those financially interested in the railroads, is No. They say that the bargain was a fair one, and is now closed. The public gave because it expected benefit; the corporation fulfilled its agreement by building the road. The terms of the charter, as granted, determine the rights of the public; but no new terms can now be read into it, even though the public now sees the question in a new light. Similar grants, though not so large, have been made to other industries. Bounties have been given to sugar-factories; tariffs have favored iron-forges and woolen-mills; factories have been given, by competing cities, land and exemption from taxation; yet no attempt is made on that account to control these businesses in a peculiar way and to treat them as public enterprises. So, it is said, the railroad is still merely a private business.

[Sidenote: Social view of railroads' obligations]

But the social answer is stronger than this. As to the precedent of tariff- and bounty-favored enterprises, most careful students would admit a close analogy in the two cases, but would maintain that the tariff policy also has been carried to an unjustifiable extreme, and that it could not be used to vindicate a still greater assault on public rights. But, further, privileges of railroads are greater in amount and more important in character than those granted to any ordinary private enterprise. The legislatures recognize constantly the peculiar public functions of the railroads. In other private enterprises, investors take all the risk; legislatures and courts recognize the duty of guarding, where possible, the investment of capital in railroads. Laws have been passed in several states to protect the railroads against ticket-scalping. Whenever the question comes before them, the courts maintain the right of the railroads to earn a fair dividend. Private enterprise has been invited to undertake a public work, yet public interests are paramount.

[Sidenote: Need of harmonizing public and private interests]

If an extremely abstract view is taken there is danger of losing sight of the real problem, which is that of harmonizing these two interests in thought and in public policy. Yet the extreme advocates of the private control of railroads have resented indignantly any public interference with railroad rates and with railroad management as an infringement of individual liberty. At the time of the passage of the Interstate Commerce Act this position was inconsistently taken by those in whose interests free competition had been violently set aside at the very outset of railroad construction, and for whom government interference had made possible great fortunes. The railroads cannot change from a public to a private character just as it suits their convenience. They cannot be allowed to play Dr. Jekyll and Mr. Hyde; smooth and affable in the character of public agents when public advantages are to be gained, and then as private enterprises ugly and scowling, flouting the public interests, charging all the traffic will bear, and resisting all reasonable regulation and conditions. Though railroads are private enterprises as regards the character of the investment, they are public enterprises as to their privileges, functions, and obligations.

§ II. POLITICAL AND ECONOMIC POWER OF RAILROAD MANAGERS

[Sidenote: Railroad rates like taxes]

1. In various ways railroad managers exercise great political influence and power. Some writers maintain that the power to make rates on railroads is a power of taxation. They point out that if rates are not subject to fixed rules imposed by the state, the private managers of railroads wield the power of the lawmaker. By changing the rates on foreign exports or imports, the railroads frequently have made or nullified a protective tariff and have defeated the intention of the legislature. High rates on state-owned roads have openly been used in lieu of protective duties. These facts go to show that a change of railroad rates between two places within the country is similar in effect to the imposing or repeal of tariff duties between them.

[Sidenote: Political influence of railroads]

The wealth and industrial importance of the railroads give them widespread political power in other ways. It is commonly charged in some states that the legislature and the courts are "owned" by the railroads. The railroads, in part because they are the victims at times of attempts at blackmail by dishonest public officials, are compelled in self-defense to maintain a lobby. The railroad lobby, defensive and offensive, is in many states the all-powerful "third house." Railroads even have their agents in the primaries, they enter political conventions, they dictate nominations from the lowest office up to that of governor, and they elect judges and legislators. The extent to which this is done differs according as the railroads have large or small interests within the state. How is this great political problem to be met except by an appreciation of its importance and by a growth of public integrity?

[Sidenote: The complex obligations of railroad directors]

2. The economic power of the higher railroad officials enables them to exercise certain functions of an important public nature. When the railroad was a young industry, its essentially public nature was not recognized. It was at first thought to be simply an iron-track turnpike to which the old English law of common carriers would apply. As this and similar notions proved illusory, the railroad manager became invested with complex and often conflicting duties to the stockholders and to the public. He wore his conscience-burden lightly, and frequently made little attempt to meet the one and no attempt whatever to meet the other obligation. The new field offered for speculation gave opportunities for great private fortunes. There were no precedents, no ripened public opinion, no established code of ethics, to govern. It was a betrayal of the interests of the stockholders when directors formed "construction companies" and granted contracts to themselves at outrageously high prices. It was an injury not only to shippers, but also to the stockholders, when special rates were granted to friends and to industries in which the directors were interested.

[Sidenote: Unclear convictions as to the railroads' public nature]

It is believed that a better code of business morality has developed, and that the officers' relation of trusteeship toward the shareholders is now more often recognized. But practical ethics need to be developed much farther than this. A railroad manager is engaged by the stockholders, is responsible to them, and looks to them for his promotion. Hence their interests are uppermost whenever the welfare of the public is not in harmony with the earning of liberal dividends. The manager feels bound to defend the principle of "charging what the traffic will bear" in the case of each individual, locality, and kind of goods. If this ruins some men and enriches others, if it destroys the prosperity of cities to increase the earnings of the road, at all events he feels he has done his full duty. Railroad directors do not yet recognize, and possibly never will, that their office is more than a private trusteeship, that it is a public trust.

[Sidenote: Progress of railroad consolidation]

3. The progress of consolidation among railroads is putting into fewer hands greater financial and economic power. The early railroads, many of which were built in sections of a few miles in length, have been slowly welded into continuous trunk lines with many branches. The New York Central between Albany and Buffalo was a consolidation, by Commodore Vanderbilt, of sixteen short lines. The Pennsylvania system was formed link by link from scores of small roads. The growth of consolidation recently has been more rapid than ever before. Sixty per cent. of the mileage of the United States is under the control of five interests; seventy-five per cent. is controlled by a group of men that can sit about one table. The country is being divided territorially into great railroad domains, within each of which one financial interest is dominant. Great financial alliances and "community of interests" still further unify the policy of the leading roads.

[Sidenote: Economic results of consolidation]

Toward this result strong economic forces are working. Consolidation has many technical advantages: it saves time, reduces the unit cost of administration and of handling goods, gives better use of the rolling stock and of the terminal facilities of the railroads, and insures continuous train service. It has the advantages of other large production and the possible economies of the trusts. Most important, however, from the point of view of the railroads, is the prevention of competition and the making possible of higher rates and larger dividends. The statement that competition is not an effective regulator of railroads often is misunderstood to mean that it in no way acts on rates. It is true that competition between roads does not prevent discrimination and excessive charges between stations on one line only; but competition usually has acted powerfully at well-recognized "competing points." The larger the area controlled by one management, the fewer are the competing points; the larger, therefore, is the power over the rate and the more completely the monopoly principle applies. It is a grim jest to say that consolidation does not change the railroad situation as regards the question of rates.

§ III. COMMISSIONS TO CONTROL RAILROADS

[Sidenote: Railroad evils and the old legal remedies]

1. Most of the states have undertaken, through commissions, to regulate the railroads in the public interest. When it became evident that public and private interests in the railroads were so divergent, it still was not easy to determine how the public was to be safeguarded. At first, some general conditions such as maximum rates were inserted in the laws and charters; but these were not adaptable to changing conditions and, for lack of administrative agents, could not be enforced. The early efforts at state ownership were, as was noted above, futile and disastrous, the remedy of state ownership, as then applied, being worse than the disease. The old law of common carriers gave to individual shippers an uncertain redress in the courts for unreasonable rates; but the remedy was costly because the aggrieved shipper had to employ counsel, to gather evidence, and to risk the penalty of failure; it was slow, for while delay was death to the shipper's business, cases hung for months or years in the courts; it was ineffectual, for even when the case was won, the shipper was not repaid for all his losses, and the same discrimination could be immediately repeated against him and other shippers.

[Sidenote: Object and working of the state commissions]

Attempting to remedy these evils, thirty-one of the states have appointed commissions and, as the most important states are included, this mode of regulation applies probably to four fifths of all traffic beginning and ending in a single state. These commissions differ in power, but in general they attempt to prevent excessive discrimination in rates and to check all railroad practices injurious to the public welfare. The commission principle, strongly opposed at first by the railroads, has been upheld by the courts and is now an established public policy. The state commissions, however, have fallen far short of a solution of the problem. Though they have done much to make the accounts of the railroads intelligible, something to make the rates reasonable and subject to rule, and much to educate public sentiment, on the whole their results have been disappointing. It has been difficult to get commissioners at once strong, able, and honest; the public does not yet know its own mind well enough to support the commissions properly; and--more fatal weakness still--the courts early decided that state commissions could regulate only the traffic originating and ending within the state, and this left untouched the much greater volume and more important class of interstate traffic.

[Sidenote: Passage of the Interstate Commerce Act]

2. The Interstate Commerce Commission is an agency by which it was hoped to secure a uniform national public control of railroads. Public hostility to private railroad management was greatest in the regions where the most rapid building of roads occurred from 1866 to 1873. One center of grievances was in "the granger states" of Illinois, Wisconsin, Kansas, Nebraska, Iowa, and Minnesota; another center was in the oil regions of Ohio and Pennsylvania. The Eastern states were not without their troubles, for the report of the Hepburn Committee of the New York legislature in 1879 shows that discrimination between shippers prevailed to an almost incredible degree in every portion of New York state. When the courts, in 1886, decided that the greater portion of the railroad rates could not be treated by state commissions, national control was loudly demanded. Scores of bills were presented to Congress between 1870 and 1886, and, despite the bitter opposition of the railroads, the Interstate Commerce Act was passed in 1887.

[Sidenote: Its provisions]

The act laid down some general rules: that rates should be just and reasonable; that railroads should not pool, or agree to divide, their earnings to avoid competition; that they should, unless expressly excused, fix rates in accordance with the long- and short-haul principle (to charge no more for a shorter distance than for a longer one on the same line and in the same direction, the shorter being included within the longer). The act provided for a commission of five men, to be appointed by the President, which might require uniform accounts from the railroads, and which should enforce the provisions of the act.

[Sidenote: Results of the act]

3. The object of the Interstate Commerce Act has been but imperfectly attained. This brief proposition sums up the story of years of efforts and defeated hopes. The powers of the commission have proved inadequate to attain the main purposes of the act--the prevention of discrimination and the securing of steady and equitable rates to all shippers. By the decisions of the federal courts, the commission's power has been reduced far below the intentions of the Congress that passed the law. The railroads have in many cases refused to obey the orders of the commission and have succeeded in maintaining their refusal. Admirable results have been secured in the way of uniform accounting, uniformity of rates has been somewhat furthered at times, and the public has been in many cases enlightened. But the greatest evils remain. Railroads still give secret rates in great numbers; many competent witnesses before the Industrial Commission in 1900 and 1901 testified that discrimination had never been worse. From time to time the recognition of the injury to dividends wrought by discriminating rates prompts some railroad to offer its coöperation to the commission, and this inspires new hopes of an effective administration of the act. The pressure of competition, however, soon forces the penitent road back into its old ways. On one thing the railroads and the commission are agreed: that pooling should be permitted, though the commission wishes to have this under strict supervision. To this point the public has not yet advanced.

[Sidenote: The railroad problem unsolved]

Despite the general acceptance now of the principle that the railroads should be controlled in the public interest, despite the barren legal triumph of the commission principle, it is evident that the railroad is not yet under social control. The future must determine whether the solution is to be found in effective public regulation or in public ownership.